Exchanging Loan Collateral

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Question:

Frequently we have borrowers who wish to exchange the collateral on their loan, and leave all the terms the same. For example, a customer has a vehicle loan, trades in the vehicle and wants to exchange the collateral. The original loan was done using a combination note/disclosure and security agreement. Can we comply with the customer's request? If so, should we use a Change in Terms Agreement to document the collateral exchange or, does a new note and security agreement need to be completed?

Answer:

If the collateral substitution works for you, all you have to do under federal regulations is modify your instruments and perfect the new security. However, check your state law. Some states might require a new note, in which case you have to start all over with Regulation Z.

First published on BankersOnline.com 04/21/03