I have been searching for a law or regulation that gives information on holding US currency as collateral. Is it legal or illegal for a financial institution to hold US currency as collateral (whether collector's items or not)?

I will, of course, stand corrected if I'm wrong, but I'm not aware of any prohibition. However, I'd be very concerned about the source of the cash. Unless it's truly collectibles (or is that collectables?), I'm thinking about pulling an SAR out of my bag of tricks.

Are you talking about securing the loan with some type of a collection of cash with value beyond that of just the cash denomination? If not that, I'm with John. I'm at a loss to think of any other logical and legal explanation for wanting to take out a loan secured by cash.

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Jim Bedsole, CRCM, CBA, CFSA

Opinions expressed are my own, and do not necessarily reflect those of my employer.

Thanks for the info. Our CFO asked this question...so I started searching and came up with zero. I can't imagine why anyone would want to use currency. A SAR definitely would be appropriate.... and CTR if the amount exceeds $10,000. THanks!

Easy, Brenda. You don't want to file a SAR until you suspect something in particular. There would never be a need to file a CTR to report a cash-secured loan because there is no transaction in currency. Overreporting puts you at risk of a RFPA violation & loss of a customer who might be legit (although strange.)

Richard, suppose the collateral is going to be a collection of rare US currency that aggregates more than $10,000 in nominal value. If the bank takes that currency into its possession to perfect its security interest wouldn't that require a CTR filing? Nothing in the CTR regs says anything about the currency being that currently in general circulation does it?

As to the SAR filing issue: If the loan is to be secured by collectible US currency, that would seem to be legitimate and definitely wouldn't provoke me to a SAR filing. If the loan is proposed to be secured by currency in general circulation, that creates some serious operational concerns such as how the security interest will be perfected, where and how the bank will hold the collateral, etc. It also raises some questions that should be asked of the borrower and loan officer as to why this transaction is desired. Only if all of the questions run up against a brick wall would I advocate that a SAR filing might be in order. But as Richard says, proceed with caution on this.

I suspect, though, that your lender and borrower are wanting to secure the loan by collectible items of US currency from your original post.

[This message has been edited by jbedsole (edited 06-21-2001).]

Let me put in my two bits here -- which is much less than the currency being discussed here!

First, I have a dim recollection that the Secret Service regulates many aspects of currency. Apparently the use of currency is thought to be a presidential issue -- perhaps because much of the currency has presidents on it. However, that is where the rules are that prohibit reproducing images of currency. There may also be rules on storing currency in safe deposit boxes. Hoarding currency is definitely not good for the economy because it restricts the ability of the Fed to manage the currency flow.

As for the suspicious aspects of this deal, I have to ask why someone with enough currency to cover the deal would want a loan instead. Since currency and not a residence would be the security, there are no tax advantages here. But someone could move the proceeds of the check much more easily than the cash itself. I vote for filing the SAR. Unless the currency is rare and collectable, I can't think of a legitimate reason to do this.

There are legitimate reasons to do this. Its not much different than borrowing against a Certificate of Deposit or Savings Account, which is cash on deposit. It also reduces the rate of interest, and gives the borrower greater flexability in loan terms, over what they would get if qualified for another type of loan.

In this case the borrower has a collection of US currency with a face value of x. It may be the only asset the borrower has available to use as collateral. Not wanting to "spend the collection", using it as collateral will keep it intact, and provide the funds needed for what ever.

The bank issue is not so much as if its legitmate to use the collection as collateral, but does the borrower really own the collection, and have the right to pledge it as collateral. Putting the collection into safekeeping with enough safeguards to insure that the borrower cannot indicate something is missing is another issue.

Another potential legal problem is if the borrower goes into default on the loan and the collateral is used to pay off the loan, does the bank use the face amount of the cash, or its supposed value. The borrower could file legal action contesting how the bank disposed of the collateral which ever method is used.

All in all, unless there is a real mitigating circumstance, its best for the bank to stick with the standard deposit accounts as collateral.

31 CFR, Part 103.11 defines currency as:
" (h) Currency. The coin and paper money of the United States or of any other country that is designated as legal tender and that circulates and is customarily used and accepted as a medium of exchange in the country of issuance. Currency includes U.S. silver certificates, U.S. notes and Federal Reserve notes. Currency also includes official foreign bank notes that are customarily used and accepted as a medium of exchange in a foreign country."

