Lien Management – Not as Difficult as You Might Fear
As a lender, “lien management” may not be your primary job task. Your specialty is helping clients solve their financial issues through loans and leases, so you might view lien management as a necessary chore, and, once the client has been approved for a loan, that’s the end of the process. Not really.
On the other hand, you may be a lien management whiz but want some advice in making your process more efficient. This blog series aims to help both the beginner and the pro. First, let’s start with a few basics.
The UCC filing is the cornerstone of all loans and every lien portfolio. It is through this basic document that you alert the world you have an outstanding lien with a business or an individual. The UCC provides you and your company valuable asset protection in the event your debtor encounters financial difficulty during the life of the loan.
Should your debtor be unable to repay the loan or fulfill a lease agreement with you, the UCC enables you to become a secured lender with a guaranteed place in line among creditors. When the debtor’s assets are divided to settle claims, you will be able to recover what you are owed, hence the term “secured.”
However, if you do not have a UCC, or your UCC is found to be faulty (or imperfect) in some way you will not have a guaranteed place in the creditor line. You will be considered an unsecured lender. In other words, when the debtor’s assets are divided, you’ll be at the back of the creditor line. You’ll only get what is left over after the secured lenders are satisfied.
To avoid this bad situation, there are several steps you can take today to perfect your UCC filings, protect assets and increase overall productivity.
When you close a loan or extend a lease, that isn’t the end of the process. Rather, it is the end of the beginning. A loan or lease has a long lifecycle that starts with due diligence, moves to a UCC filing and then extends to managing that filing until the loan is completely repaid. A UCC is not a static document. On the contrary, it’s a dynamic document that can (and will) undergo many changes throughout the life of the loan.
Effectively managing a lien lifecycle can mitigate your exposure to additional risks, protect your assets and your place in line among secured creditors, and lead to a more accurate and productive workflow, enabling you as the lender to make the best use of resources.
Contrary to public opinion, there’s no such thing as an insignificant change to a UCC filing. Even the smallest modification or error can impact your standing and security as the lender or lessor. As a lender, it is best to stay on top of these changes and mitigate the risks associated with a loan or a lease.
No matter whether you extend a loan or a lease to an individual or a business, the one constant in life is change. A person or a business can move, an individual can get married and take on a new last name, a business can take on a partner, a debtor can lose their good standing, etc. The list of potential changes is nearly endless.
While it would be nice if the debtor would alert you to many of these changes so you can update your filings, in reality, that’s just not going to happen. The responsibility, therefore, rests on you, the lender or lessor, to make sure you have the proper, up-to-date information on your debtors.
If ABC Co. changes its name to ABC Inc., that must be reflected in your filing. Or, if Mary Smith moves from 123 Main St. to 456 1st Ave., that needs to be updated as well. Not doing so increases your risks – the risk that your UCC filing may be challenged and ruled not perfect. This would force you out of your place in the secured lenders’ line over to the unsecured lenders’ side, where you may not be made whole in the event a debtor defaults on the loan.
Sounds like a tough task, right? Most lenders have thousands of outstanding loans and leases. How can a firm keep constant track of all of them and update each in a timely, accurate and cost-effective manner? One potential solution is to partner with a third party that can provide debtor and UCC monitoring solutions. A monitoring solution can turn this labor-intensive, time-consuming chore to a simple automated task. These solutions can help lenders perform lien management duties in a fraction of the time and ensure greater accuracy.
To avoid constant information overload and not affect staff productivity, an automated system will allow you to set pre-determined monitoring parameters and receive alerts according to those preferences.
Automated debtor and UCC monitoring is a key first step in establishing a well-run, orderly lien management process. It reduces risk, improves filing accuracy and boosts staff productivity.
In the next installment of this series, we will drill deeper into how, specifically, monitoring and automated continuation can manage risk across your lien portfolio.