Q&A: Here’s a question that a Wisconsin credit union recently asked The League’s Legal Affairs team, along with our answer. Do you have a compliance question? Contact The League’s Compliance Hotline at (800) 242-0833 or email.
Q. Our member passed away recently. He has an outstanding loan with us, and there is money in his checking account. Can we apply the checking account balance to the loan? Or do we have to turn over funds to the POD beneficiary named on the account?
A. I will assume that this is a consumer loan, subject to the Wisconsin Consumer Act (WCA). My answer will be different if the WCA does not apply. Our ii Release No. B001 explains which loans the WCA covers.
There are several issues to consider before setting off on the deceased member’s account to recover the outstanding consumer loan balance.
First, the borrower’s death is not an automatic event of default on a consumer loan. This is from our ii Release No. 0004 on dealing with decedent accounts:
Most loan agreements include some grounds for default other than an actual delinquency. Sometimes the death of a borrower is listed as the grounds for default on a note.
Again, read the agreement carefully as the particulars will vary. For example, Wisconsin Consumer Act loan documents may include grounds for default for failure to observe any provision of the agreement where the violation “materially impairs” the condition, value or protection of the credit union’s rights in the collateral or materially impairs the member’s ability to pay the amounts due under the loan or security agreement.
Your loan agreement might include death of a borrower as a trigger of default but if the Wisconsin Consumer Act applies you may only declare default if under the standard just described. Thus, under the particular facts of that situation, does the death of the borrower “materially impair” the condition, value, or protection of the credit union’s rights in the collateral, or materially impair the member’s ability to pay the amounts due under the loan or security agreement? Maybe not. Despite a death, there may be a coborrower or a personal representative of the decedent’s estate that is ready and willing to continue making the payments on the loan as they come due.
This means that in certain cases, you may consider death to be an event of default, but in others, you must see if there is some other “trigger” to consider the loan in default. In most cases, that involves missed payments, which leads to the second issue …
Second, if the consumer is far enough behind on payments or has otherwise breached their responsibilities under the loan agreement or security agreement, then the loan can be in default. The League’s ii Release No. B031 explains how late the payments must be for a loan to be “in default.”
Third, no matter what the basis is for a default, you cannot set off until the credit union has sent the Notice of Right to Cure and waited at least 15 days for the default to be cured. State regulators have said that you can freeze funds in an account, but only in an amount equal to the delinquency, once you send the notice. If the cure period ends without the borrower fixing the problem (e.g., getting caught up on their payments), then you can set off and take the funds. We have details about the WCA rules and the Notice of Right to Cure in The League’s ii Release No. B031.
The WCA prohibits any actions to collect on a covered loan unless the loan was in “default,” and you have sent a Notice of Right to Cure, and you have waited the required 15 days for the member to cure the default. The WCA does not make an exception for cases where a debtor has died. As strange as it may sound, the credit union should still send out a Notice of Right to Cure, wait at least 15 days, and then look at setting off on the account.
How can you send a notice to a deceased borrower? We are aware that many credit unions would send the notice addressed to “the estate of” the deceased member at their last known address and wait the appropriate amount of time. We have not heard of examiners or family of the deceased faulting a credit union for that practice; however, we know that some collections attorney will advise going to court and having a “special administrator” appointed just to receive the Right to Cure notice.
Fourth, please look over the checklist in The League’s ii Release No. B013, which covers setoff. It points out issues that may limit your right to set off on a member’s account, depending on the facts. For example, credit card debts typically cannot be recovered via setoff, and federal law prohibits setoff on certain government benefits, like Social Security.
What if the account has a joint owner or POD beneficiary?
If setoff is available (under the four steps outlined earlier), then the fact that the account has joint accountholders or POD beneficiaries might not affect the credit union’s rights – depending on the language in your account forms.
The League’s “Your Account Agreement” brochure (WCUL #83005 or #83006), includes the following provision, in which your account holder(s) agree that the credit union’s right to setoff supersedes the rights others may have to the funds:
If you are indebted to the Credit Union at the time of your death the Credit Union may exercise its right of set-off against your Account notwithstanding any rights that a surviving Multiple Party account owner, a P.O.D. beneficiary, heir or beneficiary of a trust Account may have to the balance of the account.
(Check whether your forms use similar language, if your credit union buys forms from a different vendor.)
Even if setoff is not available, that clause might still be helpful. You can try pointing it out to the POD beneficiary or joint owner and asking them to let the credit union apply the account funds to the balance owed. With their consent (preferably in writing), the credit union should be free to set off. If they refuse to consent, then the credit union may need to consult with its own attorney.