It is always good to remember that the federal Truth in Lending Act (TILA) and its implementing Regulation Z have special rules regarding offset that apply only to credit card accounts.
And at least one Maryland court has held against credit unions in connection with credit card offsets.
In a 2012 unpublished order deciding issues raised in competing summary judgment motions, the U.S. District Court for the District of Maryland decided that the defendant credit union's practice of recovering credit card debt from the cardholder's share accounts violated this provision in TILA because the defendant was not enforcing a "consensual security interest" as described in the Official Commentary to Regulation Z.
Of note, the court first needed to decide whether the debtor or the creditor has the burden of proving the existence of a valid consensual security interest. The court concluded that once the debtor makes a threshold showing that a credit card issuer took funds from a deposit account and used them to satisfy the debtor's consumer credit card debt, then the burden shifts to the creditor – as an affirmative defense – to prove it did not violate the TILA offset prohibition rule.
The court made it clear that the well-recognized banker's common law right of offset does not rise to the level of a consensual security interest. (While not addressed by the court, we note that the federal credit union's statutory lien also does not rise to the level of a consensual security interest.)
Relying on the Official Commentary to Regulation Z, the court concluded that the facts presented by the credit union defendant – language included in an unsigned loan application and in two different sets of standard credit card disclosures – were not sufficient to establish a consensual security interest. We recommend that all credit card issuing depositories in Maryland carefully review their credit card documents to ensure a consensual security interest in deposit accounts is created.
For questions concerning this topic, please contact Christopher Rahl.