Here is a list of some of the most common concerns found during compliance reviews of cd/deposit secured loans:
In reality, deposit secure and CD secured loans – sometimes referred to share loans by mutual banks and credit unions due to the fact that customers are owners and are technically pledging their “shares” of ownership – really don’t carry that much risk due to their simple nature. For example, if a customer defaults, the financial institution is not going to be out any money as their collateral is cash.
Furthermore, underwriting is extremely simple as deposit secured loans are the definition of “collateral lending” where the underwriting is approved based on the collateral rather than other typical credit factors like an applicant’s credit score or even their debt-to-income (DTI) ratio. Due to the low risk nature of these loans, and the lack of a need for complex underwriting, some financial institutions even permit these loans to be originated outside of the lending department, such as through the deposit side like customer service.
While the safety and soundness risk (or risk of a monetary loss) is minimal with CD secured loans, there are a few compliance considerations that every financial institution should be aware of.
CIP Concerns for CD Secured Loans
First and foremost, it is important to remember that CD secured loans are considered to be an account under BSA rules. This means that when a new customer to a financial institution wants to open a CD secured loan, the financial institution must follow their customer identification program (CIP), just like they would for any other new account.
This is something that can be overlooked when a bank is offering these types of loans to help someone, like a teenager, establish credit when a family member offers the CD as collateral to help them get the loan, which will ultimately build their credit through their payment history.