Secured transactions in the United States are an important part of the law and economy of the country. By enabling lenders to take a security interest in collateral (that is, the assets of debtors), the law of secured transactions provides lenders with assurance of legal relief in case of default by the borrower. The availability of such remedies encourages lenders to lend capital at lower interest rates, which in turn facilitates the free flow of credit and stimulates economic growth.
In all fifty states, Article 9 of the Uniform Commercial Code (UCC) governs secured transactions where security interests are taken in personal property.[1] 1 It regulates creation and enforcement of security interests in movable property, intangible property, and fixtures.
Transactions where security interests are taken in real property are regulated not by Article 9, but by real property laws that vary among jurisdictions. However, the assignment or conveyance of a contract secured by real property may be regulated by Article 3 to the extent that the contract is a negotiable instrument. Both must be distinguished from a secured interest in a promissory note that is secured by a mortgage or deed of trust on real property, which is regulated by Article 9. This latter distinction is important in the context of the sale and purchase of promissory notes secured by real property.
There are a variety of situations in which this distinction is important. For example, a non-depository mortgage lender may fund their operations with a warehouse line of credit, while a distressed loan workout specialist may obtain a line of credit. The first makes loans for the purchase of real property; the second will acquire nonperforming loans at a discount from their face value (and then will either renegotiate them or foreclose on the underlying collateral). In either situation, the mortgage lender or workout specialist's interest in underlying real property collateral will be secured under state real property law. But their lender's interest in the notes secured by the underlying collateral will be secured under Article 9.
Security interests are particularly valuable in bankruptcy, because creditors who have security interests in a bankrupt debtor's estate take precedence over creditors who lack such interests (unsecured creditors) in the distribution of the debtor's assets.
Secured interests normally do not become enforceable upon execution of the underlying contract. Rather, they must be "perfected" according to statutory procedure in order to give the world notice that the asset offered as collateral has become encumbered.
For most types of secured interests, a creditor files a UCC-1 financing statement with the secretary of state for the U.S. state in which the property is located. For real property, the creditor records a security instrument such as a mortgage or deed of trust in the county where the real property is located.