Customer's Loan Consent

What is a Customer's Loan Consent?

A customer's loan consent is an agreement endorsed by a brokerage customer that permits a broker-dealer to loan the securities in that customer's margin account.

How a Customer's Loan Consent Works

Assuming that a brokerage customer has consented to the agreement, the broker-dealer may, for instance, loan securities in that individual's account to another customer who needs to borrow them for a while as a part of a short selling transaction. The customer's loan consent form approves the broker-dealer to loan securities up to the limits of the customer's debit balance.

A customer's loan consent form will be part of the initial desk work when an individual opens a margin account with a broker-dealer. The margin agreement illuminates the terms and conditions under which the broker-dealer will stretch out credit to the customer to trade securities. The customer's loan consent agreement isn't compulsory, and the brokerage client isn't required to consent to it. Nonetheless, in the event that the customer chooses not to consent to a loan consent arrangement, the broker-dealer might decline to open a margin account, driving the customer to take their business somewhere else.

Upsides and downsides of a Customer's Loan Consent

According to the client's point of view, signing a customer's loan consent makes little difference, with the exception of possibly on how substitute payments in lieu of dividends are taxed, as the Schwab agreement quoted below makes plain. On the off chance that the broker-dealer loans out their shares to one more investor for a short selling transaction, the customer can in any case sell shares by means of a long transaction.

From the broker-dealer's point of view, a customer's loan consent gives the firm far greater flexibility in dealing with customers' margin accounts. The broker-dealer might borrow securities from numerous account holders to get an adequate number of shares of that security to work with another customer's short sale.

A customer's loan consent isn't mandatory, however a broker might decline to open a margin account without one.

Illustration of a Customer's Loan Consent

Charles Schwab and Co., to give one model, remembered this genuinely standard disclosure for its loan consent agreement (Section 11: Loan Consent):

"You concur that property held in your Margin Account, presently or later on, might be borrowed (either separately or along with the property of others) by us (going about as principal) or by others. You concur that Schwab might receive and hold certain benefits (counting, yet not limited to, interest on collateral posted for such loans) to which you won't be entitled. That's what you recognize, in certain conditions, such borrowings could limit your ability to exercise voting rights or receive dividends, in whole or in part, with respect to the property loaned. You comprehend that for property that is loaned by Schwab, the dividends paid on such property will go to the borrower. No compensation or different repayments will be due to you in connection with such borrowings. In any case, assuming that you are allocated a substitute payment in lieu of dividends, you comprehend that such a payment may not be qualified for a similar tax treatment as may have been applied to the receipt of a dividend. You concur that Schwab isn't required to compensate you for any differential tax treatment among dividends and payments in lieu of dividends. Schwab might dispense payments in lieu of dividends by any mechanism permitted by law, including by utilizing a lottery allocation system."