Magazine article The Journal of Lending & Credit Risk Management

Steps to Avoid Losing Collateral on Existing Loans

Magazine article The Journal of Lending & Credit Risk Management

Steps to Avoid Losing Collateral on Existing Loans

Article excerpt

Y2K for Lenders--Part 1

This is the sixth in a series of occasional articles addressing the revisions to Article 9 of the Uniform Commercial Code. Subsequent articles will focus on other specific changes.

The sponsors of revised Article 9 contemplated that all states would adopt the revisions with a uniform effective date. Commercial transactions will be adversely affected if any state fails to do so. The discussion in this article is based on the premise that all states will enact the revisions to Article 9 and that they will all enact them with the same effective date of July 1, 2001.

Prior to July 1, 2001, lenders must prepare to implement the changes required by the new statute by revising standard provisions and forms of loan documentation, lending procedures and, if necessary, credit policies. Starting on July 1, 2001, lenders making new loans and taking collateral, or taking new collateral on existing loans, must comply with the provisions of revised Article 9. Those changes alone impose a burden on lenders, but there is an even greater burden with respect to existing loan portfolios.

When revised Article 9 becomes effective on July 1, 2001, it will govern all security interests and other liens within its scope. That's true even if the security interest or other lien was created before July 1, 2001. What happens, for example, with collateral on existing loans for which the place to file UCC-1 financing statements has changed? What should be done on existing loans for which revised Article 9 has changed the method of perfection for the collateral? Suppose existing security agreements describe the collateral differently from the terminology of revised Article 9. What about deposit accounts that were not governed by Article 9 and now are? What if a loan has closed and the security agreement's been signed, but the financing statements haven't been filed prior to July 1, 2001? Suppose the financing statements have been filed prior to July 1, 2001, but the loan hasn't closed.

The drafters of revised Article 9 recognized that the extensive changes in the law would affect a myriad of transactions already in existence or in process at the time the statute was enacted. As part of the revisions, the drafters included a set of rules intended to comprehensively address those problems and effect a transition from existing law to revised Article 9. Perhaps the most burdensome aspect of revised Article 9 is its mandate to bring collateral on existing loans into compliance with its provisions. The transition rules force lenders to review loan portfolios to determine what steps (if any) must be taken by the lender to continue their rights in existing collateral.

In general, the transition rules divide collateral transactions into three groups:

1. Those that are fully enforceable (attachment steps and perfection steps taken).

2. Those that are attached but not perfected.

3. Those for which the perfection step has been taken but not the attachment steps.

In addition, there are specific transition rules for the filing and continuation of financing statements. This article will discuss the various transition rules. A succeeding article, "Y2K for Lenders-- Part 2," will conclude with examples of their practical application.

General Rule-Existing Article 9 Security Interests and Other Liens

Existing Article 9 security interests. The first transition rule under revised Article 9 is that all security interests that are created, or in the process of being created under current Article 9 prior to July 1, 2001, must he dealt with under revised Article 9.

Existing non-Article 9 liens. With respect to liens created prior to July 1, 2001, that are not governed by current Article 9 but come within the scope of revised Article 9 (for example, agricultural liens, liens on commercial tort claims, and liens on deposit accounts), the lien holders have a choice as to which law they will use to terminate, complete, consummate, or enforce the lien. …

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