Raising Stakes: Best Practices in UCC Filing for Better Lien Management
In an era that calls for increased due diligence, factors and lenders need more than the basics to manage and perfect liens. Robb Zurek of Wolters Kluwer Compliance Solutions runs through some best practices to stay ahead of the game.
BY ROBB ZUREK, ASSOCIATE MARKETING DIRECTOR, WOLTERS KLUWER COMPLIANCE SOLUTIONS
The stakes have never been higher for lenders. The COVID-19 pandemic changed the game and even in a sector where there was already elevated peril in decisions to lend to high-risk borrowers, the pressure to conduct proper due diligence has increased. In addition, the emergence of high-risk segments — and with them, a higher level of risk exposure — has increased the urgency of due diligence searches at a time when lenders have even less time to spare.
Once a lien is filed, it’s crucial to monitor it and respond to events in a timely manner in order to protect the health of one’s loan portfolio. But managing long-term lending cycles and revolving credit lines adds complexity. Factors need more than just basic due diligence. It’s important for factors to implement effective, ongoing risk management capabilities through things like:
Easy UCC filing processes
Tools that increase visibility and control
Risk reduction in the lending cycle through real-time, nationwide search capabilities
Robust lien management tools
Federal Tax Liens
Let’s look at federal tax liens (FTL). These “silent liens” assume priority position over prior-secured liens 45 days after the FTL filing (or upon the date the secured party learns of the FTL, if earlier). This protocol means that in the event of a collections dispute, the IRS is entitled to claim its payment first and the prior secured party can be left unable to recoup its investment. To avoid this issue, factors and secured lenders should incorporate the following best practices:
Use recurring FTL searches at regular intervals for clients considered to be high-risk. That way, whether or not the IRS provided notice, a lender can always know if an FTL was filed on a client and would have sufficient time to resolve the issue.
Factors should be sure to perform these searches manually at the state and county levels, as necessary for full disclosure, since most counties aren’t online and, in many jurisdictions, they are the only location FTLs are required to be filed.
But scheduling and managing so many searches, potentially at varying time frames — then combing through findings each month to determine whether liens were uncovered — can be quite time-consuming.
Recurring Search to the Rescue
A “recurring search” capability can automate the FTL search process and organize the results.
Recurring searches are based on the needs of factoring companies, such as automating the process of scheduling and managing recurring searches and results. A key feature of a recurring search is the alert tracker, which is a Microsoft Excel spreadsheet providing a snapshot view of searches and results. The alert tracker gives a snapshot history of findings going back 12 months, with searches that resulted in hits distinguished from areas of non-concern. In addition, recurring searches provide 12 months of search findings in each report, with hyperlinks directly to the images of each finding. Accordingly, the results of any search performed within the past year are immediately available with the click of a button, and no login is required.
To find the right recurring search platform, consider service providers that offer a comprehensive protection from a variety of lien portfolio threats. Wolters Kluwer, for example, offers a range of recurring search options, including federal and state tax liens, judgment liens, UCC liens, bankruptcy records and litigation. As additional protection, debtor and business entity monitoring can round out the package, so no matter what changes happen to a lender’s clients and their interests, it can protect its lien positions with confidence.
It is critical to be alerted with immediacy to events in the external environment that can threaten a lien position so that a lender can react quickly and protect its secured assets. Lenders and factors should seek out providers with fully automated/paperless recurring search capability at the county court and recorder abstracting levels, which is the surest and most complete method of detecting tax liens quickly and effectively. This timely, accurate information can be combined with seamless automation and “red flag” alerts for quick, efficient management of risk.
Beyond Recurring Search
Given the nature of liens, lenders and factors must identify tax liens in time to act on them. A lender or factor should make certain that its financing statements are recorded as required to achieve perfection and that it should also maintain perfection by acting when a situation of a borrower changes and puts its claim in jeopardy. If a lender is using a reliable technology with automated lien management processes, due diligence can be easy.
Another element to maintaining a solid lien management program is incorporating functionality that provides UCC debtor and business entity monitoring. By monitoring for any change in debtor name or business entity status, a lender can take action to maintain perfection whenever a change occurs in a borrower’s situation. A superior monitoring service will issue notifications when new UCC-1s or UCC-3s are filed against a given debtor in a given state. Automatic notification should also occur when an entity debtor has a name or status change considered an adverse event that affects its good standing status in its state of formation. Keeping up to date with these changes can help lenders and factors avoid losing claims due to incorrect debtor names, as filing a UCC-1 with the incorrect legal variation of a name — however minor — may result in an invalid claim. In this way, debtor name verification tools are essential to providing a way to identify the exact and correct debtor name through a legal name verification search. From there, lenders can also order copies of a company’s articles of incorporation and amendments for even greater protection.
Many lenders and factors increasingly are adopting and reaping the benefits of increased automation and digitization of their processes. Electronic filing achieves fast recordation as well as cost savings, freeing up a lender’s team to focus on higher-level work. Due to this, lenders and factors need to stay organized within these paperless processes.
In a similar vein, lenders and factors should consider adopting a technology platform that reduces redundant work with simultaneous, multi-jurisdictional UCC filing and searches. Ideally, the system will allow multiple jurisdiction searches using a particular search term or name simultaneously, reducing administrative time along with the risk of typographical errors when keying in data multiple times.
Finally, lenders and factors should consider enlisting jurisdictional and industry experts familiar with each Secretary of State and jurisdictional office requirements throughout the United States and related territories, including policies, procedures, fees, turnaround times and more.
Following the best practices outlined in this article can bring a variety of benefits to one’s lending operations, enhancing organizational agility, workflows, accuracy and the data and transparency needed to monitor one’s liens and borrower status as a channel to lien perfection and ongoing lien management.
Robb Zurek is associate marketing director for the lien solutions business within Wolters Kluwer Compliance Solutions. He can be reached at robb.zurek@wolterskluwer.com.
Wolters Kluwer Lien Solutions is a preferred vendor of the IFA. Under this preferred vendor relationship, IFA members will receive 15% off all searches submitted via Wolters Kluwer’s iLien lien management platform. The benefit covers more than 20 different searches, both automated and manual.