Secured Transactions & Legal Requirements Under the UCC
A secured transaction is typically a loan or financing agreement in which an asset, such as real estate, a vehicle, or other property, is used as collateral for the loan. In the event the borrower is unable to repay the loan, the lender may take possession of the collateral and sell it in order to pay the balance of the loan.
The UCC is not law but instead a model code for states to adopt.
The Uniform Commercial Code, or UCC, provides many different rules and regulations governing secured transactions. Established in 1952, the UCC was enacted in an attempt to standardize various state laws regarding commercial transactions. Many transactions involve parties in different states, making interstate commercial transactions difficult in the absence of a universal set of laws. Several different versions of the UCC have been developed throughout the years, and every state in America has adopted the UCC’s provisions in one form or another. Although each state has made varying modifications to the UCC’s model provisions, the purpose and effect of each provision is largely the same.
The UCC is comprised of many different articles, which some states refer to as chapters. Several of the chapters cover rules and codes involving secured transactions. For example, the UCC provides that a security interest cannot be created unless certain requirements are met. The UCC refers to the establishment of a security interest as an attachment. Some of these requirements include that a value must be assigned for the security interest, the debtor must be provided rights to the collateral or the power to transfer the asset to a secured party, and the debtor must authenticate the security agreement. In most jurisdictions, authentication requires the borrower to either sign an agreement or execute an agreement with some sort of symbol. For types of collateral that are less common, these requirements may vary.
The UCC uses the term “collateral” to refer to any property that is a secured asset in a financing transaction. Collateral includes proceeds to which a security interest is attached, goods subject to a consignment, and accounts, promissory notes, and other specifically enumerated items that have been sold.
One of the most well known UCC provisions is the requirement of perfecting a security interest. In general, a secured transaction is designed to provide a lender with recourse in the event that the borrower is unable to repay the loan, primarily by taking possession of the asset and selling it. When there are multiple parties with secured interests in a single asset, and the borrower is unable to repay the loans, each lender may take possession of the collateral. There are many disputes that arise in this situation regarding the priority of each lender to full recoupment of the funds loaned. According to the UCC, perfecting a security interest may avoid some of these disputes. To perfect an interest in a security, a lender must file a document known as a financing statement, or Form UCC-1. This document serves as notice to other lenders and potential creditors that the party has an existing security interest in a specific piece of property. The UCC’s rules regarding the priority of creditors to a piece of collateral are complex and vary depending on the state.