When a lender considers extending credit or financing, one of the crucial steps in their due diligence process is performing a UCC (Uniform Commercial Code) search. This search provides a snapshot of a borrower's existing liens and secured financial obligations and can significantly influence lending decisions. Understanding how to interpret these search results is essential for managing risk and ensuring a sound financial decision.
What is a UCC Search?
A UCC search is a review of public records related to Uniform Commercial Code filings, which are used to secure loans with personal property. The search will reveal any existing liens, encumbrances, or claims against a borrower’s assets. Correctly interpreting a pre-funding UCC search is critical to understanding the priority and validity of claims against collateral being pledged by an applicant.
What follows is a guide to help you properly "read" UCC search reports.
Key Elements of a UCC Search
Index Date
- A UCC search should list an index date (aka through date) to inform you of how current the lien information is. If your search report does not reference an index date, contact your searcher immediately. Outdated lien information can hinder your ability to determine the status of liens and the priority of claims.
Types of Filings
- UCC-1 Financing Statements: This form is filed with the Secretary of State's office (or equivalent filing office) where the debtor is located and provides notice of a security interest in certain personal property of the debtor. It’s the primary tool used by lenders to secure their interests.
>> Read here to learn about the revised UCC filing forms - UCC-3 Amendments: This form is used to modify, continue, assign, or terminate a UCC-1 filing. It can indicate changes in the scope or terms of the secured interest.
- Additional Lien Types: Some states maintain additional lien types such as tax liens and judgment liens. These additional lien types may be indexed alongside the UCC data at the state, or they could be housed on a separate searchable index. It’s important to work with a service provider you trust to ensure all lien types available at the state are included in your search result.
Filing Dates
- Date of Filing: Indicates when the document was officially accepted by the state and entered into the public record. This date helps determine the priority of the claim relative to other creditors.
- Lapse Dates: UCC filings have a set duration, typically five years, before they lapse. After five years they need to be continued to remain effective. Lapsed filings suggest the security interest is no longer valid.
Debtors
- The name on which the UCC search was performed. The debtor is the named individual or company who has received funds, goods, or services on credit, and is obligated to repay the loan or settle the outstanding balance according to the agreed terms.
Secured Parties
- The secured party is the creditor or lender that holds a security interest in the borrower's collateral. This reveals who has an existing claim on the borrower’s assets and may impact a lender’s decision on whether to extend new credit.
Collateral Description
- The collateral description references the asset or assets pledged by the borrower to secure the transaction. Review the description of the collateral that secures the existing loans to ensure it does not overlap or conflict with the collateral you intend to take an interest in.
>> Expert insight: 3 Good Reasons to Include Similar Names With Your UCC Searches
Tips for Analyzing the Impact on Lending Decisions
- Assess Priority: Priority is determined by the order of filing, where a first-position lien has priority over subsequent liens against the same collateral (assuming the senior lien was filed according to the strict rules under the Uniform Commercial Code.) Reviewing the priority of existing liens will help to understand how they might impact your claim should you choose to move forward.
- Evaluate Risk: Multiple UCCs or other liens can indicate that the borrower has significant existing financial obligations. Assess whether the borrower’s remaining assets can support additional credit.
- Check for Conflicts: Ensure there are no conflicting claims on the same collateral. Conflicts can complicate enforcement if the borrower defaults or files for bankruptcy protection. Collateral descriptions can be vague - according to the Uniform Commercial Code they need only reasonably describe the collateral. You may need to contact the secured party for details on what specific assets are covered by the Financing Statement.
- Review Expiration and Continuation: Check for upcoming expirations or recent continuations. This helps assess the current status of secured interests and any potential risks.
Conclusion
Interpreting UCC search results is a critical step in the lending process. By carefully analyzing the types of filings, dates, secured parties, and collateral descriptions, lenders can make informed decisions about extending credit and managing risk. Understanding these elements not only helps in assessing the borrower’s current financial obligations but also provides insights into potential risks associated with the proposed loan. Always consider UCC search results as part of a broader due diligence process to ensure a thorough evaluation of creditworthiness.
We’re here to help! For any UCC related questions, or to submit a UCC search request, contact CLAS at 800.952.5696 or connect@clasinfo.com. Or, simply click on Contact CLAS, a CLAS representative will get back to you shortly.
For informational purposes only; content does not constitute legal advice.