Silver certificates and US notes in mint condition are certainly collectible, but also serve as legal tender.

Section 103.22(b)(1) states: "Each financial institution other than a casino shall file a report of each deposit, withdrawal, exchange of currency or other payment or transfer, by, through, or to such financial institution which involves a transaction in currency." A pledge of collateral is not one of the events listed in this section, and there's no provision for reporting pledges of collateral on the 4789. Should the borrower default and allow the collateral to be applied to the loan, then a transaction will occur and a CTR would be necessary.

As 'DN' indicates, there are legitimate reasons why people hoard cash and may wish to use it as collateral. The classic case is a spouse who is planning a sudden change in marital status. This customer should not be reported on a SAR! Doing so may expose the bank to liability under RFPA because the bank acted without making reasonable attempts to rule out criminality.

[This message has been edited by Richard Insley (edited 06-21-2001).]

[This message has been edited by Richard Insley (edited 06-21-2001).]

There is one statute that affects the taking of SOME coins as collateral. A criminal statute, 18 USC 337, provides that: "Whoever lends or borrows money or credit upon the security of such coins of the United States as the Secretary of the Treasury may from time to time designate by proclamation published in the Federal Register, during any period designated in such a proclamation, shall be fined under this title or imprisoned not more than one year, or both."

One other thought -- If you DO take collectible currency as collateral, you will want to be VERY careful with the collateral receipt. Make sure it's specific to a fault in its description of the currency -- each and every serial number -- unless you want to invite your borrower to come back at you alleging substitution of dross for gold.

I once examined a bank that was holding 40,000 silver dollars as "collateral" for what was basically an auto loan. By giving them as collateral, the customer got free safekeeping and didn't have to rent several safe deposit boxes!

Richard, that gives a whole new significance to the expression "laughing all the way to the bank"!

Going back to what Lucy was saying about safe deposit boxes. I remember being told (back in my branch days) that it was technically illegal to store cash in a safe deposit box. Maybe it was an insurance thing, or an IRS thing. I’m not sure, but I remember the branch manager telling me that.

This is an interesting topic so I did a little research.

OCC warned in advisory bulletin 90-5 that cash collateral might be seized in a forfeiture if a bank knew or reasonably should have known that the cash was derived from illegal activity.

There are several bulletins related to cash collateral on the OCC web site http://www.occ.treas.gov/bullst99.htm
Search for “Cash Collateral”

Richard,
Someone asked this same question recently and I was not able to respond because I wasn't sure how to respond. However, I don't know of any regulation that prohibits using currency as collateral (not rare collection). So, I researched this website and found this thread. I was wondering if you had any criticism on the loan when you examined it. I would like to open this discussion again as it relates to any recent changes to BSA. Is there anything new regarding this issue. How can a lien be perfected on such collateral (Holder in due Course?!!?)...and what about insurance should the property (cash) be destroyed, stolen, etc.? Thanks for any info regarding this issue and pardon me for opening the discussion again. I really need to make sure it's OK!

The bank I mentioned was not criticized but we did tell management that the customer was smarter than the lender who approved the deal.

I don't know of any prohibition, but you assume safekeeping risk when you accept currency & coins. What happens if half the currency turns out to be counterfeit and the customer claims you switched bills while you were holding it? Perfection is a simple as the necessary collateral document and you take possession of the cash.

If the customer is really on the up and up, and this currency is really not a rare collection or something - they should have no qualms about depositing the currency into a CD, and letting you take the CD as collateral.

That's right. I don't want to give launderers a way to hand me cash and walk away with a cashier's check and skip the record requests, OFAC checks and everything else that goes along with a new deposit account.

I don't think there is a money laundering problem. It's more like saving assets from creditors. I just doesn't sit right with me. I would like to convince the lender not to do it, but that might be my biggest challenge this week. Heh! Thanks for the replies. Very helpful.
gigi

Your other concern would be legal attachments like IRS Levies or writ of executions. Without a deposit account how would you respond to a subpoena? The bank is holding the cash, can the IRS seize it?