With the recent downturn in the stock market, we are finding we have some stock secured loans that are under-collateralized. We loan at 70% of market value, but we have found some that are still under value. We want to ask the customer for additional collateral. Is this kosher during the term of the loan? Is anyone else encountering this?

Vicky -

Your loan agreement should have a collateral covenant that says the borrower will maintain a given LTV. If you do not have that in your agreement it will be difficult to demand more collateral after the fact.

I agree. Without this in a specific loan agreement there is no requirement for the borrower to do this. It is attributed to your risk in the loan underwriting.

Part of our operational certifications was a quarterly analysis of all stock secured loans to insure the margin was still as the loan docs called for. If it fell short we called for additional collateral or a principal reduction of the loan to maintain the margin. Regulators would always classify any stock secured loan that did not have a collateral margin per terms. Until the margin was cured we had to place the loan on the "Watch" list.

This audit was preformed everytime there was a drop in the market. If it was everyday for a week so be it.

If the borrower couldn't provide additional and "acceptable" stock or make a principal reduction we sold the stock.

Would a loan over $100,000 secured by a brokerage account qualify under Reg U?