Perfecting a Security Interest in Personal Property Prior to Closing
In a typical loan transaction where a lender is taking the borrower’s personal property at collateral, the lender will file a financing statement under the Uniform Commercial Code (“UCC”) after the loan closing has occurred in order to perfect the lender’s security interest in the personal property collateral. However, in some situations, a lender may be concerned about intervening liens that are filed in the period of time between when the lender last ran a UCC search prior to closing and the actual filing of the UCC financing statements. In those situations, a lender may decide to pre-file the financing statement prior to closing and then run another lien search prior to closing in order to assure the lender of the existence and priority of its security interest.
Under the UCC, a lender can pre-file a financing statement if the borrower authorizes the lender to do so in a written statement signed by the borrower. Some lenders may choose to obtain this authorization by including language in their commitment letter or in the borrower’s loan application.
If a lender chooses to pre-file a financing statement, then the security interest will be perfected once the step of attachment occurs. Attachment is completed when the lender obtains a security agreement signed by the borrower, the lender extends value (funds the loan or draw), and the borrower has rights in the collateral (title is transferred to the borrower if the borrower did not already own the collateral prior to the loan closing.) Until all of these elements have occurred, however, the security interest will not be perfected even though the UCC financing statement is on file.
Lenders who want to pre-file a financing statement should take care that they understand the steps necessary to create and perfect the security interest properly.