If you are considering your first stock-secured loan outside of the friendly confines of your brokerage's margin loan department, or even if you feel you are experienced in stock-collatererlized funding, you owe it to yourself to learn about the the industry as a whole and the types of stock-secured lending that are available. These are matters and issues that will determine whether you end up with good, secure financing that meets your needs, or risky, bad financing that you could perhaps have avoided with just a little bit of background and knowledge. Even experienced financial professionals are in many cases unexposed to all elements of the ever-evolving stock-secured lending field. This simple summary guide is intended to help you navigate the waters and perhaps avoid the rocks.

Some remember the implosion of a company called Derivium in 2002, a victim in the opinion of many of careless management, inadequate capital reserves, and reckless marketing according to many observers. The first major private transfer-of-title lender, Derivium operated without any major issues until it found itself unable to return shares to a particularly major client whose shares had risen in value and who had repaid their loans. This was followed by fines from the state of California because of operating an office in San Francisco without a lender's license. When it went out of business, it send a signal to the entire lending industry that greater security would be needed for any securities-based lender to operate.

This led a few securities-based lenders to add a hedged portfolio model where the shares were hedged with cash or options. Here the idea was to provide a means to preserve a profit model to help offset the cost of returning shares, when that occurred, while simultaneously providing a more structurally sound means to deal with clients in default. Together with careful monitoring of all accounts to ensure that sufficient reserves were on hand to cover maturing portfolios, the model was designed to create a more stable transfer of title loan contract. For the most part, with the few lenders who managed the system well, it worked.

But the system was precarious, still, if there were no liquid assets or cash behind the lending operation sufficient to cover worst case scenarios. And though from 2002-2007 the transfer of title lending business enjoyed a period of relative stability, it required careful and almost continuous monitoring of all portfolios under management. A single stock, or example, that escaped the loan manager's attention and doubled or tripled in price for a large loan could have a ripple effect on the entire funding model and operation. Though a lender's track record, background, and abilities may have been impeccable, without cash reserves to back up the model it was vulnerable to human error. And that could lead to all portfolios under management being at risk.

Beginning in October of 2007 with stock market declines and continuing through the full force of the financial meltdown, another industry shakeout took place. Lenders with rising portfolios, particularly those with energy stock collateral buffeted by high oil prices, were particularly susceptible. At a time when the price of gas at the pump hit $4.00 a gallon, oil and energy stocks rose as well, and many borrowers whose loans were maturing found it irresistible to pay off those loans and recoup their much more valuable shares. When this occurred in significant numbers, transfer-of-title securities lenders found themselves without sufficient cash to go into the market to buy enough shares at the new, higher prices to return to borrowers. A domino effect meant that other, smaller borrowers also paying off their loans would not get their shares either as the larger borrowers took precedent. Borrowers who hadn't read their loan contracts carefully found that the lenders sometimes had 30 days or more to return the shares. Some of these lenders, at a time when AIG and Lehman brothers were in dire straits, pressured their brokers to step up delivery of their loans and fed their brokers exaggerated versions of their lending products for the sake of bringing more deals in. Some lowered their standards just to get the new shares sold, using the cash from one to buy shares for other borrowers.

The majority were not out to intentionally malign their borrowers. They had no incentive to do that in any case. But a few resorted to covering up their weaknesses with outright misstatements ended up in legal trouble. Brokers who had trusted those statements in many cases were also cashiered. When these transfer-of-title lenders needed cash, they cut corners and pressured their brokers to keep the flow of new clients coming in so they could have the cash to cover their current needs. The relatively calm ear for transfer-of-title lending had ended. l

The remaining lenders fell into two categories: Those who added easy-to-obtain "certifications" to try to keep the loans coming in, despite making virtually no changes to the standard, relatively risky transfer-of-title lending model. Various financial organizations for the web were readily available, with little barrier to entry other than a small fee, including the Better Business Bureau, which despite its long pedigree in the brick & mortar small business world was very late to latch on to the digital world, making it easy to obtain a "BBB A+ rating" even for the shoddiest of companies. Soon, transfer-of-title lenders who had changed nothing in their risky models were plastering their websites with certifications and testimonials from anonymous characters ("Tony T" "J. Smith"). The philosophy of these firms seems to be that the model, even without any capital or asset reserves, could still succeed if monitored more carefully, even though the underlying risk hadn't been changed in the least.

