Using CDs as Collateral

Question: We have had a request by a customer to pledge his Certificate of Deposit as collateral to another financial institution where our customer is taking out a loan. (We turned the loan down.) Do we have the right to deny his request? How should we handle this?

Answer: You do have the right to deny the request, because you are taking on additional, unnecessary liability. You would have to recognize the other financial institution's security interest in the CD. If someone in your bank goofs (believe me - it can happen) and accidentally allows the customer to cash in the CD, the other financial institution can go against you if the security interest has been recognized.

You might consider waiving the early withdrawal penalty so he can move the CD to the lending institution. Or, if the CD is being used as collateral for the loan, you might reconsider making the loan yourself.

Copyright © 2001 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 11, No. 12, 12/01