Can either party use the equity in a property that is under contract for deed or use it as collateral in any way? If so, how do you avoid that situation? Is it proper for one party to retain those rights?

Well, the original owner can mortgage the property to the limits of the equity... is that what you mean? They are still the "legal" owner of the property. That's one of the many, many reason why contracts for deed are becoming so controversial, and being so heavily regulated in so many places.

If you give us more specifics of the scenario you're dealing with I'm sure we can provide more specific answers.

What's your role in the situation and what are you trying to do or keep from happening?