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Collateral Valuation: Credit Risk: Termination or the extinguishing of Security Interest

Previously we discussed the creation, perfection and enforcement of security interest in collateral. In this post we will consider the situations where and the manner in which security interest is terminated. We will also consider the disadvantages to the lender of holding on to security interest and collateral after full repayment of debt has been made.

Termination or the extinguishing of Security Interest

When the debt has been fully repaid by the borrower the security interest should be terminated.  This includes situations where the borrower has defaulted on the debt but agrees to pay the lender the full amount owed together with any expenses incurred in taking, holding and preparing for the disposition of the property, including, if included in the security agreement, any legal expenses incurred. The right to terminate the security interest must be exercised before the lender has disposed of or contracted to dispose of or accepted the property as full or partial settlement of debt. Termination is effected by:

  • Filing a termination statement
  • Returning the pledged goods and documents to the borrower
  • Returning the original security agreement

If the security interest is preserved after the borrower has made full repayment, it could be misconstrued by the borrower as the lender being ready to provide them with another loan. In addition by not terminating the security interest and continuing to hold the pledged assets or documents the lender/ secured party continue to expose themselves to the risk of an unexpected liability that may arise if the pledged goods or documents were to be damaged while in their possession.

In this final post of the collateral valuation course we have looked at how security interest in collateral is terminated.

If you would like to buy the complete course on collateral valuation as a PDF file, please see the Middle Office and VaR section at our online finance course store. The online finance course store  includes easy to read and work with downloadable pdf files, excel templates and ready to work with models that are shared to illustrate usage and speed up learning and pick up for advanced financial modeling, forecasting and simulation topics including interest rate forecasting and simulation, value at risk analysis, credit analysis and processes, asset liability management and other related middle office and risk topics.

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