SBA Loan Authorizations frequently require that security interests be taken on all of a borrower's business assets or "personal property", the perfection of which are governed by the filing requirements of the Uniform Commercial Code.. Failure to properly address issues identified in UCC searches may create lien priority issues that can jeopardize lender's SBA loan guaranty. Failure to achieve required lien positions on collateral is the top reason for SBA guaranty repairs and denials. Asking the five following questions can mitigate the risk of overlook critical UCC issues.

1. Are the searches complete? The law of the state in which the borrower's business entity is formed generally is the law that controls, with a few exceptions. If for example the borrower is both a business corporation registered and operating only in Pennsylvania, then Pennsylvania UCC law and filings are all that are required. In addition, certain items, such as fixtures require additional searches in local land records where the collateral is located.  

A word on the advantages of Pre-filing. When evaluating the completeness of UCC searches, lenders should consider the advantages of "pre-filing UCCs",an increasingly popular practice that merely requires borrower's written authorization to file UCCs prior to closing. The UCCs are filed simultaneously with a "search to reflect" the filing. Consequently, a lender will be able to see its precise lien position and any UCC filings that are ahead of it. Without pre-filing, a lender orders UCC searches and then, files its UCC at closing. In this interim period, intervening UCCs could be filed, so post-closing searches are needed to confirm the lien position and ensure no intervening liens were filed. Pre-filing is a more precise confirmation of lien position and eliminates the need for post-closing UCC searches thus eliminating risk and reducing costs.

2. Is the UCC filing current? When reviewing search results, filings that are over five years old and do not have a UCC3 "continuation" filing within the last five years, have lapsed. UCC laws in every state provide that filings must be continued every five years or they automatically expire.

3. Is the UCC filing associated with a debt that is being refinanced with loan proceeds? Suppose a loan will be used to refinance a borrower's current loans with "Creditor A" and "Creditor B". Ideally, the UCC searches will only show filings by Creditor A and Creditor B. Copies of the underlying notes or equipment leases should correspond to the dates of the loans, and the same account reference number may even appear on the UCC and note. However, creditor names alone are not determinative. Suppose the payoff to Creditor A is for a loan made three years ago but filing was last month. This may signify that a Creditor A recently made another loan to borrower. Without clarification, if there are in fact two loans with Creditor A, after closing, one of those loans will prime lender's lien. A detailed payoff statement can mitigate this risk.

4. Is the unexpected UCC filing a blanket lien? Another consideration when evaluating UCC filings in favor of unexpected secured parties is whether the UCC applies to all of borrower's assets (a "blanket lien"), or to specific property. Current blanket liens in favor of third parties must be addressed or they will prime lender's lien. If the UCC only covers specific personal property, lender should evaluate whether that property is a necessary part of lender's collateral pool. Lenders should also evaluate the value of the specific property and how that affects the loan underwriting. Items such as printing presses and medical MRI machines can have significant value. If the item was not expected to be taken as collateral and not important to the loan's underwriting, then the UCC on specific property may not be a concern. The loan file should be documented with the lenders justification for proceeding.

5. Does the unexpected UCC filing correspond to a paid off loan? Suppose an unexpected UCC filing is found in favor of "Creditor C", which is not being paid off at closing. Another question to pose to borrower is whether the debt to Creditor C is still outstanding. It is not uncommon for secured parties to be paid in full but then fail to terminate UCC filings afterwards, sometimes for several years. If the debt is paid, borrower will need to contact Creditor C and obtain a UCC3 termination filing prior to closing. If the debt is currently outstanding, lender may ask borrower whether it is possible to pay off such loan before closing and obtain a UCC3 termination, or borrower must contact Creditor C to request a subordination agreement or intercreditor agreement. Otherwise, lender's underwriting department must confirm whether taking a position junior to Creditor C will be acceptable in terms of both lender and SBA rules.

By asking the above questions, lenders will avoid the most common mistakes associated with obtaining the proper lien position and protect their SBA loan guarantees. 

 For more information on evaluating UCC searches in the context of SBA guaranteed lending, contact Sharon at (215) 542-7070 or at SBrown@StarfieldSmith.com.

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