I have just read an article by Heather B. Thayer that states "a lender cannot take a security interest in a deposit account in a consumer transaction:"

It is listed in the bottom of the second paragraph at this site: http://www.fredlaw.com/articles/html/bank_0106_hbt.html

Is this correct?

The article is correct. The assignment of a a deposit account in a consumer transaction is excluded from Revised Article 9. See Section 9-109(d)(13) http://www.bankersonline.com/lending/ra9text.html#9-109.html . The Official Comment to the section notes all deposit accounts were excluded from former Article leaving security interests to be governed by common law. The drafters of RA 9 decided to include only non-consumer deposit accounts in the transactions covered by the revision. This means that a security interest in a consumner deposit can not be perfected under Revised Article 9 but will be governed by contract law regarding the agreement between the parties (the loan documents). If the account is being held by the lender, the loan agreemnt could provide in the event of non-payment, the lender can retain the funds. If the account is maintained by another institution, the lender could enter into an agreement with that institution that acknowledges the pledge and provides the funds would not be released to the borrower without the consent of the lender.

You hit it right on the head Sam, and this led us to re-examine how we were granting consumer loans that were secured by CDs (both internal and external). In fact, we will not sign agreements presented by other banks to hold CDs because they want to lend against them. The liability is just too great. If the customer wants a loan, they need to come to us for it or cash out the CD and move the money.

It is true that in most states consumer deposits are excluded from article 9 of the UCC, but that doesn't mean that consumer deposits accounts cannot secure a loan. It just means that you have to look for other state law to tell you what you must do to use the account as collateral for a loan. A certificate of deposit can be either an "instrument" under Article 9 or a "deposit." I think these days most certificates are deposits, but some institutions might still issue them as instruments.

The concern we had was if we were not perfected under UCC Article 9, could a tax lien or bankruptcy trustee have a superior claim on our collateral.

Several legal opinions said, essentially, yes it was possible for that to happen. The likelihood of it happening is another story, but the fact remained that our collateral was no longer "ironclad" as it had been before under the old California UCC 9.

We, and a few other banks, switched to issuing an actual Certificate of Deposit for those consumer loans where the customer requests a deposit-secured credit.

If a customer pledges a CD that he has with us for a loan to another bank, can we refuse to accept the pledge? Would their be any reg. that would require us to honor such a request?

To the best of my knowledge you're under no obligation to agree to the pledge. We won't do it, simply because we don't want the liability if one of the tellers messes up and redeems the certificate.

Thank you.

Look to your state version under 9-104 which defines control of a deposit account:

"The debtor, secured party, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor."

Unless there is an agreement, the assignment has no automatic authority and would not take priority over any claims you may first have on the deposit account.

I know that this was an old post, but I’m surprised that there was no mention of the cure to the problem with consumer CD in 9-304. All you need to know are the states without a problem and how they fixed it, then use 9-304 to your advantage.

9-109 takes it away but 9-304 can bring it back.