While the Small Business Administration (“SBA”) does not make loans, it does guarantee loans made to small businesses by banks and other commercial lending institutions (collectively “Lenders”). Because many SBA loans are under-collateralized, it is vital for Lenders to preserve the SBA guaranty and avoid common mistakes that could lead to repair or denial. One of the most common repair issues stems from failure to obtain proper lien position on collateral securing the loan. Fortunately, Lenders can avoid potential issues by taking the following steps and confirming their proper lien position.
If a loan is secured by a lien on a borrower’s business personal property, the borrower must execute a Security Agreement at closing and the Lender must file a UCC-1 financing statement in the correct county or state office in the borrower’s state of formation. The Lender may pre-file a UCC-1 statement prior to closing if it obtains written authorization from borrower. The authorization to pre-file can be included in the initial commitment letter for the loan, or obtained through separate written authorization from the borrower.
After the borrower provides written consent to pre-file, the Lender should file its UCC-1 and order a UCC search on the borrower to confirm whether it has the proper lien position on the collateral. If the search order reveals liens which negatively impact Lender’s lien position, Lender should require that borrower obtains proper evidence of lien termination or subordination prior to closing.
If the Lender is taking real property as collateral, the process is different because it is not possible to pre-file a mortgage or deed of trust prior to closing. If title insurance is required on the real property collateral, the Lender should order a title policy to ensure proper lien position and engage counsel to negotiate deletion of exceptions that could prime the Lender’s interest in the collateral.
If a title search is required on the real property in lieu of a title policy, the Lender should order a title search within 30 days of closing. A title search differs from a title policy in that it does not provide insurance for a proper lien position. If the title search shows that the lender will have the proper lien position, the Lender should proceed towards closing and record its mortgage or deed of trust. After the mortgage or deed of trust is recorded, Lender should re-order a title search to confirm that no other intervening liens were filed between the initial search and recording.
For more information about obtaining a proper lien position on collateral, negotiating title insurance, or other commercial lending/real estate matters, send me an e-mail at firstname.lastname@example.org.
Disclaimer: This article is made available for educational purposes only and is not intended as legal advice.