Freezing Accounts

It’s really hot outside, so I decided to think of cool things to feel cooler. So far, I’ve thought of ice cream, snow, and even The Fonz.

Nothing brought my temperature down quite like when I thought of freezing accounts. Before I develop hypothermia, let’s discuss the authority to freeze accounts and certain limitations

Impermissible Freezing

Federal regulations do not provide federal credit unions with the authorization to freeze or hold funds in a member’s account when the member becomes delinquent on a loan or other financial obligations. Instead, federal credit unions are granted a statutory lien. Statutory liens can be enforced without a court order or equitable right of set-off once default or delinquency occurs, after a lien has been impressed on the member’s account. This blog reiterates how the statutory lien works in comparison to a garnishment:

 “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.” (Emphasis added).

In practice, most credit unions will notify members of their ability to take money from accounts to pay off past due payments in loan documents.

As evidenced in this NCUA legal opinion letter, section 701.39 permits a federal credit union to only debit a member’s account “to the extent of any of the member’s outstanding financial obligations” held by the federal credit union. Further, a federal credit union does not have the authority to put a hold on a member’s account and create a share-secured loan. Federal credit unions must take the funds from the account to enforce the lien; not freeze or hold funds in accounts.

Does this mean that federal credit unions can never freeze or hold funds in an account when a delinquency occurs? Is this the end of the race? Well, according to the legal expertise of Fonzie, the race to freeze accounts is not over yet.

Permissible Freezing

There are a few ways a federal credit union can freeze member accounts. Court orders to freeze accounts suspected of criminal activity authorize credit unions to freeze affected accounts. Credit unions are not prohibited from contracting for the right to freeze an account by including appropriate provisions within member account agreements with the help of credit union counsel. Of course, limitations may arise.

Limitations: Other Superseding laws and Government Benefits

Other federal or state laws may supersede the statutory lien or give other liens a superior claim to the funds. Section 701.39(b) notifies federal credit unions of the possibility of superseding federal or state law requirements in the phrase, “except as otherwise provided by law.” It is the federal credit union’s obligation to determine whether such statutory or case law exists, before enforcing the statutory lien or freezing accounts. Failing to do so may risk costly litigation.

Sometimes, members who receive government benefits fall behind on loan payments. In this scenario, it is possible that neither the credit union’s statutory lien nor its contractual right to freeze the account will be enforceable, subject to certain carved out legal exceptions.

Generally, most forms of government income directly deposited in a member’s account is protected from most garnishments:

To determine if your credit union has the authority to enforce its statutory lien or garnishment power against government-sourced benefits, it may want to consult experienced legal counsel who specializes in creditor’s rights or government benefits.