Have you ever had a member who refused to make payments on a loan? Well, a federal credit union can use a statutory lien to claim a member's shares and dividends as security for an unpaid debt.
Under the Federal Credit Union Act and Section 701.39 of NCUA’s Rules and Regulations
credit unions are granted a statutory lien in its member’s shares and
dividends. This allows credit unions to use funds deposited in a member’s
account to satisfy outstanding defaulted loans. However, the lien comes with several
requirements and limitations.
Impressing the lien
In order to first use the statutory lien, credit unions must
first impress or attach the lien to a member’s account. Under section 701.39(c), a federal credit union may
impress or attach a lien on an account held at the credit union in one of three
ways:
• Provide notice to the member
through account opening documentation;
• Provide notice of the lien through loan documentation
that is signed or otherwise acknowledged by the member; or
• Through a bylaw amendment or policy, of which the
member is given notice.
Under Section 701.39(a)(4), notice means:
“written notice to a member disclosing, in plain language,
that the credit union has the right to impress and enforce a statutory lien
against the member's shares and dividends in the event of failure to satisfy a
financial obligation, and may enforce the right without further notice to the
member. Such notice must be given at the time, or at any time before, the
member incurs the financial obligation”
Enforcing the lien
Once the statutory lien has been impressed, no further
notice is required to enforce the statutory lien and, unless otherwise
prohibited by federal law, a credit union may debit a member’s account and
apply the funds against the member’s outstanding financial obligations to the
credit union. However, credit unions should keep in mind that Section 701.39 only allows for enforcement if the
member has defaulted. In other words, credit unions cannot preemptively use the
statutory lien but must wait until the member has defaulted. However, unlike a
garnishment, credit unions do not need to obtain a judgment in order to enforce
the statutory lien.
Limitations of the lien
There are several notable limitations on the statutory lien.
The first is that while section 701.39(b) provides credit union priority
over other creditors, this priority can be superseded by both federal and state
law. Credit unions may also want to note that their ability to impress and/or
enforce the statutory lien can be superseded by federal law. For example, under
Regulation Z, Section 1026.12, card issuers are generally
prohibited from offsetting any funds held on deposit against an obligation owed
on a credit card account. Thus, a federal credit union may not use its
statutory lien power against a member’s shares and dividends to satisfy a credit
card debt.
Credit unions may also not freeze an account. In a 2002 legal opinion letter, the NCUA noted that
credit unions could not freeze a member’s account as a means of enforcing the
statutory lien. Credit unions should also be aware that the statutory lien only
applies to funds in a member’s accounts held at the credit union. The statutory
lien does not apply to other types of collateral securing a loan, such as a
vehicle. Lastly, the statutory lien only applies to defaulted loan debts; it
does not apply to losses from a non-credit account, such as due to a returned
check.
Here is a link to the NCUA’s Examiner’s Guide that provides a
discussion on exceptions to the statutory lien (see page 33).
