Collateral Exception
In banking, an exception is an item that needs attention because it does not meet certain predefined requirements. Collateral exceptions pertain to borrowers’ assets that are pledged for loans. Financial institutions often consider collateral exceptions “critical” due to the risk they pose if left unresolved.
Types of Collateral Exceptions
Examples of collateral-related exceptions include:
- Expiring UCC Continuations: Documenting a lien on untitled assets like equipment or livestock typically involves filing a UCC financing statement. Maintaining first position on a lien requires careful monitoring and prompt filing of continuations prior to expiration. Failing to take action could result in the loss of a lien position and considerable risk.
- Past Due Collateral Inspections: Financial institutions may need to inspect the value of assets that are used as collateral. For example, a manufacturer who pledges inventory as collateral would likely expect regular inspections from the lender. Forgetting to conduct inspections leads to exceptions for financial institutions.
- Missing Documentation for Accounts Receivable: Some businesses leverage their accounts receivable as collateral on loans. Receivables change frequently, which creates a documentation obligation for the borrower. When borrowers do not submit their information as required, collateral exceptions increase.
- Uncollected Trailing Documents for New Mortgages: Documents that are collected after a loan’s consummation date are known as trailing documents. Obtaining a recorded mortgage (or deed of trust) from the local recorder’s office is a key step for avoiding exceptions.
- Missing Insurance on Collateralized Equipment: Fires, floods, and other natural disasters can have devastating consequences to an asset’s value. It’s therefore no surprise that financial institutions require borrowers to maintain proper insurance coverage on collateralized assets. Failing to submit necessary insurance documentation may indicate that a policy has lapsed.
Tracking Collateral Exceptions
Spreadsheets and tickler files are relatively common solutions for tracking collateral exceptions. Manual data entry and reporting workflows can be error-prone, resulting in a growing number of collateral exceptions. Given the critical nature of collateral exceptions, such approaches may expose a financial institution to unnecessary risk.
AccuAccount, Alogent’s ECM system that’s optimized for commercial lending, reduces manual data entry via automated core data feeds. Document placeholders keep staff informed about required documents. Expiration dates and automated exception reports help users identify potential issues before they become exceptions. Scanning missing documents can simultaneously clear multiple exceptions when collateral is pledged to more than one loan.
Contact Alogent to learn about our collateral tracking solution
