What are the implications of a loan officer using his/her personal CD for collateral on a loan for a customer? This doesn't seem quite right to me, but I can't pinpoint what is wrong. I would appreciate your opinion.

To best of my knowledge, there is nothing to prevent this.

I would:

Make sure you give the loan officer the proper co-signer notice (if applicable).
The loan officer signs a third party pledge agreement.
That the loan officer has nothing to do with this credit transaction (another loan officer should be handling all the processing, documentation, underwriting and closing.)

If the loan officer is making and/or servicing this loan - his conduct and the loan could be subject to some kind of self-dealing. The regulators really, really don't like that. They've been known to ban people from banking over those deals.

What's the relationship between the loan officer and the customer? If it's a valid business or personal (customer is a relative) relationship, then let another officer make and service the loan. If you don't see a valid relationship - then I think it's very suspicious!

ig brings up some very good points and that is why I said the loan officer should have nothing to do with this credit transaction. It should go thorugh your standard underwriting procedures for CD loans with no input or guidance from the loan officer pledging the CD. He should be treated just as any other "co-signer" would be.

I would really like to know what is the link between the customer and the loan officer. If it's not a relative or someone he has very long-term close ties with, this may be the beginning of some very bad things. I would approach this very suspiciously. I would look very carefully at the "purpose" of the loan and the other relationships between the bank, loan officer, and customer.

When the loan was originated, this loan officer actually made the loan then signed another loan officers name to it. Then signed off as the second approving officer. The loan doc clerk notified me of the situation and I recommended that new loan docs be drawn up and have the customer resign. Then have the other loan officer sign and another officer initial off. This has been done.
As far as I know, the customer rents a house from the loan officer. I just have to question why a loan officer would use their own collateral for someone else's loan that is not a relative. Strange things just keep happening.

The fact that the loan officer forged the name of another loan officer on a document is grounds for immediate termination. I hope that you filed a suspicious activity report, reported this to your board of directors and notified your bonding company - if not and something goes terribly wrong with this officer, you may have voided your bonding coverage. You are talking about a felony act here!

How was the CD taken as collateral? Isn't this a consumer purpose loan? My understanding of the Revised UCC Article 9 is that you can no longer perfect a security interest on a consumer deposit account for a consumer purpose loan. I think there are discussions in the Article 9 forum.

Al,

I thought that you just couldn't perfect a security interest in a consumer deposit for a consumer purpose transaction under Article 9. That doesn't prevent you from creating a valid security agreement under common law - especially if you hold the CD, does it?

A few more issues may come into play. We stopped making loans secured by deposits because we were limited on the loan rate to the CD rate plus a margin - if I recall properly it was 2% and was based on state law. You may also need to check the CD maturity vs the loan maturity - if the CD matures sooner, even if you have a hold on the collateral the renewal rate may decrease, requiring the loan rate to decrease (again, based on if your state requires a relationship between the rates). With CD rates where they are today you may end up having to pay them interest

rl- as I understand it (and we no longer do deposit secured consumer loans, so my memory may not be as clear as it should be), you can take posession of an "instrument" to perfect your lien. Unfortunately, most of us stopped issuing CDs as instruments and went to "non-negotiable" receipts. The receipts may not be instruments.

That being said, the UCC is not absolutely uniform. It is a State law issue.