If your broker or advisor recommended that you take a loan secured by your securities or other savings, you may have legal recourse. This can be a recommendation to use margin or to otherwise take a loan secured by your investments. Such recommendations may be inappropriate. Please call 303-300-5022 for a free and confidential consultation with an attorney,
While historically low interest rates and relatively strong stock growth since 2009 gave some incentive for brokers to recommend loans to investors secured by account holdings, greater incentive came from the fees brokers collected for the loans.
These loans are now in jeopardy due to sharp drops in the U.S. stock market. Just as sharp drops in the housing market led to mass foreclosures in 2008 the sharp drops in the securities market is leading to liquidations of the saving of many of these borrowers of brokerage loans.
Borrowers, however, have rights and many of these loans have been made improperly. Brokers have duties to only recommend strategies that are consistent with an investors financial sophistication and tolerance for risk. Risking the life savings for a loan is a highly aggressive strategy and suitable for only the most sophisticated investors. Investors who were looking for moderate or safe strategies should not have been recommended such loans.
The brokerage lenders also have duties of good faith and fair dealings. Other safeguards exist under federal and FINRA, the Financial Industry Regulatory Authority, margin loan requirements.
The perils of such recommendations have always been known by financial professionals. In 2015, the Securities and Exchange Commission, the SEC, issued a warning about the rapid increase in lines of credit backed by securities. The SEC reported that one large brokerage firm increased the sale of such loans by 70% in just two years.
In 2014, Fortune magazine called securities based loans the “rich man’s subprime” in reference to the 2008 collapse of subprime loans. Unfortunately, brokerages expanded the market for securities-based lending beyond the rich in the years since 2014. The article described how such lending, often referred to as non-purpose lending, was exploding. The commissions were so great, Wells Fargo advisors referred to the commissions as the “13th month.”
Such lending was not limited to Wells Fargo. Firms known to have actively pushed such loans because of the extensive profits include Merrill Lynch, UBS, JP Morgan, Citi, and UBS. Fortune, in 2014, stated that Wall Street likes to push a “trend like this way past the bounds of logic and reason.”
Jeffrey Pederson has been representing investors, including margin and other loan, investors since 2002. Please call to discuss your options and potential legal recourse.