What is a Customer's Loan Consent?
A customer's loan consent is an agreement signed by a brokerage customer that permits a broker-dealer to lend the securities in that customer's margin account.
How a Customer's Loan Consent Works
If a brokerage customer has consented to the agreement, the broker-dealer may, for example, lend securities in that person's account to another customer who wants to borrow them for a period of time as a part of a short selling transaction. The customer's loan consent form authorizes the broker-dealer to lend securities up to the limits of the customer's debit balance.
A customer's loan consent form will be part of the initial paperwork when an individual opens a margin account with a broker-dealer. The margin agreement spells out the terms and conditions under which the broker-dealer will extend credit to the customer in order to trade securities. The customer's loan consent agreement is not compulsory, and the brokerage client is not required to agree to it. However, if the customer decides not to sign a loan consent agreement, the broker-dealer may decline to open a margin account, forcing the customer to take his or her business elsewhere.Pros and Cons of a Customer's Loan Consent
From the client's point of view, signing a customer's loan consent has little effect, except potentially on how substitute payments in lieu of dividends are taxed, as the Schwab agreement quoted below makes plain. If the broker-dealer lends out his or her shares to another investor for a short selling transaction, the customer will still be able to sell shares via a long transaction.
From the broker-dealer's perspective, a customer's loan consent gives the firm far greater flexibility in managing customers' margin accounts. The broker-dealer may borrow securities from multiple account holders in order to obtain enough shares of that security to facilitate another customer's short sale.