The bank has taken as loan collateral a 7.5 carat diamond ring and diamond bracelet. The client is wearing the collateral. The bank has been listed on the client's insurance as loan loss payee and the bank has filed a UCC along with the appraisal on the ring and bracelet with the Sec of State's office.
Any thoughts on the adequacy of this arrangement? I had expected that the bank would hold the collateral in its vault under joint custody. But this is an unusual transaction for this bank.
My opinions are not legal advice, not my employer's, and may change anytime.
Not directly related to the lending aspect, but I thought that for rocks of that size, the owner wore a replica in public to avoid the possibility of loss or theft.
By the way, did you get any kind of certificate from a gemnologist? First, you want to be sure that you weren't looking at a replica when you saw the collateral. Second, the size may be huge, but if the clarity, cut, etc. are substandard, its value may be less than you'd think.
Loc: Down South, USA
Unlike autos and real estate, there is no mechanism for registering your interest in jewellery, so although you have registered your interest in the insurance, you are still exposed to the risk of a fraud by the borrower who sells your collateral and defaults on the loan.
I would say that you should have the original gems in your vault.
This is my opinion; it is not legal advice, nor the view of my employer, and it may change tomorrow.
Loc: Las Vegas Nevada
IMHO This is an unsecured loan in disguise. How would you ever repossess the collateral? and What ever possessed a loan officer to take this as collateral?
I won't even go into all the ways the value of jewelry is effected, but unless the loan officer knows them, and has documentation from a reliable independent third party you can't even begin to determine a value. If the loan to value was based on the retail value established by an appraisal provided by the borrower you have another problem.
Borrowing on a luxury item like this would make me question financial ability. I hope there is a good primary and secondary source of repayment other than the sale of the diamond.
You are correct the collateral should be locked up in the banks vault. They want to wear it, pay off the loan.
IMO The borrower should qualify for this unsecured and if not pass
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Loc: FINALLY ABOVE the gnat line
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.
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Loc: The Pennant Race
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.
_________________________ The opinions expressed here are personal and do not represent opinions of my employer.
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.
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