What is the Collateral

Understand exactly what you’re putting up = as collateral

By Dale Windsor, Coffman Capital Inc.

&nbs= p; There are many documents that must be signed whenever a loan is closed. For the m= ost part, one may rely on the explanations of the loan officer who summarizes w= hat the text is intending without you having to read through the document(s) wo= rd by word. It is always a good suggestion to get a copy of the lenders loan documents prior to closing, even if just a sample, and to thoroughly read through it. It is important to understand what rights the lender has, and w= hat rights you have. These are most important when defining default, and your r= ight to cure the default should it occur. What will it cost you if your payment = is late?

&nbs= p; The one item that generally receives the least amount of attention is the UCC1 Form. This form is filed on a State and/or County level to perfect the lien= on the asset financed, and any other collateral that will serve as additional security. It is a triplicate form that includes a box that details exactly = what is pledged as collateral. It is the lenders way of making sure that, if they are not paid under the terms of the financing agreement, they can go in and foreclose or repossess the financed item(s). Most times it will extend beyo= nd the financed item, and include additional and/or personal assets as well. T= his happens many times without the borrower ever knowing that it has. Whenever = you secure financing, it is important to know exactly what assets, whether pers= onal and/or corporate are being attached by a Lien.

It has become a point of contention, on numerous occasions, between borrowers = and lenders. One of the primary challenges for the borrower is that they rarely know that a lender has put a blanket lien on all their assets until they ha= ve a problem. Whether they can’t close on the sale of their house or they = can’t secure additional financing until a lien is released, it unfortunately beco= mes an issue long after it has been filed within the court records. On one occasion, a dentist in Boca Ra= ton took out a $25,000 Line of Credit to remodel his practice. He made it a poi= nt to make sure the loan was in the name of his corporation with no personal guarantee. He later contracted to sell on of the four dental offices he own= ed. The Bank would not give a partial release of Lien so he could close on the sale.

As it turned out, his 2 Million Dollar home, his collection of cars, his multi= ple corporations generating well over 5 Million Dollars a year were all attache= d by the Lien filed for a $25,000 Line of Cr= edit. When the doctor was notified, he said “I’ll just give them a ca= ll; there is some mistake.” The mistake was his. The UCC1 Form he sign at closing read: All assets, whether now owned or hereafter obtained, where ever located includi= ng but not limited to , Accounts…. And he signed it. That= is what he was told when he called the President of the Bank. After he vowed n= ever to do business with the bank again, and he complained how the Bank had gone down hill since the big bank bought it, he alleged deceptive lending practi= ces, called his attorney, and threatened to call the Banking Commissioner in Tallahassee. The = answer was still the same. “Doctor, if you had a problem with the loan documents, why did you sign them?”

Bottom line, two weeks later, after a big headache, he got the payoff letter from = the bank. The balance of his Line of Credit was paid out of the sale proceeds, = and he closed on the sale of the practice. It is important to understand the complete extent of the Uniform Commercial Code 1 (UCC1) filing that you are signing when you sign it.

I have seen many occasions where a borrower took a loan from a bank because it was the lowest interest rate. T= hey never asked what the extent of the collateral was. Is it worth 2% per annum= in higher interest not to have everything you own pledged as security? I think= so. Although the bank, with which you deposit your money, may seem like the best option to finance your business, you owe it to yourself and your family to explore some other options. Chartered banks generally offer the lowest lend= ing rates, but they also require the highest degree of security for the loan. W= hen questioned, they will explain how they are Federally Regulated. Most of you, with loans, probable have similar Liens filed against you now. Keep thinking “Oh not me. I told the loan offi= cer my house could not be used for collateral for the loan, and he promised me = it was not.” The reality is that, if the UCC1 form reads as indicated above or similar, your house and everything you own is pledged collateral, and you signed agreeing to it. If= for some reason you can’t repay the loan, it will be difficult to protect anything but your primary residence and one vehicle.

The best advice i= s to make sure to read the UCC Forms. They should be in every loan package you e= ver see. If it is blank, don’t sign it. If it is a blanket Lien, don̵= 7;t sign it. Call a lender that only requires a Lien on the assets that they finance, and sleep a little easier. &= nbsp;