Cash Secured Loan

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Question:

When making a cash secured loan, is the bank able to hold the funds in the customer's checking account or MMA, or do the funds have to be held in a savings account or certificate of deposit? The question is posed for both consumer and business loans.

Answer:

Answer by Kathleen Blanchard:Depending upon the bank's system, it can place a hold on funds in checking or money market accounts. It is difficult to manage this, however, and many banks require that the funds being held for collateral be placed in a designated savings account or CD. That is a much better practice.

Answer:

Answer by Dan Persfull:If you use the DDA or the MMA be sure you spell out in your loan agreement how you will treat checks coming in on the account. If the DDA balance is $30,000 and you have a $20,000 hold on it, will you pay a $14,000 check drawn on the account, or will you return it as a NSF item? If you pay it, then what's the purpose of your hold? A savings account is the easiest and cleanest to maintain as security for the loan.

First published on BankersOnline.com 11/02/09