| Passage 3 Secured loans involve the pledge of specific collateral. An example is a loan that is secured by a chattel mortgage on an automobile or some other form of personal property. Pledged collateral for secured loans may consist of a variety of assets such as real estate, warehouse receipts, accounts receivable, plants and equipment, trust receipts, negotiable bills of lading, oil runs, corporate stocks, and bonds. The basic requirement of such assets is marketability. The main reason for requesting that a loan be secured is to reduce the bank's risk of loss in the event the borrower is unwilling or unable to repay the loan at maturity. Security does not assure that the loan will be repaid; however, it does reduce the risk, since the hank becomes a preferred creditor in the event of liquidation, and takes precedence over general creditors in the liquidation of any assets pledged to the bank as collateral. The value of the assets securing a loan may deteriorate, and this deterioration, coupled with a forced sale, may not furnish sufficient funds to cover the indebtedness. In arranging security for a loan, it is imperative that the bank obtain the primary claim to the collateral and that its value be as great as, or greater than, the amount of the loan. Should the value of the collateral exceed the amount of the loan, and the bank be forced to liquidate it because of default on the part of the borrower, the excess is returned to the borrower. In the event the security is not sufficient to cover the loan, the bank can in some instances obtain, through court proceedings, a deficiency judgment for the difference. This entitles the bank to a claim on additional property or income, should the borrower have any. In recent years some states have enacted legislation limiting the use of deficiency judgments in the area of consumer lending. In most instances this has taken the form of eliminating the deficiency judgment when the loan is reduced below a certain level. The objective of limiting deficiency judgments was to reduce overcharging on consumer durable goods at the retail level. The limitation was later extended to lenders as well. Limiting the use of the deficiency judgment has increased the risk of lending and will eventually reduce the availability of credit to certain borrowers. Consumer credit will, to an increasing extent, be made available only to those borrowers who have a good, well-established credit record. |