When a borrower gives property to a lender as collateral for a loan, the lender is considered a secured creditor. The loan is secured by the collateral, so if the borrower doesn’t repay the loan, the lender can take the collateral and sell it to satisfy the debt. When the collateral is not real estate, the lender perfects its security interest in the collateral by filing a UCC-1 financing statement, often called simply a UCC. When the loan is paid, the lender must terminate the UCC lien by filing a UCC-3 form marked with “termination.”
The Uniform Commercial Code
The Uniform Commercial Code, abbreviated as UCC, is a set of uniform laws drafted in the 1950s that the states were free to adopt or not to adopt into law. As more states adopted the UCC, it became easier to conduct business in different states, because the laws were generally the same from state to state. As of 2019, all 50 states as well as Puerto Rico and the U.S. Virgin Islands have adopted some version of the UCC.
Each state’s version of the UCC may differ slightly, but for the most part, they contain the same language and are numbered the same. Thus, the laws are uniform from state to state.
The UCC has nine articles, each relating to different types of transactions. Article 2, for example, contains laws relating to the sale of goods, while Article 3 concerns commercial paper. One of the most widely-applicable articles is Article 9, which regulates secured transactions. UCC forms are the most commonly used relative to Article 9 secured transactions.
Article 9 of the UCC
UCC Article 9 contains laws about secured transactions related to personal property. Personal property is any property that is not real estate, including but not limited to bank accounts, vehicles, furnishings, equipment and appliances. Article 9 contains the laws that relate to lien perfection and lien priority.
Read More: How to File a UCC Lien
Secured Transactions: Liens on Property
Secured transactions are transactions in which one party gives a security interest or lien to another party.
For example, if a business borrows money to buy a new machine, the business will usually give the lender a security interest in the machine. The machine is the collateral for the loan. It’s the same principle as a car loan. The lender has a lien on the car and can take the car from the borrower and sell it if the borrower doesn’t pay the debt. Vehicle liens are included under Article 9, as are liens on machinery, equipment and other tangible items, plus intangibles like accounts receivable and deposit accounts.
UCC Filing Rules
When a borrower grants a security interest in property to a lender, the lender must take extra steps to perfect the lien and place other lenders on notice that the lien exists. Lien perfection is important, because without it, the lender doesn’t keep its place in line with respect to the collateral. A piece of property may have more than one lien on it, and if the first lender didn’t perfect and the second lender did, the second lender could get paid first when the property is sold.
The method for perfecting a lien depends upon the type of property at issue. Liens on cars are perfected by adding a notation to the car title, while liens on deposit accounts are perfected by possession. For most physical items, though, like equipment, the lender perfects the lien by filing a UCC-1 financing statement. UCC filings will show up in a UCC filing search, showing other lenders that this lender has a lien on the asset.
UCC-1 Financing Statement
UCC-1 Financing Statements are often simply called UCCs. UCC forms require the lender to indicate the name and address of the borrower, the name and address of the lender, and a detailed description of the collateral. Preparing the form correctly is crucial; the parties and the collateral must be properly identified. The name of the borrower should be spelled correctly so that anyone running a UCC search for that borrower will find the UCC. The collateral should be described with specificity, including make, model and serial number, if applicable.
Once completed, the UCC must be filed with the appropriate state government agency. That may be the secretary of state (such as in California) or the department of state (like in Pennsylvania). Each state has its own rules as to which agency handles the filings. UCCs can be filed online or in hard copy via mail or in person, and there is always a filing fee.
Some lenders file their own UCCs; others will hire attorneys or third-party filing companies to file them.
Where to File a UCC
The UCC should be filed in the appropriate state, which depends upon the type of property, where the property is located and where the borrower is located. Attorneys or registered agent services may be used by lenders to navigate the somewhat tricky laws surrounding UCC filings to ensure they’re filed in the right place.
Some lenders will file their UCCs in multiple states to cover all the bases. If the property is located in Florida, but the borrower is incorporated in Delaware, a lender might file UCCs in both Florida and Delaware, just to be safe, even if only one state is required.
UCC-3 Financing Statement Amendment
The UCC-3 form is the form a lender must use to amend, continue or terminate a UCC filing. So a UCC continuation statement, a UCC amendment, a UCC assignment and a UCC termination statement are all the same form. The form has check boxes for each of these actions, and the lender must simply check the correct box to take the correct action.
Continuation to Prevent Lapsing
UCCs are good for five years; after five years, they lapse. To prevent a lapse, the lender must file a continuation statement prior to the lapse date. The continuation statement will extend the UCC’s duration another five years. Continuation statements can be filed to continue the lien for as long as necessary until the loan is repaid. However, the lender must wait until it is within six months of the lapse date. If a UCC will lapse on July 1, the lender cannot file the continuation statement until after January 1.
Amendment, Assignment or Termination?
If the lender’s name or address changes or the borrower’s name or address changes, or the nature of the collateral changes (such as adding new collateral or changing collateral), an amendment must be filed.
If the lender assigns the loan to another entity, the lender must file an assignment. That means that the lender no longer has a security interest in the collateral and the entity receiving the assignment is the new secured party.
If the loan is paid in full or the parties otherwise agree that the lien should be removed, the lender must file a termination statement.
Filing a UCC Termination Statement
A UCC termination statement is the UCC-3 form with the "Termination" box checked. The termination statement must be filed with the same state agency at which the original UCC was filed. Once filed, the lien is extinguished, and the borrower owns the property free and clear.
Terminating a UCC-1 financing statement is as easy as filing a UCC-3 Financing Statement Amendment, marked “termination,” with the appropriate agency.
- California Secretary of State: UCC Financing Statement
- Cornell University Law School Legal Information Institute: UCC Financing Statement
- Pennsylvania Department of State: Uniform Commercial Code (UCC)
- Wolters Kluwer: What You Need to Know About Common Uniform Commercial Code (UCC) Forms
- Nolo: What is the UCC?
- Uniform Law Commission: Uniform Commercial Code
- Uniform Law Commission: UCC Article 9, Secured Transactions
- Cornell University Law School Legal Information Institute: Uniform Commercial Code - § 9-513. Termination Statement.
- Type or laser-print the form, ensuring that it is legible. If you have any questions or concerns, speak to an attorney before completing the form. You can only make one amendment per form. Use a separate form for a second amendment.
Rebecca K. McDowell is a creditors' rights attorney with a special focus on bankruptcy and insolvency. She has a B.A. in English from Albion College and a J.D. from Wayne State University Law School. She has written legal articles for Nolo and the Bankruptcy Site.