Collateral Damage.

• Author: Glade, Kevin
• Position: Brief Article

New Rules Governing Collateral for Commercial Loans

Sophie Sales, the owner of Sophie's Sofas, knows her divans and davenports and it shows. Business is brisk and she needs money to grow. Sophie asks Lon Lender at Big Bank about a loan. Lou Lender asks Sophie about collateral for the loan. Sophie lists the possibilities:

* inventory

* receivables

* savings account

* brokerage account

* autographed picture of The Monkees

* throw rugs made from dryer lint

Lou Lender reads the list and says, "Gosh, as collateral I like the inventory, the receivables, the savings and the brokerage account. You can keep the picture and the throw rugs."

Lou explains to Sophie that on July 1, 2001, important changes to the Uniform Commercial Code (UCC) become effective in Utah. The UCC has rules that govern the taking of collateral for loans.

Sophie is intrigued by this UCC. The term had always been family shorthand for "unspeakable creamed corn" ("I hope that's not UCC on my plate again!"). Lou gives Sophie a pamphlet: "Giving Collateral -- Like Giving Blood."

That night, after dinner, Sophie sits down to study the UCC. The pamphlet explains how the UCC, with origins from the days of Johnson and Goldwater, has three basic principles:

Attachment. The borrower signs a "security agreement," giving the lender a lien on the personal property collateral. If the loan goes into default, the lender can take the property, sell it and apply the proceeds to the unpaid loan.

Sophie shudders at the cold image of the repo man gripping her furniture inventory and taking it away.

Perfection. The lender gives notice to the world that the borrower has given collateral. The most common way to "perfect" is far the lender to file a UCC Financing Statement with the Utah Department of Commerce, which becomes available for public review. It is a half-page form with names and a simple list of the collateral.

Sophie thought that "perfection" related only to combo plate No. 7 at El Toreador.

Priority. The lender who "perfects" first has "priority" over the claims of any other creditors. The lender with priority gets all of the money when the collateral is liquidated.

Sophie compares it to the guy with the No. 1 wristband for the concert tickets.

Now that...