A very small number of transfer-of-title firms actually shored up their liquidity, had third-party verification of assets to present to clients, and adopted policies to include greater reserves, much like banks keeping more reserves on hand for critical situations.

Many felt this would be the end of private placement transfer-of-title lending. But the crisis also helped spawn a reaction born firmly from the lessons of the transfer-of-title experience and the voices of prospective clients, past clients, regulators, and government agencies, who clearly wanted to see greater disclosure and far more secure lending structures in the securities-based lending arena. That development was the Custom Institutionally Managed Loan structure.

These represent a complete break from the transfer-of-title lending programs of the past. To begin with, all management, loan documents, processing, due diligence, maintenance, facilities, accounts, and access are handled 100% by licensed, fully-regulated, U.S. financial institutions.

The securities remain entirely in the client's own account, which the client opens at the brokerage arm of the lending institution with this form of financing. It remains in the client's title, not transferred into the ownership or title of the lender. Shares appear in the account, documentation and records are both online and issued as all brokerage and banking statements are issued by any major U.S. institutions. Legal and regulatory compliance is identical to the thorough regulatory requirements of any major U.S. bank or brokerage.

But these are custom facilities. They are not the same facilities offered on a walk-in basis to anyone off the street. They are the end result of private depository relationships that allow loans with far higher advance rates and a level of personalization and flexibility normally reserved for clients at the upper tier of the wealth spectrum who are also willing to leave significant portions of their wealth aside - a very small universe indeed.

A custom institutional loan facility offers unheard of advance rates at 95% or higher. Interest rates can be tied to low monthly LIBOR rates and the full services of a major institutional advisory relationship allows clients to move into a range of areas freely as an extra benefit, without disturbing their existing relationship with their prior financial advisor if that is their wish. Custom institutional loans involve simple liens on client shares in accounts, and the liens are removed on pay off. No issue of buying stocks in the market occurs; the stocks are not sold.

The best of them are formed as lines of credit. This allows full leverage of the client's portfolio without a sale and the freedom to repay the principal at any time, thereby refilling the credit line. All of the accounts benefit still further from industry standard SIPC insurance, and the fully regulated and licensed institutions who manage and handle every portfolio are also properly licensed in every state and nation where they operate.

Best of all, these custom institutional lending facilities offer powerful features that were never part of the old transfer-of-title regimen, including the freedom to trade/swap shares in the collateral account; higher credit limits when stock grow in value; low interest-only payments and no fixed principal payments; payoff any time without penalty; and 24/7 access to all account online.

These are the next-generation loans, first appearing in 2010, and now taking the industry by storm as a perfect "marriage" of the best of standard institutional lending and private innovation. The winner? The financial consumer.

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Below is a simple checklist that can be used to help focus your questions before you undertake your next securities-based loan. No recommendations for any one loan program are provided here; that decision is up to you. However, we suggest you run through this checklist before you sign on the dotted line to make sure that he financing you are receiving is the same as the financing you think you are receiving.

1) You are about to pledge your precious assets as collateral for a loan. Who gets paid?

All financing is not ceated equal. Just as a $15 "Armani" handbag sold on the bootleg market in Hong Kong is not the same as a fine Swiss watch carefully crafted by a licensed master in Zurich, so the age of the Internet has allowed most anyone to put up a fancing website and call themselves a "lender".

Watch for these flags:

"Zero Point" Loans. If your stock-secured loan offer shows no points and a low rate and, say, a 70% loan-to-value in a nonrecourse, default-and-walk-away package, you should be doing cartwheels of joy right?

Not so fast. When your transfer-of-title lender tells you he is offering you a 70% LTV loan at 1.5% interest fixed, with no points, there is almost certainly much he isn't disclosing to you, all facts that you should have before you sign on the dotted line. Certainly you should be aware that current Consumer Financial Protection Agency legislation clearly calls for the disclosures that you are unlikely to be seeing with loans like this.

