Does anyone have any information regarding the procedures a bank should take upon learning of a tax lien loan on their collateral?

IRS or property tax lien? Also was it a loan on your collateral to pay the tax lien?

ad valorem and it was a loan to pay the ad val taxes !!!

And you didn't issue the proceeds check directly to the taxing authority?? That would be banking 101 when making a loan for past due taxes. You need to get with your legal counsel regarding your options. Also, if the customer told you that the funds were for taxes and they used them for something else, then pull out a SAR and file it for mortgage fraud.

no no no -- the customer got a loan from another individual/company (tax lien lender) to pay his ad valorem taxes thus creating a priority lien on our lien..... ugh

oh - you still need to get with legal counsel. Most likely your mortgage documents prohibit the consumer from entering into any transaction that would cause a superior lien to be filed on the property. They are most likely in default, but how you proceed is going to based more on State law than anything else.

Oh, and in some jurisdictions, a tax lien lender has to notify any current lien holders prior to doing this - so again, another question for your legal counsel.