|Subject:||Revisions to Article 9 of the Uniform Commercial Code|
|Date of Memorandum:||04/18/2001|
|Expiration Date:|| |
|Signed By:||Smith, Roland|
|FCA Contact Person:||Holland, Tom|
|List of Attachments:||Uniform Commercial Code|
April 18, 2001
To: The Chief Executive Officer
All Farm Credit System Institutions
From: Roland E. Smith, DirectorE. Smith, Director
Office of Examination
Subject: Revisions to Article 9 of the Uniform Commercial Code
Farm Credit System (FCS) institutions and their legal counsel should be alert to the need to prepare for the changes brought about by major revisions to Article 9 of the Uniform Commercial Code (UCC). FCS institutions should understand how these revisions affect the attachment and perfection of their existing and future security interests. The revisions were drafted and endorsed by the National Conference of Commissioners on Uniform State Laws and the American Law Institute. Many states subsequently adopted the revised version of Article 9, and others have introduced legislation to do so. Revised Article 9 has a uniform effective date of July 1, 2001, although it does not become law within a particular state until adopted by its legislature. Revised Article 9 contains a number of new or revised rules for secured transactions that affect an institution's procedures, systems, documentation, and the enforceability of security interests.
While many of the basic concepts have been retained, the scope of Article 9 has been expanded. Specifically, the revisions broaden the types of collateral, proceeds, and other receivables that are covered by a creditor’s security interest. For example, debtors will be able to pledge deposit accounts as collateral for commercial loans, and the sale of payment intangibles and promissory notes will create a security interest. Also, the revisions to Article 9 explicitly cover obligations (such as letters of credit and guaranties) and any property (including real estate) that secure a right to payment or performance of a security interest and any collateral thereto. Especially important to FCS institutions are new rules that affect agricultural creditors. For example, new Section 9-109 brings nonpossessory statutory agricultural liens within the scope of Article 9, while various sections in Part 3 revise rules that govern both the perfection and priority of agricultural liens and other security interests. Additionally, Section 9-324 establishes special purchase money security interest rules for livestock.
Rules governing attachment and perfection of a security interest, security agreements, financing statements, place of filing, possessory security interests, purchase money security interests, changes in the debtor’s name and identity, rights and duties concerning default and enforcement, and other important features have been revised. Changes concerning purchase money security interests and their proceeds, location of the debtor and collateral, and the rights of third parties, such as other creditors, are also especially important to FCS institutions. Revised Article 9 affects loan documentation and filing of security interests at origination and renewal, required notifications to debtors and creditors, and identification of the interests of other creditors. As a result of these revisions, institutions may need to review and modify their procedures, systems, and documentation of security interests.
Revised Article 9 governs collateral for loans made both before and after the law's effective date, in each state. Part 7 of the Article provides transition rules that lenders must follow to ensure that their rights to collateral on existing loans continue after the effective date of the revision. Part 7 also contains special transition rules for security interests in property that is covered by this revision, but was not covered by former Article 9. Time periods are established for the transition from existing Article 9, during which secured parties should take steps to prevent losing their rights to existing collateral. In addition, since filings recorded prior to the revised Article's effective date of July 1, 2001, can continue to be valid for some time thereafter (in some cases filings may remain valid until June 30, 2006), lenders, including FCS institutions, will need to conduct UCC searches both under the current and the revised rules until all of the pre-revision filings have expired. FCS institutions and their legal counsel will need to understand and comply with the requirements of the new law (as well as former Article 9 requirements) in order to protect security interests on new transactions and to ensure that existing rights are not lost.
FCA examiners will assess FCS institutions’ efforts to properly prepare for the revised Article 9. All institutions are expected to:
· Be aware of the changes to Article 9 and evaluate the effect those changes will have on the institution;
· Determine the need for revised policies, procedures, systems, and documentation (e.g., security agreement) and implement the revisions as necessary;
· Review secured transactions entered into under existing Article 9 to ensure that existing rights are protected under revised Article 9 and make changes as necessary; and
· Provide adequate training to ensure that staff understands and complies with the revisions to Article 9.
If you have any questions about this Informational Memorandum, please call Don Clark, Assistant Director of the Office of Examination, at (703) 883-4201, or correspond with him on the Internet at e-mail address email@example.com.