According to the SBA National Guaranty Purchase Center, one of the top reasons why the SBA repairs or denies SBA guaranty purchase requests is due to the Lender's failure to obtain correct lien priority in the collateral securing the SBA loan.  In practice, we often see that Lenders trust that the Borrower's existing secured parties will eventually terminate their recorded financing statements a few weeks after being paid off by the Lender.  In reality, often those paid off secured creditors never get around to terminating their financing statements against the Borrower.  Too often this fact is discovered after the Borrower is in default, when it is too late to get the Borrower or the paid off secured party to assist in cleaning up the lien priority record. 

Under 9-513 of the Uniform Commercial Code, a secured party must send a debtor a termination statement for a filed financing statement or file the termination statement in the filing office within 20 days after a secured party receives authenticated demand from a debtor, if there is no obligation secured by the collateral covered by the financing statement, and no commitment to make an advance, incur an obligation or otherwise give value.   Nowhere does the UCC give a Lender who has paid off the debt of a Borrower the authority to terminate the prior secured party's financing statement once it has made payment on the Borrower's behalf. 

Therefore, Lenders must rely on the Borrower to make demand of the secured party to release its lien and wait 20 days to see if the secured party files the termination statement.  Further, only the Borrower has the authority to make the demand and file the termination statement.  An easier process is for the Lender to require its Borrower to obtain the authority to release the lien in its payoff letter from the existing secured party in connection with closing. 

Lenders should require the following items in payoff letters from existing secured parties:

• A defined Payoff Amount, including all fees, costs and expenses owing to the secured party;
• A date and time by which the Payoff Amount must be received (so that no further interest or fees will accrue);
• A per diem amount in case the Payoff Amount is not sent on the specified payoff date and time;
• A statement by the existing secured party that upon receipt of the Payoff Amount, Secured Party's lien on and security interest in all of Borrower's assets and personal property shall be released and terminated; and
• A statement by the existing secured party authorizing the Borrower or its agent, assigns or designee to terminate the existing financing statements and take all actions necessary to effectuate the release of the existing secured party's lien on the Borrower's assets and personal property.

For more Iinformation on best practice in obtaining payoff letters or for other information on commercial lending, contact the author at krayer@starfieldsmith.com or at (215) 542-7070.