After two years of preparation, new rules governing how banks perfect liens and how borrowers file collateral statements took effect July 1 in 46 states and the District of Columbia under a revised Article 9 of the Uniform Commercial Code.
Alabama, Florida, and Mississippi are delaying implementation until Jan. 1 and Connecticut until Oct. 1, 2002.
Article 9 of the UCC governs what lenders can accept as collateral and how collateral agreements must be documented. Its revised form sets parameters for using personal property, rather than real estate, as collateral for a loan, and changes the filing system for financing statements that detail collateral. The revisions are intended to streamline these processes.
Previously the financial statements were filed where the collateral was located, often at the local level. So if a retailer took out a loan using inventory as collateral and the inventory was in warehouses in 10 states, financing statements would have to be filed in all those states. Now they would have to be filed in just one place: the Secretary of State's Office in the debtor's home state. John M. McCabe, legislative director for the National Conference of Commissioners on Uniform State Laws, said the holdout states wanted the extra time to be sure their filing systems could accommodate the revised law, and he said the delays could lead to problems.
"People will be filing in more than one jurisdiction to make sure liens are perfected," Mr. McCabe said. If a lender extended credit across state lines into one of the four holdout states, in the event of bankruptcy it would face questions about which version of the law would be applied to determine whether the lender had priority status.
Financial statements already filed will be grandfathered into the law. Since most filings are valid for five years, it will not be until 2006 that banks will be free from having to search local and state records when perfecting a lien.
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