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#26005 - 07/30/02 09:30 PM
Reg Z Security Interets
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Anonymous
Unregistered
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Our bank currently uses Bankers System ARTA systems and practices disclosing in the FED BOX to borrowers a security interest "in the collateral securing other loans with you may also secure this loan". This disclosure is used in addition to the disclosure "the goods or property being purchased ". This requirements is found in section Reg Z section 226.18m. The purpose of the practice is the attempt to cross collaterialize on every loan, even in future situations, when a borrower receives money secured on a separate piece of colleratal.
I contend that the cross collateralization disclosure should only be used when it applies. Not for every loan. Is this a problem to follow such a practice? Is this practice a violation, or are we misinforming the borrower, when in fact, no other collateral exits at this time? The Z Commentary does not elaborate.
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#26006 - 07/30/02 10:41 PM
Re: Reg Z Security Interets
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10K Club
Joined: Jul 2001
Posts: 85,422
Galveston, TX
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The only issue that I see, and this situation is usually addressed somewhere in the contract, is that if you have a loan outstanding secured by their principal dwelling. With the cross-collateralization clause, you would be required to provide a right of rescission. This is a pretty common practice. You may need to consult state law concerning forward looking collateralization statements (is collateralization really a word???)
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#26009 - 07/31/02 03:04 PM
Re: Reg Z Security Interest
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10K Club
Joined: Jul 2001
Posts: 85,422
Galveston, TX
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David - That's what I meant by "usually addressed somewhere in the contract", but I guess I wasn't too clear. If it's not appropriately addressed though and I've seen it happen - look out!
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#26010 - 07/31/02 06:59 PM
Re: Reg Z Security Interest
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Gold Star
Joined: Oct 2000
Posts: 398
Derry, NH
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David, in response to your post regarding FDIC in KC citing banks for checking "my deposits...", I had a discussion regarding this practice with the Concord (NH) Field Office resident Reg Z expert who said that he would not cite it because he felt that it disclosed the contractual right of set-off. I don't agree with his position and I am advising my banks not to check it off. Wouldn't be nice if FDIC examiners were all on the same page?
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Allan D. Virr, CRCM,CRP
Compliance Audit Solutions, LLC
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#26012 - 07/31/02 07:18 PM
Re: Reg Z Security Interest
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10K Club
Joined: Oct 2000
Posts: 27,769
On the Net
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Bankers Systems instructions for this box indicated that this is applicable if setoff is considered a security interest under state law.
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AndyZ CRCM
My opinions are not necessarily my employers.
R+R-R=R+R
Rules and Regs minus Relationships equals Resentment and Rebellion. John Maxwell
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#26013 - 07/31/02 10:05 PM
Re: Reg Z Security Interest
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Platinum Poster
Joined: Oct 2000
Posts: 692
Wherever my most benevolent em...
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David,
FDIC Chicago told us the same thing in 1998. That the deposit account should not be checked unless it is a perfected security interest. Marking it to ensure that you can touch it in the case of setoff is covered elsewhere in your documentation.
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David J Mulkerin, CRCM
All opinions expressed are mine and not those of my employer and are not to be taken as legal advice.
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#26014 - 07/31/02 10:24 PM
Re: Reg Z Security Interests
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Anonymous
Unregistered
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I wanted to respond to our responder, PatT. Thank you! I do agree with your explanation from the pages of your commentary on FED BOX security. This was also my contention, playing the devil's advocate game. Maybe this is why the Fed's Commentary does not elaborate, because of the wording "(may) also secure this loan". Even though I do not agree, I can live with this. David Dickerson may have another thought on the subject. But, if our bank continues practice marking this box, it opens up the can for more worms (questions) when I say during our training, that you only mark your disclosure when it applies to your situation. Do you agree here? PatT, what's your opinion on a blanket use for the right of set off. Our KY Bankers attorney suggests that we only use it when applicable. 
