Beware of Cross-Collateralization

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Most people have not heard of the term “Cross Collateralization” unless they are in the finance industry or have had the unfortunate experience of going through it themselves. Hidden in the fine print of the contracts for many lending products is a clause that allows the lender to seize certain types of collateral if a borrower becomes defaulted on a different account. This is something I always looked out for in my days as a credit card negotiator – a  borrower who has fallen behind on Chase credit cards, but has money in a Chase savings account; or a borrower who is behind on an auto loan through their credit union, and has a checking account at that same credit union.

Until now, I had not seen this type of issue with private student loans. Navient, the largest private student loan originator, does not offer checking or savings accounts (as far as I’m aware) so this is not a potential issue with them. Neither does NCT, another large private student loan holder. However, many other private student loan lenders like Discover, Chase (which has discontinued originating new private loans), Citibank, Wells Fargo, Discover, and Keybank are all financial companies that offer checking and savings accounts in addition to their student loan products.

I recently spoke with a borrower who had fallen behind on his Wells Fargo student loans. Within a few weeks of defaulting, Wells Fargo had withdrawn over $17,000 from his Wells Fargo checking and savings accounts – without so much as a phone call or letter indicating their intent to do so. Wells Fargo has recently gotten in quite a bit of trouble for unscrupulous financial practices; but this was a surprise for me to hear about since Wells Fargo is generally not that aggressive in pursuing borrowers with litigation. Whereas some private lenders will be well on their way to filing a lawsuit within the first year of a default, Wells Fargo accounts can take much longer until they finally attempt legal action. In terms of the cross collateralization though, they were extremely aggressive; taking so much money that the borrower could be in jeopardy of not being able to pay their mortgage or bills. This is an unauthorized transaction, highly unethical – but legal, according to the fine print that the borrower most likely does not remember reading years ago when signing for their Wells Fargo private loans.

This is the first time I’ve heard of cross collateralization happening with a private loan, but it is a well known problem in the credit card industry. If you fall behind on credit cards, auto loans, or private student loans; and you have other checking or saving accounts with the same financial institution, withdraw all funds from those accounts and transfer them to an unrelated bank or better yet, a credit union. It might be a bit of a pain to re-do your Direct Deposits and auto-pay bill payments, but it’s a small price to pay to avoid a massive unauthorized withdrawal by your lending institution.

If you do fall behind on private student loans, you want to work toward a plan of repaying them or settling them. By hiring a professional negotiator, you can make sure your loans are settled for as low as possible and that the settlements are executed correctly, and most likely save money versus trying it on your own – even including the negotiator’s charge. In the meantime, you want to protect the assets in your savings and checking accounts and move them to an unrelated financial institution as soon as you fall behind.

Examples of potential situations that could result in unwanted cross collateralization include the following: 

-Citibank private student loans when you have Citibank checking or savings accounts

-Discover private student loans when you have Discover checking or savings accounts

-Wells Fargo private student loans when you have Wells Fargo checking or savings accounts

-Chase credit cards when you have Chase checking or savings accounts

There are also different types of cross collateralization that can cause problems for borrowers with secured assets like automobiles, or during bankruptcy. Until now, I had not heard of a private student loan lender using this aggressive, underhanded, and unethical tactic. By making sure your funds are kept safe in a different financial institution, you can prevent waking up to a surprise 5-figure withdrawal from your checking and savings accounts if you fall behind on your private student loans.


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About Andrew Weber, NACCC Certified Student Loan Counselor

Andrew Weber is a NACCC Certified Credit Counselor and a NACCC Certified Student Loan Counselor. He is the only certified student loan Counselor who specializes exclusively on private student loan issues in the US. He's helped over 2,500 borrowers drastically reduce their debts.

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