1st American Offers to Insure Collateral

WASHINGTON - First American Corp., a Santa Ana, Calif., title insurance giant, says it can carve a new niche for itself by insuring the collateral banks accept as part of loan agreements.

Currently banks that accept non-real-estate collateral in loan contracts have no absolute guarantee of their right to the collateral in the event of a default.

Typically, before a bank approves a loan with such collateral, a lawyer is asked to offer an opinion on the validity of the bank's potential claim, but this opinion has no legal weight if another creditor asserts a prior claim.

First American is marketing its Eagle 9 policy as a solution to that problem, and it is using changes in the Uniform Commercial Code, or UCC, that are scheduled to take effect July 1 as an additional selling point.

Specifically, changes in Title IX of the code, which sets the rules for secured transactions, would make documenting a bank's security interest in collateral more onerous, the insurer said.

The product's name alludes to First American's corporate symbol, an eagle, and the number of the code section that inspired it.

Theodore H. Sprink, a vice president at First American, said the company will do all the research, file all the necessary paperwork, and make all the required updates to assure that a client bank is not displaced by another creditor. Thus, the company would be insuring its own work.

"Research has shown that a leading source of writeoffs for banks is documentation defects, no matter how minor they may be," Mr. Sprink said. "This offers a solution at a time when these UCC revisions present a challenge."

Edwin E. Smith, a lawyer in the Boston firm of Bingham Dana, helped draft the section of the revised code that deals with collateral.

First American's offering may appeal to bankers trying to accommodate the new rules, Mr. Smith said. "They are very clever. There is really a market niche here, and the appeal is the substitution of the insurance for legal opinion and the possibility of outsourcing."

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