Non-recourse stock loans
A “non-recourse stock loan” is usually not a loan in the sense a margin account or a bank credit line is. The lender asks you to transfer your shares to it, advances you a percentage of their value, and promises to return the shares when you repay. You are told you can walk away if the stock falls. The catch is that once the lender owns the shares it can sell them right away, and if the stock rises it may have nothing to give back.
What FINRA warned about
FINRA’s investor alert on stock-based loan programs focused on non-recourse loans from third-party lenders that are generally unregistered and unregulated. Its points, in plain terms:
- You transfer the stock to the lender, which then has total control over it and may sell it almost immediately.
- Because of that transfer, the IRS might treat the deal as a sale. You could owe capital gains tax on stock you thought you still owned, which hurts most when you have held it a long time.
- If the lender sold your shares and the stock then rises, you lose that gain, and you are relying on the lender having the cash or the shares to give back at the end.
- Some pitches use the loan to sell you something else, such as an annuity, which can add fees, surrender charges and another taxable event.
- The firms offering these programs were often not registered brokers, so they have no duty to check that the deal suits you.
Warning signs
- The paperwork transfers title to your shares instead of pledging them in an account in your name.
- The lender is not a bank or a registered broker-dealer and will not say who holds the shares.
- The pitch leans on avoiding taxes on a sale, or on keeping all the upside with no risk.
- The loan proceeds come with a product to buy.
The regulated alternatives
A margin loan from your own broker or a securities-based line of credit from a bank keeps the shares in your account, in your name, under rules on disclosure and custody. They are not risk-free; both let the lender sell if the collateral falls short. But you can see their rates, and you know who holds your stock. Compare published margin rates or read how securities-based lines of credit work.
Sources: FINRA investor alert, Stock-Based Loan Programs (archived copy); FINRA, Securities-Backed Lines of Credit Explained.