+ Are there restrictions on the use of the loan funds?
A borrower can use the proceeds from the stock loan for whatever purpose EXCEPT to purchase or carry margin securities. Nevertheless, this is a disclosure matter for the borrower about the source of the proceeds and lies with the bank or broker.
+ Who is the owner of my securities during the life of the loan?
The securities title is transferred to the lender but the borrower keeps all beneficial interests in the stocks or bonds. The borrower receives any potential dividends, interests or benefits that come from the securities throughout the life of the loan.
+ If the securities pay a dividend or interest, will the borrower get it?
The borrower receives a credit against the interest payment equal to the amount of dividends or interests. Nevertheless, the borrower does not get the money directly.
+ Is the reassignment of the loan considered a sale and does it have any tax consequences?
The transfer of the title is not taxable. This kind of operation is mentioned in Internal Revenue Code § 1058 which indicates that taxpayers entering a qualifying security lending agreement get non-recognition treatment with respect to gains or losses at the time of the transaction. This section actually provides with an exception to Section 1001 of the Internal Revenue Code. This type of transaction is very frequent in financial markets.
+ Is the interest paid on the loan tax deductible?
It depends on the use of the proceeds of the loan and how the loan is structured. Borrowers need to talk to their own tax consultants. Nevertheless, the borrower can use the following information as guidance ONLY:
If you use the proceeds to pay for personal debt (credit cards, etc.), then it is not tax deductible.
If it is to purchase a home, the interest paid is also not tax deductible because the debt is not secured by a mortgage but by securities.
If it is to fund business or investment activities, then the interest paid is tax deductible.
Please take your time to consult with your tax advisor before applying for this loan if this is something you are worry about. Remember, the information provided above can not be considered to be tax advice.
+ What happens if the borrower defaults on the loan?
If the borrower does not make the interest payments when they are due or fails to repay the principal at the end of the loan, the loan will be terminated and cancelled. The borrower keeps the money received from the securities and the lender keeps all interest in the security. However, the cancellation of the loan is not reported to any credit bureau.
+ What are the tax consequences of defaulting on the loan?
The amount realized is the different between the loan amount and the cost basis of the security. The difference is usually treated as capital gain. Of course, please talk to your tax advisor about this scenario.
+ Is the borrower personally liable for this loan?
No. This is a non-recourse loan. There is no personal (or corporate if you are a company) liability in this type of loan. The lender has no legal basis to go after the borrower.
+ Will the loan be reported to credit bureaus?
No. This loan is not reported to any type of reporting services. There is no public record of this loan. If the borrower defaults because, for example, the stock prices have gone down, it is not reported.
+ What happens if the value of the stocks goes downs?
If the value of the security falls under the agreed minimum set in the agreement, then there is an event of default. The minimum value is set at 80% of the loan.
For instance, assume the stock had a value of $20 when the loan was originated. Also, imagine that the loan to value was set at 70%, so the loan was set for $14 per share. If the value of the stock goes below 80% of the loan amount ($14), then there is a reason for default that can be remediated by the borrower. In this example, if the price of the stock goes under $14 X 80%, or $11.20 per share. For a default to happen, the value of the stock in this example would have to go down by more than 44%.
If the security goes down by over 44%, the borrower would have to add additional cash or stocks to keep the loan functioning. At this point, the borrower may decide to add one of the two options and keep the loan in good standing or default on the loan.
If the borrower decides to add the necessary cash or stocks, the funds and stocks do not become part of the collateral and are not repaid or refund at any time. However, the added payment establishes a new floor value and risk threshold for the lender and the borrower.
+ Is stock the only security I can use as collateral?
No. Bonds and U.S. Treasuries are usually accepted. If you have a different type of asset, please let us know. We take each asset on a case-by-case basis.
+ How does the lender set the “strike price” and the loan value?
The “strike price” (the per-share price that the value of the assets will be based on) is set by a three day average model. It is based on the average closing price for the security during three straights days starting with the day the stocks are transferred to the lender.
+ How long does it take to be approved for the loan?
Once all the paperwork is filled out and the transfer of the securities takes place, funds will be deposited into the borrower’s account in three to five days. If the borrower is under a dateline, the lender will work to set a fast-track to close the loan quicker.
+ What happens if the securities go down in price but I still want to get them back at the end of the loan?
To ensure you get your stocks back despite a large decline in market value, the lender will help you get the loan out of default. In order to do so, the borrower may have to add shares or cash to keep the loan viable.
