Maximizing Deficiency Collections and Minimizing Legal Exposure

One of the most frustrating aspects of any credit union’s business is having to collect delinquent debt obligations from its membership. These circumstances can be made worse where members present defenses, which can bar the recovery of this obligation.  Even more alarmingly, in certain instances a member may be able to bring valid claims against the credit union, potentially creating a situation where the credit union actually has to pay this member money, exacerbating the loss already in place on an account.  Unfortunately, these pitfalls can be common place with collateralized loans during the repossession, sale and subsequent collection action taken to recover a deficiency incurred after this sale.  A credit union must be sure that it is complying with its state’s laws with respect to the timing of the repossession, timing of the sale, ensuring proper advertising of the sale and being sure the credit union issues the proper notices of sale and deficiency before and after the sale/auction.  This article focuses on the most common missteps credit unions make, particularly related to the notice of sale. 

In Ohio and most states, repossession and sale is governed, in part, by the Uniform Commercial Code (UCC).  Among the requirements imposed by the UCC is that creditors issue a notice of sale which includes certain elements, in advance of the sale date, typically at least ten days prior to the sale occurring.    It is very important that the credit union include each and every required element in the notice of sale in order for it to be compliant with the law.  Failing to include a particular element, even if it seems trivial, may bar recovery of a subsequent deficiency or, even worse, draw potential claims by the member against the credit union.  A notice of sale must include at least the following:

• The name and address of the secured party;
• The date of the sale;
• The name and address of any obligor who is also a debtor;
• A description of the collateral intended to be disposed;
• The method of disposition (public vs. private);
• A notice that states the debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for the accounting;
• The time and place of a public disposition or the time after which any other disposition is to be made;
• A description of any liability for a deficiency of the person to whom the notification is sent;
• A telephone number from which the amount that must be paid to the secured party to redeem the collateral is available; and
• A telephone number or mailing address from which additional information concerning a disposition or any obligation secured is available.

However, in some cases, credit unions are under the misconception that certain elements of the notice need not be included, or in other instances, that the notice need not be provided at all.  For example, in instances where a member voluntarily turns over collateral, the notice of sale described above, must still be provided to the member, and any other liable parties on the loan.   The voluntary nature of the vehicle’s surrender does not alleviate the credit union’s obligation to send notice of the sale.  Also, in instances where a member files bankruptcy, whether or not it has been discharged, a notice of sale must also be provided.  In cases of a bankruptcy filing, it is important to amend the notice of sale to ensure that it does not suggest a member will be responsible for any deficiency in the event the bankruptcy is discharged. 

In other situations, credit unions mistakenly believe that only one notice of sale must be sent, even when the sale date is reset.  Auction houses routinely reset sales when the collateral does not meet a minimum set bid.  In those cases, the credit union must send out a new notice of sale with the rescheduled sale date.  Due to the requirement that the notices of sale must be submitted at least ten days prior to the sale date, a credit union should plan on resetting the sale date at least two weeks out in order to meet the requisite advanced notice requirement described above. 

Sending out a proper notice of sale is imperative to maintaining a viable deficiency collection and avoiding legal exposure. Other steps, which this article does not cover, must also be considered such as whether a right to cure is required and when to send a proper notice of deficiency, if one is created after the sale occurs. Your credit union should be certain it is following all necessary steps during this process and consult with legal counsel on any questions that arise in order to maximize your collection recovery and minimize your legal exposure.