At the closing of a personal property secured transaction, legal counsel for the borrower often delivers an opinion to the lender concerning the security interests in the borrower’s personal property the borrower has granted to the lender. At the time, the parties typically consider whether a Security Interest Opinion is necessary and, if so, the professional best able to render such an opinion. There are various considerations in making this assessment.
All states have implemented the federal Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) originally enacted by Congress in 2008. Along with California, the states have adopted state “SAFE” Acts based on model law.
Reducing a working arrangement to writing is always wise for the obvious reasons. In many cases, the law simply requires it. In California, lenders licensed under the Residential Mortgage Lending Act may not engage in brokerage services without providing a loan brokerage agreement that must be offered to the borrower “as soon as practical” after a borrower requests a loan from another institutional lender.
In all likelihood, California has the most complex licensing system for mortgage professionals in the United States. Rules and regulations regarding licensing are set forth in two different state laws: the California Finance Lenders Law, now called, “California Financing Law” effective October 4, 2017 (CFL) and the California Residential Mortgage Lending Act (CRMLA).
Lenders typically take a security interest in the proceeds of the assets of personal property in addition to the asset in which they originally take a security interest. A security interest in the proceeds of personal property attaches automatically pursuant to California law only if there is a properly perfected security interest in the original personal property.
California law states that, with exception, a security agreement may create or provide for a security interest in after-acquired collateral. However, a security interest does not attach under a term constituting an after-acquired property clause to either consumer goods in most circumstances or commercial tort claims. Of course, one may argue that such provisions may make it difficult to finance growth through future borrowing.
A “security agreement” is a document that provides a lender with a security interest in a specific asset that acts as collateral for the original loan made by the lender. If the borrower defaults on repaying this loan, the secured party may seize and sell this collateral. Thus, a security agreement mitigates the default risk encountered by lenders in every loan transaction.
In 2012, the State of California reorganized various state bodies, including those related to mortgage loans and licensing. Two new agencies were created to assume supervisory roles of the state’s mortgage loan industry. In the summer of 2013, the California Department of Business Oversight (DBO) was created. With its numerous oversight responsibilities related to the financial services industry in California, the DBO’s intended purpose is to protect all of the state’s consumers and business entities.
Recent blogs have addressed the role of UCC financing statements in regard to secured transactions. Once filed, these UCC forms allow a creditor to establish a relative priority with other creditors of the debtor. The effectiveness and authority of these notices and statements are not infinite. At some point in time, the filing party must review the interest and take further action, otherwise, the initially-filed financing statement will lapse and no longer be effective.
A security interest provides lenders with the promise of repayment if a borrower defaults on a loan. In this instance, the lender may recover the amount of the loan by seizing and selling the asset used as the loan’s underlying collateral. A security interest is typically significant in debtor bankruptcy cases since, in most cases, it allows secured creditors to collect their debts before unsecured creditors, those obligors of a debtor who do not possess a security interest.