Secured transactions in the United States
Encyclopedia
Secured transactions in the United States
are an important part of the law
and economy
of the country. By enabling lender
s to take a security interest
in collateral (that is, the assets of debtor
s), the law of secured transactions provides lenders with assurance of legal relief in case of default by the borrower. The availability of such remedies encourages lenders to lend capital
at lower interest rate
s, which in turn facilitates the free flow of credit and stimulates economic growth.
In all fifty states
, Article 9 of the Uniform Commercial Code
(UCC) governs secured transactions where security interests are taken in personal property. It regulates creation and enforcement of security interests in movable property, intangible property, and fixtures.
Transactions where security interests are taken in real property are regulated not by Article 9, but by real property laws that vary among jurisdictions. However, the assignment or conveyance of a contract secured by real property may be regulated by Article 3 to the extent that the contract is a negotiable instrument. Both must be distinguished from a secured interest in an promissory note that is secured by a mortgage or deed of trust on real property, which is regulated by Article 9. This latter distinction is important in the context of the sale and purchase of promissory notes secured by real property.
There are a variety of situations in which this distinction is important. For example, a non-depository mortgage lender may fund their operations with a warehouse line of credit
, while a distressed loan workout specialist may obtain a line of credit
. The first makes loans for the purchase of real property; the second will acquire nonperforming loans at a discount from their face value (and then will either renegotiate them or foreclose on the underlying collateral). In either situation, the mortgage lender or workout specialist's interest in underlying real property collateral will be secured under state real property law. But their lender's interest in the notes secured by the underlying collateral will be secured under Article 9.
Security interests are particularly valuable in bankruptcy
, because creditors who have security interests in a bankrupt debtor's estate
take precedence over creditors who lack such interests (unsecured creditors) in the distribution of the debtor's assets.
For most types of secured interests, a creditor files a UCC-1 financing statement
with the secretary of state
for the U.S. state in which the property is located. For real property, the creditor records a security instrument such as a mortgage or deed of trust in the county where the real property is located.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
are an important part of the law
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
and economy
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
of the country. By enabling lender
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
s to take a security interest
Security interest
A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
in collateral (that is, the assets of debtor
Debtor
A debtor is an entity that owes a debt to someone else. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor...
s), the law of secured transactions provides lenders with assurance of legal relief in case of default by the borrower. The availability of such remedies encourages lenders to lend capital
Financial capital
Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
at lower interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s, which in turn facilitates the free flow of credit and stimulates economic growth.
In all fifty states
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
, Article 9 of the Uniform Commercial Code
Uniform Commercial Code
The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
(UCC) governs secured transactions where security interests are taken in personal property. It regulates creation and enforcement of security interests in movable property, intangible property, and fixtures.
Transactions where security interests are taken in real property are regulated not by Article 9, but by real property laws that vary among jurisdictions. However, the assignment or conveyance of a contract secured by real property may be regulated by Article 3 to the extent that the contract is a negotiable instrument. Both must be distinguished from a secured interest in an promissory note that is secured by a mortgage or deed of trust on real property, which is regulated by Article 9. This latter distinction is important in the context of the sale and purchase of promissory notes secured by real property.
There are a variety of situations in which this distinction is important. For example, a non-depository mortgage lender may fund their operations with a warehouse line of credit
Warehouse Line of Credit
A warehouse line of credit is a credit line used by mortgage bankers. It is a short-term revolving credit facility extended by a financial institution to a mortgage loan originator for the funding of mortgage loans....
, while a distressed loan workout specialist may obtain a line of credit
Line of credit
A line of credit is any credit source extended to a government, business or individual by a bank or other financial institution. A line of credit may take several forms, such as overdraft protection, demand loan, special purpose, export packing credit, term loan, discounting, purchase of...
. The first makes loans for the purchase of real property; the second will acquire nonperforming loans at a discount from their face value (and then will either renegotiate them or foreclose on the underlying collateral). In either situation, the mortgage lender or workout specialist's interest in underlying real property collateral will be secured under state real property law. But their lender's interest in the notes secured by the underlying collateral will be secured under Article 9.
Security interests are particularly valuable in bankruptcy
Bankruptcy in the United States
Bankruptcy in the United States is governed under the United States Constitution which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." Congress has exercised this authority several times since 1801, most recently by adopting the Bankruptcy...
, because creditors who have security interests in a bankrupt debtor's estate
Estate (law)
An estate is the net worth of a person at any point in time. It is the sum of a person's assets - legal rights, interests and entitlements to property of any kind - less all liabilities at that time. The issue is of special legal significance on a question of bankruptcy and death of the person...
take precedence over creditors who lack such interests (unsecured creditors) in the distribution of the debtor's assets.
Perfection
Secured interests normally do not become enforceable upon execution of the underlying contract. Rather, they must be "perfected" according to statutory procedure in order to give the world notice that the asset offered as collateral has become encumbered.For most types of secured interests, a creditor files a UCC-1 financing statement
UCC-1 financing statement
A UCC-1 financing statement is a legal form that a creditor files to give notice that it has an interest in the personal property of a debtor...
with the secretary of state
Secretary of State (U.S. state government)
Secretary of State is an official in the state governments of 47 of the 50 states of the United States, as well as Puerto Rico and other U.S. possessions. In Massachusetts, Pennsylvania, and Virginia, this official is called the Secretary of the Commonwealth...
for the U.S. state in which the property is located. For real property, the creditor records a security instrument such as a mortgage or deed of trust in the county where the real property is located.