Robert Wonneberger, partner, has his “Why Secured Lenders Must Mind the Gap in UCC Searches” expert analysis article published by Law360. The article highlights a key issue in secured lending: the “indexing gap” in Uniform Commercial Code (UCC) searches. When lenders file UCC financing statements to secure collateral, there is often a delay between the filing and indexing of these statements, meaning they may not appear in a UCC search for several days or weeks. This gap can expose lenders to unexpected risks, as prior, unindexed security interests may exist, potentially putting the lender in a weaker, junior position with respect to the collateral. Consequently, lenders need to be proactive to safeguard their security interests from such hidden encumbrances.
Bob suggests practical steps for lenders to mitigate this risk during the loan origination process. To establish their priority, lenders can file the financing statement before the loan closing if the borrower grants authorization. Including authorization within commitment letters or early in the loan process allows lenders to file financing statements promptly. Additionally, by scheduling UCC searches after accounting for the indexing delay, lenders can better ensure that their interests are correctly recorded and prioritized. This careful timing allows them to confirm any prior claims on the collateral and secure their position effectively.
The indexing gap is generally less problematic during enforcement since UCC provisions specify the required timing for searches to notify other lienholders of impending asset disposition or collateral acceptance. Lenders are required to provide notification based only on indexed records as of the search date, so missing, unindexed filings are less likely to interfere. By following these strategies for filing and search timing, lenders can avoid the potential pitfalls of the UCC indexing gap and strengthen the security of their collateral positions.
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