To begin with, your "zero point loan" is not a zero point in loan in reality at all. Most transfer-of-title lenders (yes, some even with the easy-to-obtain Better Business Bureau "A+" ratings) sell your stocks in order to fund your loan. This is allowed, because if you have signed their loan contract(s) you have contractually permitted them to do so. But if your loan is for 70% LTV, and they give the 70% of the sale price to you, you may not know that they then give, perhaps, 10% to the agent - 10 points in reality that have not been disclosed to you. The remaining 20% become a profit to the lender, who hopes you will default on the loan and "walk away" so he does not have to go back into the market to buy enough shares to return to you if you should pay off your loan at maturity.

In effect, he has told you it is a "zero point loan", but in reality he is paying the agent from the proceeds of the sale of your securities ten points (or whatever figure is negotiated). The only difference is that he has not disclosed this fact to you, and you have signed your loan contract thinking you received a zero (or perhaps one/two) point loan, and probably didn't question it . Perhaps, to the lender's delight, you were instead focused only on getting the loan cash.

Then there is the matter of the "nonrecourse" loan. This means that if you default, you owe nothing. The loan reverts to a sale, they will tell you, and the shares become entirely the lender's, but you owe nothing more in return.

In fact, this is the outcome the unscrupulous transfer-of-title lender hopes to see. If you default and walk away from repayment, he can keep his 20%, and doesn't have to worry about going back into the market to buy the stocks needed to return to the borrower when he/she pays off her loan. He's home free when you default.

He has not disclosed to you the fee he has buried in the financing but which he pays to the agent just as he would points. Essentially, hedeceives the borrower into thinking it is a zero point loan though the net effect is quite different. He sells all the shares, then he hopes you don't pay off your loan's balloon payment at the end so he doesn't have to use his own money (or proceeds from another sale of another client's stocks) to go back into the market and buy the shares to return.

Remedy: Demand full disclosure of fees, in writing, paid to any agent on any transaction.

2) Find out how stable your lender is. How is he capitalized? How secure are your stocks?

The usually low interest your lender requires you to pay is for the many transfer-of-title lenders simply a bonus. You are basically paying interest on a loan made with cash from the sale of your own securities, something you have probably agreed to in the loan contract. Perhaps you didn't read that part, or glossed over it because you were in a hurry to get access to your cash without - so you thought "a sale." You are trusting that if the shares rise in value by the maturity date of your loan, you can pay it off and regain all of what woud then be your much more valuable shares. The lender assures you of his track record, points to his Better Busines Bureau A+ rating (without telling you how easy that is to obtain or how hard it is to register a complaint) and says let's sign, the offer is only good for a few days. Better sign, right?

Perform a checklist first. Does he have any capital or asset reserves? Is he willing to verify those reserves via a third-party such as a CPA or attorney?. If yes, then you are more likely to have a transfer-of- title loan that you can depend on. A transfer-of-title loan if verified and fully vetted, offered by a company with a solid track record with verified liquidity or cash assets to support its operations, can be a perfectly legitimate form of financing and one you can probably undertake with confidence provided that you have read the contract and understand thoroughly the fees and other elements of that contract. In the end, if you did choose to pay off your loan, you could be reasonably sure of every share being returned in such circumstances although there are of course no guarantees any time one moves their assets into another's name, title, account, or outright ownership.

Assess Fairly, But Perform Due Diligence. Start with a simple online check of your lender or broker. Enter a common search term, such as "stock loan". Do they only appear in search engines under pay-per-click results, or do not appear at all? Do you see grand claims of being in business for extraordinarily long periods of time, or standing as "number one", or pages/descriptions filled with superlatives or attempts to look "global"?

When doing your background check remember that there is a substantial difference between being found guilty in a court of law for a civil or criminal violation, and simply being accused by someone of wrongdoing. In the field of finance, it is not unusual for clients and advisors to take a common disagreement and elevate it to a court filing, or for clients to blame advisors, brokers or others for losses that were not the fault of those brokers or advisors, then to attempt to turn it into "fraud" by abusing the court system. Were the stakes something other than money, in most cases the issues would be resolved peacefully, but with money at stake, this is usually difficult or impossible, and today "litigation abuse" by over eager regulator or legal personnel is rampant. As an informed consumer, you should study the facts yourself and come to your own decison rather than letting a government agency or unreasonable client establish the 'truth".

