Q&A: Here’s a question that a Wisconsin credit union recently asked The League’s Legal Affairs team, along with our answer. Do you have a compliance question? Contact The League’s Compliance Hotline at (608) 640-4050 or email.
Q. We need to take a share certificate as collateral for a loan. What forms are needed to do that?
A. The process and forms needed to take a share certificate as collateral will vary depending on the share certificate and loan forms being used. Financial institutions can take two different approaches to document certificates.
- The League’s certificate form (WCUL 82012) is old-fashioned and is no longer used by many credit unions. It’s a traditional share certificate that is designed to be printed on security paper. It sets out all the terms of the account and is signed by the credit union. It’s an actual “live” instrument like a check, meaning that the member must endorse it on the back and surrender it to the credit union to cash it in. In other words, the piece of paper for a $10,000 certificate is actually worth $10,000. For more information, see The League’s ii Release No. 0015.
- In the early 1990s, the Truth in Savings Act was passed, requiring a disclosure that describes certain terms of a certificate account. As a results, vendors were free to develop a “certificateless” share certificate. It does not use the old-fashioned certificate on security paper that must be surrendered for payment. Instead, it typically uses a printed sheet that outlines the terms of the certificate, and the member (or bank customer) signs off on a signature card or even a receipt that sets out ownership terms, account number and recites that the member agrees to the terms of the separate printed sheet. The separate printed sheet has legal terms and is often accompanied by the Truth in Savings disclosure. Nothing needs to be surrendered to the credit union to redeem the certificate.
Taking a paper certificate as collateral
The League’s share certificate form (WCUL 82012) takes the traditional, but now old-fashioned, approach. Our certificate form is a “live” instrument, designed to be printed on security paper.
When you let a member pledge that kind of old-fashioned paper share certificate to secure a loan, the credit union needs to take possession of the certificate for the duration of the loan. Otherwise, you risk the member taking it to a bank or other institution and pledging it on a loan there. In a dispute, the bank can win since they would have the certificate.
It may be best to also have the member sign a “collateral pledge agreement,” as well. More information on that form is in the next section.
When you take the member’s original paper share certificate as collateral, you must give them a receipt, since that piece of paper is worth money. The receipt should give the date you take possession of the certificate, the credit union’s name, the share certificate number, the loan number, the share certificate owner(s) name(s), and the fact that the CU has taken possession of the share certificate as collateral until the identified loan is paid in full. The receipt is signed by a credit union official, followed by their title.
Taking a “certificateless” share certificate as collateral
If the credit union is taking a “receipt and disclosure” form of share certificate as collateral (as opposed to an old-fashioned paper certificate form), then a collateral pledge agreement is needed. It is used instead of the chattel security agreement, which is normally used for a loan secured by personal property, like a motor vehicle. The collateral pledge is used when the collateral is in the possession or control of the credit union.
The League does not offer a collateral pledge agreement. But two collateral pledge agreements are offered for sale through FIPCO. (FIPCO is a subsidiary of the Wisconsin Bankers Association, but they do sell their forms, which are drafted with Wisconsin law in mind, to many credit unions.) One FIPCO form is used when the account or certificate is held for a consumer purpose. The other form is for accounts or certificates owned for a business purpose:
- Consumer WBA 421 “Consumer Collateral Pledge Agreement.”
- Business WBA 421 “Business Collateral Pledge Agreement.”
Establishing control over the certificate
A security interest in a share certificate is perfected by control, not usually by filing a UCC-1 Financing Statement, which is often needed for other types of collateral.
Establishing control of a paper certificate is straightforward: The credit union keeps the physical certificate in its possession (whether issued by the credit union or a different financial institution).
But what if the certificate offered as collateral was issued by another financial institution and it’s “certificateless,” without a physical paper form? Then the credit union can ask its debtor and the other financial institution to sign a “control agreement” with the credit union. Under the Uniform Commercial Code, a secured party has control if the debtor, the secured party, and the other financial institution have signed a written agreement that the other financial institution will comply with the secured party’s instructions to pay out the funds in the account without further consent by the debtor. See Wis. Stats. §409-104(1)(b). Your credit union’s attorney can answer questions about this and help draft the appropriate documentation.
Other compliance issues
Here are a few other points we try to stress to credit unions when they ask about taking a share certificate as collateral:
Check your note and Truth in Lending disclosure forms
Your consumer note probably has a section where the credit union must identify its collateral for the specific loan. Typically, in the note, you would identify the share certificate account number and/or the date of a collateral pledge agreement. Your Truth in Lending disclosure must also reference taking the share certificate as collateral.
For example, on The League’s “Consumer Note and Federal Truth in Lending Disclosures” form (WCUL #82014) includes both a note section and a Truth in Lending section:
- The Note section is at the top of the first page includes this clause, which should be filled out as indicated in italics and underlined:
This Consumer Note is secured by security agreement(s) dated April 15, 2025, from John Smith and Mary Jones to Credit Union and ***** covering the items specified therein. In addition, the Borrower pledges as security for the Consumer Note the following shares and/or deposits: Share Certificate No. 12345.
- The Truth in Lending disclosure is halfway down the first page of the combined form. It would be completed as indicated in italics and underlined:
Security: You are giving a security interest in:
*****
[x] The following shares and/or deposits: Share Certificate #12345
IRA share certificates
See what, if anything, the share certificate form says about its use as collateral. Usually, it will say that the credit union has no right of setoff against the certificate if it is owned by an IRA. That is because taking a pledge or lien against the share certificate destroys the tax deductibility of the IRA. For the same reason, do not take an IRA share certificate as collateral on a share secured loan. It would destroy the IRA tax deductibility, and if the credit union issued that share certificate, taking it as collateral would violate the credit union’s duties as custodian.