In the past when we have a CD loan we place a hold on the CD on the system and put the cd in the vault. We have gone to just putting a hold on the system and not requiring possession of the CD as it is not really a negotiable item.

Has anyone else gone to this procedure?

No. Based on bank counsel recommendations we require possession of the actual CD. We provide the customer with a safekeeping receipt detailing the item and referencing the possession as collateral for the loan.

We too discontinued the physical taking of the CD for safekeeping in our vault. Additionally, we no longer issue a physical Certificate rather we issue a CD passbook if the customer desires a "physical item" to have. The underlying pledge agreement executed by the grantor of the collateral along with the system "Hold" is adequate. We review monthly to ensure that the hold has not been released and funds are still adequate to cover the loan.

We don't issue a physical CD either. Just like you almost never see a physical stock certificate anymore.

We still issue a physical CD and my recommendation was to stop putting them in the dual control vault, and simply hold them in the loan file. I think that taking them from the customer is a good practice, for the reason that a customer might put one over on a CSR, but I would rather keep the access to the dual control vault (holding securities) more limited.

My one concern with keeping physical CDs in the loan file would be if you let those files out of the file area with all contents (CDs, vehicle titles, etc.) If you let lenders have the file, do you have an audit process when they are returned to make sure all collateral is still in the file?

Well, my thinking is that you aren't talking about "real" collateral, if it is not a negotiable CD. Yes, there is something to be gained by taking it away from the customer (it keeps them from taking it to a teller and asking to cash it), but I don't think the bank is taking any additional risk should it be lost.

Our process is the same as Jokerman's. We hold the CD, but we keep it in the loan file. It is a non negotiable item, so there's no reason to keep it in a dual control vault.

I don't disagree with not keeping it in a dual control vault, that serves no purpose as it is not negotiable. But by leaving it in the loan file when you let a lender walk away with the file, you have given the lender the ability to give it to the customer and you are back where you started (same with vehicle titles). Hence my question, do you check that the lender returned everything?

But kaybee, the lender could theoretically do that with anything. The lender could order the hold on the system removed, which would indicate to a teller that it was ok to cash the CD. The lender could give the note document back to the borrower, too.

The lender is responsible for the completeness of loan documentation.

I agree the lender could do that with anything but the bank needs controls (at least public banks under SOX) need processes to know what they have at all times, especially once the file has left and come back. If a lender takes a loan file and releases titles or CDs or life insurance, the bank should have a way to know that prior to having a problem and finding it is missing. And having audit do periodic audits would not count. Audit is not a control.

That is why I said that is a concern I have when that process is allowed. I have worked at banks where we did not allow lenders to have those types of documents unless there was an approval to release the collateral. Otherwise they received a sanitized file. At my present bank we had to institute a new process (periodic file audits) to satisfy SOX.

I hadn't thought of a SOX angle on this. How does your new periodic file audit help, since "audit is not a control"?

If you only want to allow officers to access "shadow" files, or (even better, IMO) imaged files, I think that's great. But at the point you get the file back from the officer and he's lost the [car title/account assignment/CD document/original note], you've already got a problem - at the point you know about it, it's already been a problem, right?

At the moment it is quarterly file audits by the collateral management unit (not the audit department). I would prefer not letting the collateral go in the first place since that is really a control, and am still pushing for that. We will see how this current periodic file review process flies!

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If a lender takes a loan file and releases titles or CDs or life insurance, the bank should have a way to know that prior to having a problem and finding it is missing.

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Proper internal controls would suggest that a loan officer could not do any of these things. Collateral control and access to deposit system holds should only be performed by a third party within the bank. If you allow your loan officers to perform these function, IMHO your internal control process already looks like swiss cheese.

The file vault in our bank has a third party custodian. But if a loan officer wants to see that loan file, they are going to give it to them. I'd be very stunned if that is not how the overwhelming majority of banks in this country operate.

You allow your officers to release collateral? Review is one thing, access to the deposit system on which holds are placed - in the case of the current topic of CD secured loans is a whole other issue.

No, our officers have no maintenance ability on the system. (But, in reality, the officer is the one who authorizes bookkeeping to release the hold.)

I agree, Randy, and that is why I raised the point. If a lender has a file with those things in it, what is to stop the lender from giving it to the customer? I see it as a major flaw (and one we have here). I have suggested that they image those items (they don't want to image the whole file due to expense). I am waiting for a response. I want a true control where a third party keeps those and they don't float around the bank.

However, I have to agree that this is common practice. I just don't happen to agree with it. I view it as a large gap.

What is stopping the lender from making loans to un-creditworthy individuals?

I think there are just some risks for which the only reasonable control is the fact that you're going to eventually get caught.

For SOX, we thought through our entire process and identified processes such as no individual lending authority, credit administration/legal counsel doc prep, exception reporting, etc. that prevent a lender from creating undue risk at the front end.

Always been that way, and at several other large banks I have worked at. Current bank requires too many. At others, it was just 2 with some additional signoffs for certain situations.