Sunday, November 8, 1998 - Page updated at 12:00 AM

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Loan `Cross-Collateralization': Look Closely At The Fine Print

The Washington Post

When changing jobs stressed out Andrena Bundy's finances earlier this year, the Baltimore resident began juggling payments on her bills until things stabilized again. To help out, last July, Bundy's father paid off the loan on her 1990 Mazda 626.

Weeks later, after Bundy hadn't received the title for the paid-off car, she called the lender. Navy Federal Credit Union not only is where she borrowed money to buy the car, but also had checking and savings accounts, and a Visa credit-card account. NFCU told her it was refusing to turn over the title because the Mazda served as collateral on her credit-card debt as well. And she had fallen behind in making payments on it.

That her credit card was somehow linked to her car was news to Bundy. She requested a copy of the promissory note. There was, indeed, "verbiage on the bottom of the agreement," Bundy says, two paragraphs of legalese that were indecipherable to her and most ordinary consumers. NFCU maintained that language constituted "cross-collateralization" on her loans. A lawyer she consulted said it didn't.

Depending on whom you talk to, cross-collateralization is considered either creative financing for consumers who otherwise can't secure a loan, or a way lenders stack the deck in their favor when making unsecured loans to customers who also have a secured loan with them.

Although it is a legal device used more often in high-finance, corporate-level wheeling and dealing, cross-collateralization has trickled down into ordinary consumer lending as well. Parents who want to help their adult children purchase a home, for instance, sometimes can cross-collateralize by using a portion of their own home equity as a down payment. Consumers who sign a cross-collateralization agreement with their bank agree to allow the bank to draw on one account to pay on another account.

Basically, it enables a consumer to use collateral from a secured debt to cross over and secure another debt - usually an otherwise-unsecured debt such as a credit card. Should the consumer not repay the unsecured loan, the lender could ultimately confiscate the collateral assets.

Different state laws and judicial decisions, along with federal truth-in-lending laws, restrict where and how cross-collateralization can be employed. Automobile loans and credit-card accounts, both mainstays of credit unions, appear to face the fewest restrictions. But cross-collateralization isn't a standard loan-default clause; it requires an agreement by the lender and borrower - and is just one more reason why, before signing the bottom line on a loan, consumers really do need to read and understand all the "verbiage."

And Andrena Bundy? Refusing to give in, she telephoned her way up NFCU's corporate hierarchy until she got the answer she wanted. "They simply gave in when I went up the line to the manager and VP," says Bundy, who received her car title about three weeks later.

Crib-sheet hazard

Parents of infants should double check the sheets on their child's crib to make sure they fit securely and properly. According to a report in the November issue of Good Housekeeping magazine, most crib sheets don't measure up and can pose a strangulation hazard to tykes who pull the misfits off the mattress. Of the 23 crib sheets tested by the Good Housekeeping Institute, 15 shrank and fit poorly after five machine washings. The institute concluded that the toughest and best crib sheet was the 100-percent cotton sheet ($16) from the Lands' End catalog. Four other sheets, from the Company Store and Eddie Bauer Home, also filled the bill.

Copyright (c) 1998 Seattle Times Company, All Rights Reserved.


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