jewelry as loan collateral

??? huh???? You can skip town with a house? ... a whole house? ... or are me talking mobile home?

Reminds me of this . . .
Q: In Arkansas, how are a divorce and a tornado alike?
A: Either way, somebody's losin' a trailer.

Without possession you have a violation of the FTC's Unfair and Deceptive Credit Practices Act. Section 227.13 indicates, "It is an unfair act or practice for a bank to enter into a consumer credit obligation that contains any of the following provisions, ....(d) a nonpossessory security interest in household goods other than a purchase money security interest." "Jewelery" is included in the definition of household goods in section 227.12(d). You may also find this in Reg. AA. If this is a nonpurchase money, consumer loan - you might have a little regulatory problem.

Actually, jewelry is excluded from the definition of "household goods" under 227.12, except for wedding rings.

Good catch, Louvera.

Thank you for the insight on FTC rules. This loan, however, is a commercial loan.

Re: "There are some goods you can perfect against only by possession. Gold bars, rare coins, jewelry and such fall into that category."

The bank has filed a UCC on this jewelry. Are you saying that a provison of law makes this filing of no effect?

There is a strong possibility that if your borrower wanted to, they could sell your collateral without your knowledge and consent.

Jewelers are not very likely to check with the county courthouse or secretary of state (or whoever handles filings in your state) to determine whether or not the jewelry they are about to buy is subject to a security interest.

The average consumer on e-bay or who reads your newspaper is even less likely to do so.

Even if you managed to track the jewelry once it is sold, I find it unlikely that the courts would punish a buyer who purchased the jewelry in good faith just to protect you from your lack of foresight.

Collateral has value as collateral only if you can actually sell it to recover your loan. Bankers would take possession of business furniture, fixtures, and equipment if it wasnt for the fact that the business could not operate if they did.

We have taken diamonds as collateral a few times. We have the customer get a current appraisal from a jeweler, which can identify the stones and establish collateral value. Then we open a safety deposit box, bank and customer on signature card. The Bank's key can go in your collateral vault. In addition, all parties should be present when collateral is put in box. This way there cannot be any question of switching diamonds at the time the collateral is being released.

Thank's Ted, I read that backwards. You can tell that this law was written in an age where wedding rings meant something and people would really be willing to repay the loan to get them back

In the age of stock certificates being the only means to identify ownership the only way to perfect against stock was to take possession. A UCC filing against stock certificates then was meaningless.

As Paul points out, if the collateral is stuff the bank cannot practically take possession of the way to perfect is to UCC file. You start getting into gray areas when the item is large. Would a gun collection in possession of a consumer be best perfected by UCC or by possession? I would argue by possession. Would a Renoir hanging on the wall be best perfected by possession or UCC? I would say by possession. A 1965 Cobra? Fortunately such a vehicle would be titled so lien on title is the way to go.

Perfection protects against the claims of 3rd parties. If it's in the bank's possession it would be pretty tough for a 3rd party to claim it's theirs. The UCC says a possessory perfection beats a filing perfection unless the filing perfection is done in accord with another statute. Thus, if the diamond is pledged to one lender who does a UCC filing with no possession and the borrower goes to a pawn shop and surrenders the diamond to the pawn shop the pawn shop wins as they have possession. On the other hand, if the borrower pledges a car to a bank that merely takes possession and stores it in the bank's garage and another lender later advances funds and files a lien on the title to that same car, the latter lender wins in a fight as the latter bank followed another statute that says perfection by lien on title was the way to go.

State law probably does not address how to perfect a lien against a Renoir or a gun collection so possession obtained by another lender is going to beat the bank that merely filed a UCC.

In Michigan we have an issue with snowmobiles being untitled goods. A UCC will protect against a 3rd party buyer (we hope) but if another bank took possession of the snowmobile as collateral the UCC lender would likely lose. This is a bit ridiculous example as no bank is going to take possession of a snowmobile but it could happen.

Ag bankers know they have to follow other weird rules on how to perfect against crops, hogs and other livestock. Absent those perfection rules the only way to perfect would be to take possession. How do you take possession of hundreds of acres of growing plants? Who wants possession of 300 hogs?

If there is no other statute in your state that addresses how to perfect, take possession.

The only way to perfect your lien in this type of collateral is by POSSESSION. It is like a stock certificate, you either have possession from the individual or an acknowledged control agreement from a broker. Customer does not keep it with him.