Is That Loan Really Collateralized (2001)

Revision of Uniform Commercial Code Article 9 may leave secured lenders naked if they don't adjust policies and procedures. And, yes, this may even affect loans already in your portfolio Editor's Note This article provides a national overview of some of the key changes in UCC-9, taking a practical, rather then exhaustive legalistic, perspective for the working commercial lender. A detailed exposition of all the alterations would fill this entire magazine. The author, therefore, addresses only some of the major changes here. Also, changes relating to consumer secured transactions are not addressed here. Veteran bank lenders may think they can handle secured loans in their sleep. Those who do had better make sure that they don't get caught napping, or they may find their security agreements worth less than the paper they are recorded on. What's changed? Article 9 of the Uniform Commercial Code--the model law which forms the foundation of secured lending law-has been revised, with some 29 states and the District of Columbia having already adopted the revisions (to take effect July 1, 2001). In addition, most of the other states and territories are in the process of adopting this new model legislation. (See the box on page 38 for the status of the legislation in your state.) New lay of the land Commercial lenders will be spending the next few years becoming accustomed to the new rules under Article 9. Changes in procedures will be required. Many ticklish issues will come up during the new law's transition period. However, the good news is that the eventual, overall impact of the revisions to the statute will be a simplification of perfection and a more streamlined approach to searches. Revised Article 9 is designed to be more user-friendly and to address and resolve some of the more contentious uncertainties under the old statute. Core areas of the Uniform Commercial Code have been affected, including: * The types of collateral covered. * The methods of perfecting a security interest. * The choice of state law which governs a transaction. The changes are intended to keep pace with changes in technology and the market. However, the short-term impact will be significant on all lenders. * Lenders should understand, up front, that the revised Article 9 will not only affect their work from the effective date forward, but will also have the potential of affecting existing collateral arrangements. * Further, lenders performing searches to snake sure prospective collateral isn't already encumbered will have to check its status especially carefully during the new article's transition period. (More detail on these critical points is provided in the large box on the page 34 of this article that deals with transition issues.) A note regarding structure: I've set things up to describe changes to the code in the order that they would arise when a lender is preparing a financing statement. (Section references to the code are indicated by the 9- notes appearing throughout this article in parentheses.) Basics of the paperwork NAMES AND CAPACITIES OF THE PARTIES: Be sure to get the names right. Article 9 continues to require that the financing statement filed to perfect the lender's security interest contain the debtor's name and the name of the secured party. Revised Sections 9-502 and 9-503 tighten the requirements regarding the name of the debtor and loosen the requirements regarding the name of the secured party. Where the secured party is an agent, the financing statement is still effective with only the name of the secured party even if the representative capacity is not shown. Section 9-503(a) sets the limits on what is sufficient for the debtor's name. For a registered (i.e., an entity organized under the law of a single state where the state is required to maintain public records showing the organization 9-102(70)), the financing statement is only effective if the name is shown as it appears in the public record of the state of organization. …