That does not mean that wrongoing in finance doesn't occur. Human greed being what it is, financial impropriety is normal and both our legal system and regulatory apparatus does a reasonably good job given the daunting task before it. Many genuinely and intentionally fraudulent actors are punished every day in American courts, and rightly so. But frivolous court cases and regulatory actions also abound as money-driven lawyers of questionable ethics pursue what they view to be easy paydays at the expense of companies and individuals.

Merrill Lynch and Bank of America are sued repeatedly every year by clients who think they were unfairly steered to, accounts, stocks, customer service personnel, etc. that didn't please the litigant for one or another reason, even though these things are through no real fault of Merrill Lynch. Regulatory agencies too, under pressure to demonstrate that they being "effective" in policing America's financial marketplaces, will often make flimsy our outright false accusations against innocent third parties to force the accused to settle, knowing that the high cost and long hours required to fight a deep-pocketed government agency is usually not worth it - leaving aside the issue of innocent or guilt. The tendency of the U.S. financial regulatory agencies to go after "low hanging fruit" - i.e., small companies, Mom-and Pop businesses, etc. - to notch settlement "wins" despite letting the true offenders like Bernard Madoff get a free pass has been written about extensively in legal and political journals, but as a prospective securities loan client your interest is in understanding any case that you do encounter sufficient to draw your own conclusion so that you can make use of the most appropriate facilities without fear or prejudice. Always look at the complete picture of any lender, company, broker, trader, or advisor rather than taking a court filing or regulator settlement as automatic final evidence that a lender or company is legitimate or not. That's simply being smart.

3) Use the Rule of 3: Identify and Count All Flags.

The rule of three says that if you see any three flags, you would be best not to conduct your financing with that company or in this case, lender. Here are some of the most common flags in the stock loan and securities finance industry to watch for:

What to look for:

• Does the direct lender make claims of having been "in business" for very long periods but cannot corroborate those claims (for example, though their website has only been up a short time, do they claim to have been in business for 12 years, etc.)?
  
  
• Is their website sloppily constructed with spelling and grammar mistakes and little content, indicating hastiness? Do they oddly pump up memberships with unknown organizations, as if such memberships should end all discussion concerning the integrity of the company or their services?
  
  
• Do they avoid detailed and verifiable information, instead insisting on a phone call as the sole medium for communications to ensure that there is no paper trail that could end up in court someday? Do they present easy-to-obtain licenses form state organizations for brokering or lending, when those licenses have very low bars and no real standards for issuance? (Remember too that unscrupulous "lenders" can lie just as easily on their license applications as to you directly. Don't be taken in by licensing claims alone.) Do they refuse to let you verify their methods of funding? Do they refuse to provide verifiable third-party references, or do they use people who seem to be in collusion with them as "references"?.

Phony Testimonials. Made up or fake testimonials are commonly listed with an initial and a last name, or vice versa. They sound absurdly positive. Most are simply fake. If you see a full name, dig deep and ask the tough questions, such as how much in fees has the lender paid to them in the past? A person making fees from an unscruplulous lender who gives a testimonial for them to you cannot be given much credence.

When they are untraceable or made up. Testimonials are powerful selling tools in any industry, but legitimate testimonials in the stock loan business are rarely placed on a website. Individuals who own substantial stock or securities positions and have obtained good financing rarely allow their private stock-related activity to be broadly publicized for the sake of pumping their lender's business, as these are private financial matters that can impact other shareholders. Corporate employees shareholders who also work for companies or hold substantial positions will not do anything that could spark rumors that might have a negative effect on the value of their or other shareholder's securities. If you see "testimonials" on any stock lender's or broker's website, ask to verify and speak with the originators without the "lender" present before assuming the "testimonials" are accurate and true.

"Trust-me" longevity claims. Trust and longevity go hand in hand for most businesses, so its no surprise that the certain "lenders" would exaggerate and pump up their claims if they felt that would get you a little closer to your assets. Claims of being in business for many years have the intention of fooling you into thinking you are dealing with an established company. It is not hard to verify these claims through Chambers of Commerce, website dating, and public records. For a fast way to estimate a company's longevity, use Alexa's "www.archives.org", which takes a snapshot of virtually every page on the web and will show you just what the company looked like in the year it claims to have been in business. If the black hat "lender" company says they have been in business for 12 years but they've only had a website for two years, the claim is not likely to be true. Common sense would say that If they are willing to mislead there, they will be willing to mislead elsewhere.

