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#145988 - 01/06/04 09:32 PM pro and con of collateral held in branch
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We take Certificates and savings accounts as collateral for loans. We do not ever print actual certificates - just give a disclosure with requried info and the rest is on system, same goes for savings accounts. So, when we take one of these for collateral the lenders are just doing an assignment of account and it is kept in the loan file in the central vault - nothing is kept at the branch in a collateral box. I have a new employee who is saying if we take the certificate or savings as collateral for a branch loan we should take the assignemnt and keep it at the branch is a dual control box (the central vault is not dual control). Thoughts?

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#145989 - 01/06/04 11:57 PM Re: pro and con of collateral held in branch
rlcarey Offline
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Galveston, TX
The assignment would be no different than any other type of security agreement. I see no reason for dual control of anything that is non-negotiable.
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#145990 - 01/07/04 02:39 PM Re: pro and con of collateral held in branch
Risk Officer Offline
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I agree with rlcarey. We have been doing "paperless" CDs for a few years now. When taking a security interest in a CD or savings account, the key control is putting the hold on the system, and checking for holds when withdrawals are made. There is no need for dual control over the assignment...put it in the credit/collateral file.
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#145991 - 01/07/04 03:48 PM Re: pro and con of collateral held in branch
Andy_Z Offline
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Count me in. I believe the distinction is a negotiable vs. a non-negotiable instrument. You have the latter and dual control provides nothing additional.
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#145992 - 01/07/04 04:57 PM Re: pro and con of collateral held in branch
Jokerman Offline
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Quote:

dual control provides nothing additional.




In fact, it may take away. I worked at a bank that was doing this and we recommended they stop b/c it was providing additional access to actual negotiable collateral. Why are we getting in and out of the collateral vault over 100 deposit loans and jeopardizing the negotiable collateral securing 10 or 15?

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#145993 - 01/07/04 05:40 PM Re: pro and con of collateral held in branch
beaten blind Offline
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Wow - your external audit firm and examiners must be REALLY different from ours. We are REQUIRED to maintain all collateral, whether negotiable or not, under dual control. All assignments of insurance policies, savings, CDs, etc. are maintained with the same regard as gold coins and diamond rings. This is something checked annually by both auditors and safety & soundness examiners. This has actually been discussed at our bank and decided against due to safety & soundness issues.

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#145994 - 01/08/04 02:36 PM Re: pro and con of collateral held in branch
Rocky P Offline
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Florida
Dual control is for security and accountability. It ensures that if something is removed (especially when there may be a loss for unauthorized removal) that it can be accounted for.

I could understand stock certificates, certificates of deposit (not receipts), gold, bearer anything, blank money orders and cashier's checks, etc. being under dual control. I would want someone to give a good case why a reproducable piece of paper, (which probably is electronically referenced on the customer's computer loan record) should be locked and guarded for other than privacy reasons.

Collateral, deposits, security has changed over the years and so should policies.
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#145995 - 01/08/04 04:36 PM Re: pro and con of collateral held in branch
Johncrcm Offline
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Eastern KY
Quote:

We take Certificates and savings accounts as collateral for loans. We do not ever print actual certificates - just give a disclosure with requried info and the rest is on system, same goes for savings accounts.




this bank's operation just converted from a manual hardcopy new account system to a new account software system. They decided to use a special paper for the a printed certificate form and an emboss on the customer copy with the account number etc. The form only serves as a curtesy to a customer for a file at home or office.

I am happy to see this discussion because I have the same feeling regarding the dual control aspect of "what to do now" syndrome. The systems have changed, whatabout the loan collateral safeguard system. I believe it needs to change as well. We also have recently grown from three offices to six with the distance factor from branch to main office. I believe transportation of non-negotiale instruments is more of a risk due to possible privacy issues, in agreement with a prior post.

from one audit dept to another, if anyone has a written procedure and inventory system on an excel format, and willing to share it with another auditor, please contact me directly via the email address.

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#145996 - 01/09/04 05:59 PM Re: pro and con of collateral held in branch
rlcarey Offline
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Galveston, TX
Quote:

We are REQUIRED to maintain all collateral, whether negotiable or not, under dual control. All assignments of insurance policies, savings, CDs, etc. are maintained with the same regard as gold coins and diamond rings.




Diana,

All collateral? With that mindset, what about deeds of trust, UCC filings, and security agreements? I think that someone needs to have a serious talk with your external auditors and your examiners and move them into the 21st century. I see a great opportunity for some efficiency gains at your institution.

Would you be so kind to elaborate on the arguments presented that vetoed changing this policy from a "safety and soundness" issue? I would be curious as to what risks were identified at your institution that every institution that I have worked for or consulted with in the last 15 years have been ignoring??
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#145997 - 01/09/04 06:38 PM Re: pro and con of collateral held in branch
beaten blind Offline
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No - UCCs, security agreements, etc. are not filed in the collateral vault. The theory is that because these items are filed with public officials who maintain a record of such, then they do not need to be filed in the collateral vault. Insurance policies, CDs, savings assignments, along with any personal items and any negotiable items, are maintained in the vault under dual control. The intention is to prevent 2 events: (1) Loan officer makes a fradulent loan and takes a customer's CD (expecially a long term CD or a dormant savings) as collateral without customer's knowledge. By requiring a signed assignment by the customer which goes into dual control, the loan officer is deterred (supposedly). (2) Loan officer makes a legitimate loan to a non-qualifying customer, takes CD or savings assignment to justify loan, then releases collateral when no one is "watching" to allow the customer use of both loan proceeds and savings funds. By requiring dual control over the collateral vault (which is the only way the "hold" would be released from the CD or savings to allow it to be cashed) the officer is deterred (again, supposedly). These are the arguements, correct or not. Our internal auditors perform periodic surprise audits to verify that the collateral log is consistent with the vault's contents.

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#145998 - 01/09/04 07:48 PM Re: pro and con of collateral held in branch
rlcarey Offline
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Galveston, TX
Sounds like your management has little faith in the integrity of your loan officers. All loans and loan documents should be regularly reviewed by another party anyway. I am unsure as to how maintaining all of these items in dual control outweigh the risks presented, if as you say, you have the requisite on-going testing of your loan collateral. Sounds like your external auditors like to create additional billable time and your internal auditors need to be more proactive in helping management determine true risks and assist the bank in gaining in efficiency.
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#145999 - 01/09/04 08:32 PM Re: pro and con of collateral held in branch
Rocky P Offline
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Florida
Quote:

(1) Loan officer makes a fradulent loan and takes a customer's CD as collateral without customer's knowledge. (2) Loan officer makes a legitimate loan to a non-qualifying customer, then releases collateral when no one is "watching".



One issue that is "insinuated" is that the loan officers have control over the deposit and collateral systems. A loan officer should be approving loans and usually does not have access to the loan and especially the deposit systems. The watchdog is not in a piece of paper, but who can effect computer changes.

While a loan officer can authorize a loan and specific terms, the input would be a different function, based on LO instructions, by someone with appropriate supervisory authority to make changes in collateral and account records.

The same for holds on deposit accounts. A collateral hold should be released by someone authorized to release holds, upon written authorization (not "when no-one is watching"). Like Randy mentioned someone has a distrust which is causing your bank a lot of money. Have someone look at the control points to see if a piece of paper is really a control. You might consider having an automated collateral report indicating any release of colleteral rather than guarding paper.
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