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#26015 - 06/23/06 04:38 PM
Re: Reg Z Security Interets
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100 Club
Joined: Jun 2004
Posts: 106
The Deep South
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Quote:
The disclosure required by Regulation Z is that "collateral securing other loans may also secure this loan." This wording is not misleading if the person has not given collateral for any loan, because the wording doesn't say that the person has given collateral. It just indicates that if the person has, it might be collateral for the new loan. It's alerting the person to look at the documents for the first loan, to make this determination. If the person has given collateral for another loan, the wording is not misleading, because it alerts the consumer that the collateral may also secure this loan, depending on what the other agreement says. So, I don't think the wording is misleading whether or not the person has another secured loan.
If you read 226.18(m)-5 it DOES appear that this should only be marked when you KNOW that there are pre-existing, secured loans. However, if you read 226.17(a)(1)-6 under General Disclosure Requirements, Reg Z appears to allow the disclosure of the "possibility" of a security interest arising from a spreader clause in a multipurpose note even if not applicable to a specific transaction. Ergo the use of the word "MAY" rather than "SHALL." Any comments on that? Below are the two Reg Z cites:
226.18(m) Security interest.
5. Spreader clause. The fact that collateral for pre-existing credit with the institution is being used to secure the present obligation constitutes a security interest and must be disclosed. (Such security interests may be known as "spreader" or "dragnet" clauses, or as "cross-collateralization" clauses.) A specific identification of that collateral is unnecessary but a reminder of the interest arising from the prior indebtedness is required. The disclosure may be made by using language such as "collateral securing other loans with us may also secure this loan." At the creditor's option, a more specific description of the property involved may be given.
226.17(a)(1) General Disclosure Requirements.
6. Multiple-purpose forms. The creditor may design a disclosure statement that can be used for more than one type of transaction, so long as the required disclosures for individual transactions are clear and conspicuous. (See the commentary to Appendices G and H for a discussion of the treatment of disclosures that do not apply to specific transactions.) Any disclosure listed in §226.18 (except the itemization of the amount financed under §226.18(c)) may be included on a standard disclosure statement even though not all of the creditor's transactions include those features. For example, the statement may include:
* The variable rate disclosure under §226.18(f).
* The demand feature disclosure under §226.18(i).
* A reference to the possibility of a security interest arising from a spreader clause, under §226.18(m). I think THIS is where the word “MAY” applies…
* The assumption policy disclosure under §226.18(q).
* The required deposit disclosure under §226.18(r).
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#26016 - 06/23/06 05:04 PM
Re: Reg Z Security Interets
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Power Poster
Joined: Nov 2004
Posts: 3,328
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I think it boils down to the question of whether you have a cross-collateral clause in your docs. (In most states, I don't think the right of setoff constitutes a "security interest" that merits this disclosure.) If you have a cross-collateral clause that includes collateral given for future loans, the disclosure is appropriate. It tells someone that collateral for other loans may also secure this loan, even if there are not any other loans at this point in time.
If you don't have a cross-collateral clause, you shouldn't use it.
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#26018 - 06/26/06 06:41 PM
Re: Reg Z Security Interets
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Diamond Poster
Joined: Oct 2005
Posts: 1,139
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Right of set-off is not a security interest. Security interests are obtained by agreement. The right of set-of is known as a lien interest. Judicial and statutory liens are lien interests and not security interest. The term security interest is reserved for those who obtain a lien by agreement. They are consensual and not statutory or judicial.
It is like the difference between a secured creditor and a lien creditor. A secured creditor is by agreement and a lien creditor is by judgment and seizure, or rule of law or statute.
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#26020 - 06/28/06 06:56 AM
Re: Reg Z Security Interets
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Diamond Poster
Joined: Oct 2005
Posts: 1,139
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A dragnet clause is a security interest not a lien interest. A dragnet is by agreement not by statute. There is a big difference between a dragnet clause and the automatic right of set-off.
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