Credit Policy 5: Collateral Rules That Actually Protect You

There’s a common misconception in lending that the collateral will “save you” if the deal goes sideways. But anyone who’s had to enforce on a bad loan knows that isn’t always true. A strong asset doesn’t just backstop a deal it shapes how you structure it. In a non-bank context, where borrower risk is often higher, collateral is your most reliable line of defense.

That’s why every credit policy needs clear, practical, and enforceable collateral guidelines. Not for compliance, but for protection.

Not All Collateral Is Created Equal

It’s tempting to treat all real estate as “real” security. But seasoned underwriters know some assets are far more liquid, stable, and insurable than others. The same applies to other types of collateral, your ability to liquidate security assets for the right dollar values should drive your lending approach. Considering “real property” as an example, your policy should clarify:

• Eligible property types:

  • Owner-occupied residential

  • Rentals (single-unit vs. multi-unit)

  • Condos

  • Commercial (office, retail, industrial)

  • Land (serviced? raw?)

  • Specialty (student housing, short-term rentals, mixed use)

• Ineligible or restricted assets:

  • Leasehold or co-ops

  • Mobile or modular homes

  • Foreign-owned or off-grid properties

  • Environmentally contaminated sites

• Geography:

  • Are you lending in rural or remote areas?

  • Is resale demand stable in the market?

  • Are there zoning, flooding, or market volatility concerns?

Consider a beautiful cottage as collateral—lakefront, great pictures, solid LTV. But it is water-access only. When enforcement becomes necessary, that “dream property” turned will only appeal to a small pool of buyers.

The Appraisal is Just the Start

We lean heavily on appraisals—and we should. But your policy should guide how to interpret them, including:

• Approved appraiser list: Only accept reports from licensed, independent professionals.

• Comps must make sense: No cherry-picking from out-of-area or unrenovated comparables.

• Forced sale value (FSV) vs. market value: Which are you underwriting to?

• Age of report: Should be recent, especially in fast-moving markets.

And always compare the appraisal to the rest of the file. If the value seems inflated to make the deal work, don’t ignore your gut.

Title and Legal Considerations

Your policy should also account for:

• First vs. second position: What’s your risk tolerance? What equity buffer do you require?

• Registered owners and beneficial interest: Are the borrower(s) truly the owner(s)?

• Encumbrances: Are there other liens, caveats, or private debts on title?

• Condo rules: Are status certificates reviewed? Are there special assessments?

I’ve seen well-intentioned deals collapse post-funding because the borrower’s spouse wasn’t on title—or worse, was but wasn’t disclosed. A title policy doesn’t catch everything. Your review still matters.

Solid Collateral = Smarter Structure

Strong collateral doesn’t just reduce loss exposure—it lets you structure more creative deals. You can extend terms, reduce pricing, or make exceptions for credit if you’re confident in the exit via a high-quality asset.

But none of that works without a clear, consistent framework for what qualifies as “strong.”