Securing Funding with Securities
Stock loans and similar funding sources deliver brokers another lending vehicle
By Adrian Skiles, owner, Artice Funding
In your work as a commercial
mortgage broker, you may have heard
the terms “stock loan,” “stock-secured
financing” and “securities-based lending.”
These phrases all refer to lending programs
in which borrowers pledge their securities —
stocks, bonds, mutual funds or options — as
For mortgage brokers, these programs
offer an alternative form of funding for
clients. Brokers can earn income from
the origination of these products either
by collecting a referral fee from the lender
or by collecting a fee from the borrower.
Typically, a broker or loan-origina-tor license is not required — these are,
after all, not mortgages. Brokers should,
however, check with their local authorities to ensure that they are in compliance
with all requirements before offering
When brokers begin to work with securities-based lending programs, there is
plenty to know and learn.
to repay the principal at the
end of the loan term, the lender’s only option is to keep the
securities. Should a loan default occur, the loan is canceled, the borrower keeps the
money received from the loan,
and the lender keeps all interest in the securities. The loan
default is not reported to any
credit bureau or placed on
To start, these loans are nonpurpose. The
securities alone stand as collateral for the
debt, and loan proceeds may be used for
any purpose other than purchasing or
Interest rates for these programs usually fall between 3 percent and 5 percent.
Also, loan-to-value ratios may be as much
as 80 percent of the securities’ value. The
liquidity of the securities on the open
market determines the interest rate and
the loan amount. Although there is no
minimum or maximum loan amount,
lenders typically like loans to be greater
Loan terms typically are between
three years and 10 years with a fixed interest rate and interest-only payments
due to the lender. The loans do not have
closing costs, broker fees or transaction
fees. Moreover, credit reports, income
verification and employment verification
are not required.
The loan application process is
quite simple, and funding often occurs in just a few days.
To start, the borrowers
supply the name and number
of shares that they wish to
pledge, along with the desired
loan amount and term. The
lender then conducts a preliminary examination of the
request. Based on an assessment of risks, the lender will
determine the loan-to-value
ratio along with a proposed
Once the borrower and
lender agree on terms, the loan
documents are drawn up and
arrangements are made for the
securities to be transferred to
a holding company. The securities’ average closing price for
three consecutive market days
determines the final value assigned for loan purposes. This
is called the “strike price.”
The borrower then transfers
the ownership of the securities
to the lender. The borrower
retains all beneficial interests
in the securities and will receive any dividends or interest
At the end of the loan term,
the loan may be renewed, refinanced or paid off. If the
loan is appropriately paid in
full, the pledged shares are returned to
the borrower. It is, however, important to
note that lockout provisions prohibit borrowers from making principal-reduction
payments or paying off the loan early.
“These programs offer an alternative form of funding for
clients. Brokers can earn income from the origination of these
products either by collecting a referral fee from the
lender or by collecting a fee from the borrower.”
All securities not OK
Not all types of securities may be used as
collateral. The securities must be able to
be freely traded without restrictions, and
borrowers must prove that they are not
directors or executive officers and do not
have more than a 10-percent stake in the
company that issued the securities. Also,
retirement funds such as 401(k)s and pension plans cannot be used.
Beyond that, these loans are non-recourse. If the borrower doesn’t make
the interest payments when due or fails
■■ What is the company’s track record,
and can it offer client references?
The value effect
If the securities’ value falls below an
agreed-upon minimum fair-market value
(usually 70 percent to 80 percent of the
loan amount) during the loan term, the
loan is considered in default.
Adrian Skiles began his career in the mortgage business more than 20 years
ago and is the author of the book Secrets of Mortgage Lending. Since 1997, he
has owned his own mortgage firm, now called Artice Funding, in Atlanta, where
he offers residential and commercial services. He is a long-time member of the
National Association of Professional Mortgage Women and the National Association
of Mortgage Brokers. Contact Skiles at (770) 888-8063, adrian@articefunding.
com or www.articefunding.com.
In such cases, the loan contract may
require borrowers to contribute additional shares or cash. The decision to
move forward is solely up to the borrower.
Remember, this type of lending is nonrecourse. Borrowers may simply stop making payments and walk away from the
loan, thus forfeiting the collateral without
When evaluating securities-based lenders, mortgage brokers should help their clients answer the following questions:
■■ How long has the company been in
■■ What are the company principals’
■■ What assurances can the company
give that the full collateral will be re-
turned upon successful completion of
the loan term?
Borrowers with securities that qualify
for this type of lending should be well-informed of the benefits and drawbacks.
As with any major financial transaction,
borrowers should consult with their tax
adviser before entering any agreement
that may have tax consequences.
Commercial mortgage brokers who
work with these loans will soon realize that their clients can use funds for
downpayments or the outright purchase
of property. In that way, securities-based
lending can lead brokers to additional avenues of income.
In today’s tightening credit markets,
securities-based lending is a funding option worth exploring.
Illustration: Traci Daberko