The Steps Necessary to Avoid Losing Collateral on Existing Loans: Y2K for Lenders: Part 2

By McElroy, John M. | The RMA Journal, September 2000 | Go to article overview

The Steps Necessary to Avoid Losing Collateral on Existing Loans: Y2K for Lenders: Part 2


McElroy, John M., The RMA Journal


Article 9 of the Uniform Commercial Code, Secured Transactions, is the set of legal rules that governs the taking of most kinds of collateral for loans. How to protect your rights to collateral against the claims of others, how to describe collateral in security agreements and financing statements, where to file financing statements, what rights concerning collateral a lender has after default--all are questions answered and controlled by Article 9. From 1953 until 1998, Article 9 was revised three times--the first revision addressing relatively minor problems and the latter two revisions in 1977 and 1994 addressing changes in the securities industry. In 1998, the American Law Institute and the National Conference of Commissioners on Uniform State Laws approved a substantial revision and reorganization of Article 9--the culmination of an eight-year process that began in 1990 with the formation of a study committee. Various state legislatures have begun enacting the new Article 9 into law. As of the date of pu blication of this article, 14 states have introduced the new Article 9 into the legislative process, with an additional 28 states already enacting the revision into law with a subsequent effective date. The 14 states are Colorado, Florida, Idaho, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, New Jersey, New Hampshire, New Mexico, New York, South Carolina, and Wyoming. The 28 states are Alaska, Arizona, California, Delaware, District of Columbia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Minnesota, Montana, Nebraska, Nevada, North Carolina, Oklahoma, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, and West Virginia.

When revised Article 9 becomes effective on July 1, 2001, it will govern all security interests and other liens within its scope. That includes not only transactions commenced after July 1, but also those completed or commenced prior to July 1. Revised Article 9 imposes a heavy burden with respect to collateralized loans and other transactions already on the books when the new statute goes into effect. Lenders must bring documentation for existing loans into compliance with revised Article 9.

Revised Article 9 has added to its coverage new transactions, new debtors, new types of collateral, new perfection rules, and new UCC-1 filing rules. Existing loans and other transactions must be reviewed to determine whether any of them is impacted by any of those new Article 9 provisions. To the extent that an existing loan or other transaction does not comply with revised Article 9, it must be redocumented to bring it into compliance within the time frames specified in the statute.

This is the ninth in a series of occasional articles on revised Article 9. What follows are specific examples of what a lender must do to effect the transition rules of revised Article 9. These examples are not intended to be exhaustive.

New Debtors

Transfers by a state or a governmental unit of a state are excluded from coverage by current Article 9. Revised Article 9 brings such transfers of collateral within its coverage for the first time.

Existing collateralized loans to states or governmental units of states must be brought into compliance with revised Article 9's attachment and perfection rules. Security agreements must be reviewed for proper descriptions of collateral, and the security interest must be perfected under revised Article 9.

Please note that it has been common practice to file UCC-1 financing statements on governmental loans (for whatever practical notice such filing would achieve) even though the filing had no legal effect. If such financing statements are filed in the proper office and state under revised Article 9, they will be legally effective on the date revised Article 9 takes effect. However, such financing statements must be reviewed for compliance with revised Article 9's requirements for a financing statement and amended to bring them into compliance, if necessary. …

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