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How to Calculate IR on Certificate of Deposit

Question: 
What rate is used to calculate the interest rate on a loan that is secured by a Certificate of Deposit account? The interest rate on the Certificate of Deposit or the APY on the Certificate of Deposit?
Answer: 

Answer by Richard Insley: Unless state law sets a specific standard, you are free to set the loan's interest rate any way you want.

CAUTION: CD-secured (100%) loans are risk-free and should all be priced the same way. Otherwise, you invite fair lending investigators to compare your loan rates along the lines of Reg. B's protected characteristics.

Answer: 

Answer by Randy Carey: Richard, I agree except with this statement "CD-secured (100%) loans are risk-free". While most bankers believe that, if the monies used to establish the CD are from illicit gains or the individual is subject to an IRS lien prior to the bank making the loan, the CD may or may not be available to satisfy the loan in the future. Or if it is, not without a long and protracted fight. But this comment is a little off subject.

Answer: 

Answer by Richard Insley: [That's a good point, Randy. Maybe this revision is a better way to narrow the fair lending part of the comment. Feel free to rewrite if you want. The ECOA risk is hidden--but real. I know a regulator who did this.]

Unless state law sets a specific standard, you are free to set the loan's interest rate any way you want.

CAUTION: All loans that are fully collateralized by CDs present the same credit risk and should be priced the same way. Otherwise, you invite fair lending investigators to compare your loan rates along the lines of Reg. B's protected characteristics.

Answer: 

Answer by Randy Carey: I like it.

A very timely comment too, seeing how the regulators have a renewed focus on fair lending within non-real estate secured consumer loans. The real hot spot right now is unsecured lending and using surnames as a surrogate for determining Hispanic descent.

First published on BankersOnline.com 10/29/12

First published on 10/29/2012

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