How can lenders protect UCC liens from federal tax liens and debtor name changes?

In a heightened era of due diligence, factors and other commercial lenders must place greater emphasis on the statutory requirements related to filing and perfecting a lien under the Uniform Commercial Code (UCC).

In the wake of COVID-19, they are conducting heightened due diligence to understand the risks related to any transaction, asset, debtor, or business partner. As new higher-risk lending opportunities emerge and become more complex, so does the need for diligent collateral searches. The stakes could not be higher. Yet businesses require financing faster than ever. Due diligence must be thorough, and it must be expedient.

Filed UCC liens represent an ongoing relationship between the lender, filer, and debtor. Monitoring and defending these liens over time is critical to the continued value of the lender’s lien interest. But this obligation doesn’t stop with the initial search. In an era of longer lending cycles and revolving lines of credit, a single search simply isn’t enough. Four components have become imperative:

• Simple UCC Filing workflows
• Tools for Oversight and Control
• Live Nationwide Searches that Cut Lending-Cycle Risk
• Strong UCC Monitoring Tools

Federal Tax Liens

The most critical and, perhaps, the most overlooked threat facing factors and other commercial lenders: Federal Tax Liens. Federal tax liens can devastate a lender’s collateral position. Federal Tax Liens (FTLs) are called ’silent liens’ for a reason. Forty-five days after filing (or sooner, if the lender becomes aware of the lien,) an FTL can jump ahead of previously recorded secured loans. In a collection dispute, the IRS will be paid first. The lender that placed its secured lien first may not recover its money.

To minimize the threat of liens, lenders should consider adding tax lien searches on higher-risk lending situations to be performed regularly. One best practice is a recurring search tool that checks for new filings even when the IRS sends no notice, and catches the problem while there is still time to fix it.

A second best practice is a Federal Tax Lien search that checks manually at both the state and county levels for maximum disclosure. In many states, FTLs can only be filed at the county level, and many counties do not publish lien information online.

But tracking many separate search schedules and reviewing reports month after month consumes enormous amounts of time.

A recurring search feature that can customize, track, and organize the search process can automate the process.

With a recurring search tool, there’s no need for the lender to track and execute each follow-up search. The tool provides an alert tracker tool: a Microsoft Excel spreadsheet providing an overview of every lien search, plus every report result, and a breakdown of tax lien hits versus non-concerning data. A good vendor’s service covers twelve months of findings. It provides hyperlinks to images of each finding; there is no login. It’s always just one click away.

When evaluating a recurring search tool, choose one that covers a broad range of threats to liens, and combines lien monitoring, debtor monitoring, and business-entity monitoring in one platform. This allows lenders to protect liens with greater confidence.

Outside events can threaten to overtake your lien position and throw your investment into danger. When these sudden threats arise, an immediate alert can let you protect your assets as fast as possible. Look for a paperless recurring search system.

Because a new threat to any secured lender’s collateral is never far away, lenders must keep vigilant. They must find tax liens early enough to act. They must record financing statements as required to achieve perfection; then keep perfection by responding when the borrower’s situation changes. All the while, lenders must keep checking and rechecking to make sure no threat to the loan occurs.

A Lien Monitoring Tool Alerts You

An important feature of lien monitoring is the update service. A lien monitoring tool alerts you when anything happens that endangers the position of your lien. For example, the tool alerts when a new UCC-1 or UCC-3 filing names the debtor in a given state. The tool alerts if an entity debtor’s name or status changes adversely, hurting its good standing in its state of formation. When you’re filing financing statements, look carefully at the debtor’s exact legal name. A UCC-1 with an incorrect debtor name may be invalid. Lenders can order a debtor’s legal articles of incorporation, along with any amendments. Name verification tools are now essential in debtor due diligence.

Electronic Filing Services

More and more lenders are seeing the benefits of automating their filings, and many find the electronic process to be so efficient, they completely digitize their UCC search-and-filing process. Electronic filing services for UCC-1 statements and other documents save time, money, and delays. The software itself has to be reliable. It should possess clear and simple workflows, plus tools that allow lenders to track and manage their filings.

Consider a platform for filing and searching in many jurisdictions at once with one search term. These solutions can save time and significantly reduce administrative burden on your team. Rekeying data for different county systems can get unwieldy quickly and leave risks for miskeyed items.

Consider using a service provided by experts who know the processes, procedures, costs, and turnaround times in each Secretary of State, and each county-level filing office, in the United States and its territories. Different states and territories file a little differently.

By following this suite of best practices, lenders can make their lending operations more agile and create greater efficiencies in workloads. These practices streamline workflow, improve accuracy, provide data, and boost transparency. Lenders keep liens perfected and easily updatable.