1.         Notice Content

Multiple requirements related to notices and their content apply when credit unions seek to repossess and sell collateral. Some states require a notice that the credit union intends to repossess the property. Other jurisdictions, like Maryland, do not require that notice; however, if it is sent, specific requirements govern its substance.

Once repossessed, but before the collateral is sold, credit unions in most states are required to send a notification. Maryland and D.C. require this notification. The debtor and any other lien-holder or secured party must receive this notice. This notification must include items such as identification of the collateral, how the credit union intends to dispose of the collateral, including the date and place of sale, and the consumer's right to redeem the property and receive an accounting. Failure to include necessary provisions can result in a violation of law.

After selling collateral, credit unions are required to send a deficiency or surplus letter, depending on the sale's outcome. This notice must include specific information such as the amount of sale proceeds, an itemization of the expenses and fees charged, and an explanation of the deficiency or surplus calculation.

2.         Collateral Sale

Credit unions should understand the requirements for a collateral sale. Most statutes impose a standard of commercial reasonableness, including every aspect of the sale from the method to the time of sale.

3.         Notice Timing

The timing of notices varies by state. Notices of repossession, whether discretionary or required, likely have to be sent a certain number of days before the repossession. Most states require the notification sent before a sale to be sent within a reasonable time before the disposition.

The member and other secured parties need time to react to the notice whether it be redeeming the property or attending the sale. There may also be timing requirements associated with the deficiency or surplus letter. For example, Washington, D.C., requires such notice to be sent within five days of the sale.

4.         Application of Sale Proceeds

Following the sale, the UCC specifies how the funds must be applied. For example, the reasonable expenses of collection and enforcement are the first items to be satisfied.

5.         Ancillary Regulations

Credit unions need to be familiar with all regulations imposed by their state that are not part of the UCC and any restrictions contained in their loan agreements. Failure to follow these rules could result in additional penalties. For example, a D.C. regulation restricts where an automobile can be stored once repossessed.

Furthermore, although the credit union likely prepared its loan documents, those agreements may contain notice provisions that impose a contractual obligation on the credit union.

Read more: Class action implications …

Class-Action Implications. An error or omission in a credit union's repossession process likely will be uniformly made across a segment of members, i.e., all residents of D.C. who had a vehicle reposed by the credit union during the past four years. That uniformity across a "class" of affected members enables a named plaintiff to allege claims in a lawsuit brought on behalf of himself or herself "and all others similarly situated."

The filing of such a lawsuit is the first step in the class-action process. Certification of a specifically defined class of members is the next step.

To obtain certification of a class, a member of the credit union who is seeking to become the class's representative must demonstrate the following:

1.         Numerosity — the class is so numerous that joining all individual plaintiffs into one lawsuit is impracticable;

2.         Commonality—there are questions of law or fact common to all;

3.         Typicality—the claims of the representative party are typical of all others; and

4.         Adequacy—the representative party will fairly protect the interests of the others.

Upon demonstrating those four elements, the court will enter an order certifying a class.

In the repossession context, a single mistake in the process can be repeated countlessly over a specified period of time. To avoid the possibility of defending against a class action, the credit union repossession process must strictly conform to all applicable state and local laws and be rigorously followed every time it is utilized. Repeating a mistake or cutting a corner could prove enormously costly to a credit union.

Marc E. Darnell is a member of the Kaufman & Canoles Credit Union Team in Norfolk, Va.