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Why does our forms vendor suggest using “limitations on cross-collateralization” clauses in our commercial and consumer promissory notes and security agreements? – IBA Compliance Connection

IBA Compliance Connection

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Why does our forms vendor suggest using “limitations on cross-collateralization” clauses in our commercial and consumer promissory notes and security agreements?

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Your vendor’s limitations on the cross-collateralization clauses in its loan forms appear to be meant to prevent you from inadvertently triggering and violating statutes and regulations that apply to residential real estate loans.

For example, if your bank places a broad cross-collateralization clause in the mortgage document for a loan secured by residential real estate, any future loans made to the customer by your bank also would be secured by that residential real estate. If your bank were to subsequently make a car loan to the same borrower, that loan also would be secured by the residential real estate, arguably triggering the disclosures required by Truth-in-Lending Act and the Real Estate Settlement Procedures Act (as well as other applicable federal and state laws). Meanwhile, since you would be making a car loan, you most likely would not be providing the disclosures required by those laws. Limitations on the cross collateralization clause in the mortgage document would avoid such inadvertent violations by preventing the mortgaged residential real estate from being dragged into the subsequent car loan.   

For citations related to our guidance, please see:

  • Regulation Z, 12 CFR 1026.43(a) (Regulation Z applies to “any consumer credit transaction that is secured by a dwelling . . . .”)
  • Regulation X, 12 CFR 1024.2 (RESPA applies to “any loan . . . that is secured by a first or subordinate lien on residential real property . . . designed principally for occupancy of from one to four families . . . .”)