A loan could be at risk for a variety of reasons. Here we look at the ways that debtor information could put the loan at risk.
A loan given to a borrower with a healthy credit history doesn’t necessarily mean that the loan can be recovered easily. During the life of the loan, the debtor’s information could change for a variety of reasons. These changes could be with the debtor name or the entity status. Any changes to the debtor information negatively affects the financing statement or the recoverability of the loan.
When a UCC financing statement is filed, making sure you have the correct debtor name on the financing statement is crucial. If the debtor name is completely wrong or if a minor variation of the debtor name (like a spelling or spacing mistake) is made, then the security interest may not be perfected. If this is the case, a search for the debtor name used in the financing statement may not lead to the correct results. This filing becomes seriously misleading and is not useful. The lender must file a UCC-3 to amend the name and update the debtor information with the correct name. If the UCC-3 amendment is not filed within four months of the name change, then the financing statement will be good for the collateral acquired prior to the name change and within four months following the change.
A borrower that is an active business entity implies that a bank will be able to recover a commercial loan. However, due to economic or other reasons, business entities may not perform well, and those entities may experience a change in their status such as becoming inactive, non-compliant, or, in a worst case scenario, dissolved. With the debtor in the dissolved state, it becomes extremely difficult to recover a loan. A lender has to continuously observe the health of their debtors. If they don’t monitor them continuously, then the debtor could change from active to dissolved status without the lender being made aware of this change. If the lender monitors the debtors' states, then with the first hint of a debtor moving away from the active state, the lender can take precautionary actions to ensure that the loan can be recovered from the debtor. Lenders are therefore very well-served to find a way to monitor their debtors.
When a UCC-1 is filed, the jurisdiction used in the filing must be the same as the entity’s state of incorporation. If the correct jurisdiction is not used, then the financing statement is not effective.
Lenders with a large portfolio of loans may face challenges to track and determine the issues related to risk. Though there may be processes in place in the lender’s environment to trigger alerts for some of these issues, there is the risk that some go unnoticed until it is past the recovery stage.