What Are Secured Transactions?
Loans are part of many businesses, and business leaders try to make sure that any loans they make are paid back in full. A secured transaction is one in which a debtor puts up their personal property, usually through a security agreement, to guarantee that they will pay a debt to a creditor. In contrast, in an unsecured transaction, the debtor promises to pay but does not offer any collateral, property used to secure a loan with the understanding that its owner will forfeit it in the event of default, as backing for the loan. Article 9 of the Uniform Commercial Code (UCC), which is a group of uniform laws that regulate business and commercial transactions, governs secured transactions in almost every jurisdiction of the United States.A security agreement is a contract that shows intent to provide a security interest to the lender, discusses the rights between parties, shows that there is an agreement between the parties, defines default, and explains how the secured party will collect. In other words, the security agreement protects the lender's interest by allowing the lender to take and sell some of the borrower's property if the borrower stops making payments. This significantly reduces the lender's risk.
Basics of Secured Transactions
Types of Collateral Under Article 9
1. the creditor gives something of value in exchange for the security interest
2. the debtor actually owns the collateral and has the legal right to transfer it to someone else
3. the debtor either signs the security agreement or hands over the collateralAttachment is important for creditors because it provides them with an enforceable security interest, meaning that if the debtor does not pay, the lender can use the collateral to recoup any loss. For example, Ben goes to First Bank in hopes of obtaining a personal loan to fund a family vacation. Ben offers the title to his car as collateral for the loan. Ben proves that he owns the car free of any claim and that he has the right to transfer the ownership. First Bank and Ben set forth the terms of their agreement in writing, and Ben hands over the title to his vehicle to First Bank. First Bank's security interest attached because Ben (1) gave his vehicle, something of value, in exchange for the loan; (2) owns the vehicle and has the legal right to transfer the vehicle to someone else; and (3) gave First Bank the title to the vehicle. This means that First Bank now has an enforceable security interest against Ben if he fails to satisfy the loan requirements. However, to ensure that First Bank has priority in the event that Ben becomes insolvent, First Bank should ensure that its security interest is perfected to prevent claims of higher-priority security interests in the vehicle title from other creditors.
Requirements for Attachment
Overview and Purpose of Security Interests
Elements of a Purchase-Money Security Interest (PMSI)
In business it is common for a PMSI to be created in inventory and equipment. However, different rules apply. For example, a creditor may take a security interest in the goods part of an inventory that are being sold to another party. This is common when the bank loans a company money to purchase goods (inventory) that the company then sells to the public. In this case Article 9 has two main requirements for this security interest to create a PMSI. First, the security interest must be perfected at the time the debtor receives the goods. Second, the filer of the security agreement must provide a detailed written notice to any other creditors that have an interest in the debtor's inventory at least five days before the debtor receives the goods. In contrast, when the creditor takes a security interest in noninventory collateral, such as equipment, the creditor does not have to notify other parties. A PMSI in consumer goods perfects automatically, without the need to file any documents.
For example, suppose First Bank took possession of the title of Ben's vehicle; as a result, its security interest automatically perfected when it attached. This is because perfection can be achieved by actually possessing the collateral that is subject to the loan in question. Even though the actual collateral is Ben's vehicle, the title of his vehicle has the same effect because it would be impractical for Ben to physically give First Bank his vehicle. On the other hand, assume First Bank did not take physical possession of the title to Ben's vehicle. First Bank could achieve perfection by filing a financing statement, usually with the applicable secretary of state's office. In this instance, First Bank is not in physical possession of anything that would put other creditors on notice that it has a security interest in Ben's vehicle. However, other creditors are put on notice with the filing of the financing statement.