Question: I have a credit card with the same bank where I have a Certificate of Deposit. My credit card payments are in default. I was using a credit counseling company to help me get out of debt and help me arrange a payment plan on the overdue credit card debt. The bank used my Certificate of Deposit to pay off the credit card debt without my permission. Is this legal?
Answer: General credit cards are issued by a national bank called the card issuer. The person who receives and uses the credit card is called the cardholder. There are many different types of credit cards including credit cards that are secured by the deposits in the cardholder’s bank account. (The deposit funds serve as collateral which the card issuer can “take” if the debt is not paid on the credit card.)
These 'secured' cards are targeted at people with either poor credit or limited credit histories who may not qualify for the traditional unsecured credit card. Consumers are able to get credit or establish a credit history by using a secured credit card. If the consumer stays current with payments, the bank may allow the consumer to “graduate” to an unsecured credit card. These secured types of credit cards are backed by the consumer’s deposits in the bank, such as savings or certificates of deposits. The bank must take steps to maintain a security interest to be able to take the consumer’s bank deposit funds to pay off the credit card debt. I don’t think this is right. Banks have the inherent right to set off bank accounts. If the Bank simply set off a regular bank account, it would be certainly legal unless the funds in the bank account were exempt. I don’t think its going to be any different with a certificate of deposit. I’m not sure if you’ve considered the right to set off. There’s a case called Bertha Tom v. FACU in the 10th
Circuit that I was involved in which might be a good starting place to look at this issue. Again, usually the right of set off occurs in the context of just taking someone’s regular account. So I don’t know if different rules apply where there is a certificate of deposit.
If the proper steps are taken, the bank will have what is called a security interest in the funds in that consumer’s account and it can legally access all or parts of the deposit account (the funds) to pay of the consumer’s credit card debt. Arizona banking law allows a bank to take property of any kind to secure or satisfy or partially secure or partially satisfy an obligation to the bank. (A.R.S. 6-243). Even though credit cards are issued by national banks, they are regulated by federal banking laws as well as certain state laws. Under federal law (known as Regulation Z of the Truth in Lending Act), generally a card issuer may not take any action, either before or after termination of credit card privileges, to offset a cardholder’s credit card debt by applying the funds that the cardholder has on deposit with the card issuer. However, the law also states that the card issuer has rights under state or federal law that allows the bank (or card issuer) to attach the funds held on deposit in the cardholder’s account at that card issuer’s bank. The card issuer can rely upon the Arizona law mentioned above to take the certification of deposit. Banks are allowed to have plans, if authorized in writing by the cardholder, under which the card issuer may periodically deduct all or part of the cardholder's credit card debt from a deposit account held with the card issuer (subject to any disputes over the amount due). (12 C.F.R. § 226.12) If there is a question about whether a plan was authorized, the cardholder should check with the bank that issued the card to read the contract for the credit card and certificate of deposit. For more consumer information related to banking and certificates of deposit go to: http://www.fdic.gov/consumers/questions/index.html.
May 22, 2007