What guidance has been provided for the structure of loans secured by deposits held by the institution who grants the loan? In some banks in which I have worked, the risk grade is automatically set as "1," the highest and best, and provided that the borrowers do not have other loans for which a financial statement is required, no financial information is required for the credit file. These type of loans are regarded essentially as "riskless." As long as the financial institution has exercised proper controls with holds, etc. that would seem to be the case.

Also, if the primary source of repayment is shown to be the liquidation of the collateral, none of the other typical underwriting concerns are addressed...such as having an "evergreen" loan on the books...and why would there be as long as measures are in place by which the loan balance would never exceed the collateral value [e.g. requirement of periodic loan interest payments, etc.]?

What is the case with your financial institution? Is this type of loan, properly managed of course, welcomed for as long as the borrower would want to have the loan? Have there been any concerns expressed by examiner, auditors, regulators about this type of loan?

Thank you for your input and feedback.

These type of loans are regarded essentially as "riskless." As long as the financial institution has exercised proper controls with holds, etc. that would seem to be the case.

Not is they are a non-commercial loan and the borrower has an IRS lien outstanding. The IRS will be in first position.

Just one quick story to tell. A LO at a bank I was at - (international banking facility) made a $2,000,000 loan to a customer secured by $2,500,000 in (paper) CD's in our bank. CD's were endorsed, locked in collateral file and held. As an afterthought, he asked external counsel if there was any way we could loose.

The attorney wrote back a 7 page letter identifying mostly BSA issues - illegally gotten deposits, laundered money, structuring, federal or state tax liens, etc. which could cause the bank to forfeit the CD's. It worked like a diet for the LO - he lost 15 pounds in one month worrying about it.

Two real scenarios - 1) teller paid the CD not realizing it was loan collateral.

2) Big overdraft - ops offsets CD collateral because "we can collect on the loan easier"

and in both cases I had to go to committee and charge off my previously secured "riskless" loans.

So procedures that really work are important, otherwise a lender can be made to feel risklessly foolish.

Original poster here...thank you for the responses...obviously proper structure and controls drive the "risklessness" of such a loan. Follow up question...provided that proper controls are in place to prevent such situations as Andy Z has mentioned, and provided that there are measures in place [such as requirement of periodic interest payments] such that the loan balance would not exceed the deposit balance, if you have the risk grade set at "1" [least risk] and if you do not have any specific requirements for the borrower to begin a principal repayment, is there any justifiable criticism that would be conveyed by an examiner, auditor, etc.? Would an "evergreen" loan in this type of case only be acceptable? Thank you again for your time and input.

I was researching this topic, and found this post from just over a year ago. I am wondering about the last question which Anon posed...provided that proper safeguards are in place [e.g. holds, ect.] are there any objections than an examiner/auditor would have if a borrower wanted to keep a CD secured loan on the books for many years? As long as the interest payments were made as per the note [and again excluding any IRS liens, etc.] and provided that the bank priced the loan to attain an acceptable margin, is there any drawback from the standpoint of the bank to having this type of "evergreen" loan?
Some of the officers at our bank seem to be relcutant to have this type of loan on the books for an extended time, while others see no problem [again excluding all the caveats which have been pointed out in this forum], and I am curious to understand better the viewpoint of those who are reluctant.

We have specifically written our policy to only allow CD secured loan maturity to match the maturity of the CD. If the customer wishes to refinance the loan again at maturity, just do it. They're quick and easy loans to underwrite and process.

Anon poster from 4/11/14 here...thank you...to clarify with doyoucanoe...in essence, whether the process would be making a brand new loan with each CD maturity, or renewing the loan via a modification to rate and terms, then I take it that, given the parameters previously specified, you would have no problem with having the loan(s)on the books spanning multiple CD maturities?
I cannot see the downside to that...again, with the parameters previously stated, it would seem to be only a positive thing for the bank.

If Rocky's attorney didn't include "fair lending" in the 7-page risk memo, I will. I've known regulators who considered CD-secured loans to be perfect for fair lending file comparisons. All loans in this universe have exactly the same risk level--something you can't find in any other portfolio. Since the risk is identical, any differences in pricing must be attributed to something else. If your pricing policy (and its enforcement) isn't squeaky clean and examiners find any pricing disparity that correlates with a protected characteristic, you'd better have answers ready.

I wouldn't have any problem having a CD secured loan on the books for multiple CD maturities, no. As long as (as I said earlier and you re-stated) the maturity of any single loan period did not exceed the maturity of the CD.