Generally speaking you are right. If you are honest and have all intentions of repaying the loan, what difference does it make? Usually none.

However it is a two way street. If you are being honest with your lender and doing what you can to meet his requirements, he also has a responsibility of being honest and up front with you. Asking for excess collateral in my opinion is not operating ethically.

I'm not talking about minor differences of opinion. I'm talking about having a line of credit and the bank wanting 5 or 10 times the collateral to cover it with no reason to believe the loan will be a problem. Asking for excess collateral just because they can. To me it is a poor faith effort on their part when they expect you to make a good faith commitment. One issue it can create if they are a somewhat unscrupulous lender is it can tie up collateral in such a way that they could discourage you from seeking other lenders. For example, lets say you have a line of credit for operating expenses that is only expected to cover half of the expenses. In other words you self finance the other half from savings. Further the bank has collateralized the crop insurance proceeds and has a first lien on the crop. If this is the only loan you have with the bank to me it would be disingenuous for them to require your machinery to back the loan also. They have plenty of collateral. But by tying up your machinery they have captured you as a client. Should you want to go else where and use that machinery (perhaps as collateral for a loan on a new machine because you lack the down payment) as collateral the bank is going to know about it and they have some leverage over you if they choose to use it.

A good bank that wants good long term relationships with customers would never use such leverage, but I would not bet my life that every bank out there is all sunshine and roses in the way they operate. There are likely as many shady bankers as there are in any other line of work.

So there are some reasons banks should not over collateralize and some reasons customers should call them on it if they try. It is all negotiable with the exception of what regulators require. Both sides need to operate ethically. To me it is just as unethical for a bank to ask for unreasonable loan covenants as it is for a debtor to fudge figures on the application. 

John