Misleading tax advice, e.g., statements such "Never any taxes" on transfer-of-title loan programs where the shares are sold to fund the loan. Is your lender eager to get you to sign by touting tax benefits of his transfer-of-title style loan? If yes, these could be claims designed to lure you into signing up for a loan you may regret, particularly if you went into it on the assumption that there would be a tax advantage. Always consult your licensed tax advisor before undertaking any securities loan with an expectation of a tax benefit.

Note that no stock loan provider has a right to claim tax-free status or tax shelter status for their loan program, regardless of their licensure or background or the characteristics of the loan program. That right belongs to the IRS. Every client is unique, and each case may be different. However, an institutional loan in which the shares remain in the client's account and title, where a simple lien is used to perfect the loan program, where the loan is limited recourse but not full nonrecourse, and where the loan is a line of credit where the securities are leveraged, but not sold -- should in our view not be considered a sale under any interpretation. REF: See: http://www.irs.gov/pub/irs-pdf/f3949a.pdf)

Exaggerated, misleading biographies. Unlicensed, inexperienced, would-be "stock loan companies" with dubious track records, hidden legal problems, no or trumped-up biographies adorned with made-up accomplishments on websites filled with financial advice by unlicensed individuals. Sadly, all these have begun to spring up recently, often run by ex-mortgage or real estate agents looking for a new career. Again, real backgrounds and achievements are not hard to verify.

Copying other sites' style or substance to create an impression of being a large, established firm. Did the web designer go out of his way to make the site look like that of Citibank or any other well-known financial firm? Do you see any over-the-top words that are commonly used with larger firms to encourage confidence in their legitimacy, such as "First", "Trust", "World", "Global" "Wall Street" etc.? Real firms have been around, are easily verified by simply using Google, and never use words that are amateur attempts to sound larger than they are.

The Google Factor. Though most unscrupulous websites are weeded out by Google's sophisticated ranking systems -- which are highly sensitive to complex "trust" factors and legitimacy criteria -- occasionally some of these "lenders" actively fool the system by using pay-per-click and are allowed to portray themselves as something they are not.

Legitimate companies, by and large, do not need to purchase ad space for key words where they naturally rank high without having to buy that space. But new, or low-trust sites must buy keyword space. They have no choice. They purchase adword placement in the hope that the unsuspecting searcher will think there's no difference between organic, natural results and the paid pay-per-click results that Google puts at the top of its search rankings - even though there are.

Statistics show that viewers trust natural results far more than paid results. The instinctively understand that they are more likely to reach their objective with the unpaid, natural results, but these have been far harder to achieve.

Illegal, unlicensed operations, or companies that have lied on license applications. Not all companies involved in finance businesses need licensing, but many do. Is your firm properly licensed?

California, for example, is the strictest of all states for the stock loan industry: The lender must be licensed under California Finance-Lender's Law. If they are not, you may find your loan part of an inquiry if the lender has been found to have violated the law. Other states also have various licensing requirements: If your broker is introducing a stock loan solution as part of an insurance product sale, he must have the proper licensing to do so. Tax, estate planning, mortgage lending, and financial advising all require licensing if the stock-secured loan is being touted as part of a tax, estate planning, etc. solution.

If you find a stock loan lender or representative claiming to be licensed, verify it. Numerous online resource allow verification easily. Ask for a copy of the broker or lender's license if you suspect a license is required. Check the license date to ensure validity, and to verify that they have had any state regulatory issues. If so, steer clear of those companies.

In sum: Only undertake stock-secured loans from companies that are either fully regulated and licensed institutions, or that have the equivalent in third-party verified support documents. If it is a private, transfer-of-title lender, focus on full disclosure and on assets/capitalization. .

And finally: Use common sense. Or choose the safe ground of a fully regulated, licensed U.S. institutional loan. Whatever loan structure you ultimately choose, always apply the same standards to your stock loan or securities-based loan that you would for your car, your home, or education financing.

You owe yourself nothing less.