Wisconsin Consumer Act II 1

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1 WISCONSIN CONSUMER ACT II: DELINQUENCY & COLLECTIONS PRESENTED BY: PAUL GUTTORMSSON LATE FEES Consumer Act does not restrict late fees on open-end plans, but your agreement must provide for them. Consumer Act restricts late fees on closed-end loans to $10 or 5% of unpaid amount of installment, whichever is less. A 10-day grace period is required. Real estate loans subject to various late fee rules. See ii Release No. B007. LATE FEES, CONT D. Consumer Act prohibits collecting more than one late fee on an installment, no matter how long it is in default. CU must apply payments to current installments before delinquencies, for purposes of determining if the current installment is late. ii Release No. B007 explains other state and federal rules against pyramiding late fees. Be sure your data processor can comply with all the rules. Wisconsin Consumer Act II 1

2 DEFAULT Before CU takes any action to collect on a consumer loan: Loan must be in default, CU must send Notice of Right to Cure, and Consumer must fail to cure. See ii Release No. B031 for details. DEFAULT, CONT D. Failure to pay on a closed-end loan w/ monthly payment schedule: When outstanding amount on loan exceeds one full payment for more than 10 days after scheduled or deferred due dates. If payment is missed completely, default occurs in two months, 11 days. If partial payments are made, this can stretch on for months. ii Release No. B031explains special closed-end rules: If first or last month payment missed. Loan does not have monthly payments. Balloon loans. DEFAULT, CONT D. Failure to pay on open-end loan. Borrower fails to pay when due twice within 12-month period. Violations of other terms. The violations must materially impair: Condition, value or protection of CU s rights to collateral; or Member s ability to make payments. For credit sales, a material false statement on a credit application is a default. Consumer has no right to cure this type of default. Wisconsin Consumer Act II 2

3 NOTICE OF RIGHT TO CURE DEFAULT WCUL # Includes: Name, contact information for CU; Identification of loan; Statement of how loan is in default; Statement of required action to cure (including itemization); and Deadline date. NOTICE OF RIGHT TO CURE, CONT D. Send to each borrower, joint borrower, cosigner or guarantor on the loan. One loan per notice. Certified mail or regular mail. Third strike and you re out! No more than two right to cure notices need to be sent in 12-month period. If the borrower defaults a third time, there is no right to cure. CU may immediately take action to collect. DEBTOR S RIGHT TO CURE Consumer has 15 full calendar days to cure. Suggestion: Wait extra days, for last-minute mailing. Cure = all payments currently due + late fees/charges. Or proof that other violations have been cured. Only if debtor fails to cure can the CU: Accelerate, making full balance of loan due; Start collection lawsuit; Repossess collateral, Ask for/demand return of collateral; or Setoff on accounts. Wisconsin Consumer Act II 3

4 SETOFF & FREEZING ACCOUNTS DFI says if account is otherwise eligible for setoff, it can be frozen when proper Notice of Right to Cure is mailed. But dollar amount of hold cannot be more than amount past due. CU can set off when cure period ends. See ii Release No. B013 for guidance on setoff. FORCE-PLACING INSURANCE If borrower fails to comply with agreement, CU could declare default, or it could instead perform agreement on borrower s behalf. E.g., Lapse in insurance coverage or unpaid taxes. Extensive federal rules apply to force-placing insurance on most mortgage loans. See ii Release No. B075. FORCE-PLACING INSURANCE, CONT D. 1.Agreements must permit it. League Chattel Security Agreement does. 2.Must send written notice of non-performance to borrower, giving at least 10 days to perform. For example, give notice that insurance must be reinstated within 10 days. 3.Must act in good faith and in commercially reasonable manner. For example, do not place more insurance than what is owed on loan. Wisconsin Consumer Act II 4

5 FORCE-PLACING INSURANCE, CONT D. 4.After performance, must send written notice specifying what was done. The amount of funds advanced. Brief description of insurance obtained, including type and amount of coverage. Any revised payment schedule. Sample notices: > Compliance > Topics A to Z > Force Placed Insurance. REPOSSESSION Creditor must obtain judgment for replevin of collateral before repossessing except for motor vehicles. Once judgment obtained: Creditor may seize collateral without sheriff but there may not be breach of peace or threat of breach. Sheriff assistance need a bond. See ii Release No See ii Release No. B066 on self-help repossession of motor vehicles. Combined Notice of Right to Cure Default / Take Possession form (WCUL #82049). RECOVERING EXPENSES Consumer Act prohibits default charges, with certain exceptions. When recovering vehicles, loan documents can only allow CU to recover certain expenses: Expenses paid to others to take/hold property; Travel and transportation expenses of CU; and/or Expenses in preparing collateral for sale, like repair & cleaning. See ii Release No Other charges prohibited, e.g., collection agency commission. 15 Wisconsin Consumer Act II 5

6 RECOVERING EXPENSES, CONT D. Actual attorney s fees are not recoverable for any Consumer Act collection cases. Minimal attorney s fees set by statutes. Court can add certain costs, like court filing fees, to judgment VOLUNTARY SURRENDER Consumer can surrender collateral at any time. Before end of right to cure, CU cannot ask for or demand return of collateral. Have borrower(s) and collateral owner(s) sign Statement of Surrender and Acknowledgment of Receipt of Collateral, WCUL # See ii Release No. B025. RIGHT TO REDEEM Borrower has 15 days to redeem collateral. After collateral surrendered, self-help repossession or repossession with court order. Before returning collateral, the CU may require: All delinquent installments plus unpaid delinquency charges due (no acceleration); Cure of any other defaults; Court costs, filing fees, etc., that CU incurred; Permitted expenses for recovering collateral; and Performance deposit of three scheduled installments (or minimum payments for open-end credit plans) or 1/3 of total debt remaining unpaid, whichever is less. Wisconsin Consumer Act II 6

7 SELLING COLLATERAL Sale of collateral is subject to UCC rules. See ii Release No. B045. Must be sold in a commercially reasonable manner. Two notices, in ii Release No. B060: Notice of Our Plan to Sell Property. Explanation of Calculation of Surplus or Deficiency. Borrower can be liable for deficiency after sale. If outstanding balance is $1,000 or less at time of default, on interlocking loan or consumer credit sale, borrower not personally liable for remaining debt. See ii Release No. B049 on interlocking loans. QUESTIONS? Please contact The League s Legal Affairs Department, at Wisconsin Consumer Act II 7