February 11, 2010

Kimberly Rayer, Starfield & Smith, PC

Lenders often face the challenge of keeping closing down, while still ensuring that it is conducting its due diligence prudently. For lenders that participate in the U.S. Small Business ("SBA") loan program, there is an added regulatory requirement under the SOP 50 10(5)(B) for lenders to confirm their correct lien position on small business borrower's assets as contemplated in the SBA Authorization.

As a result, lenders often order lien searches on all loan parties at the beginning of a new deal, a bring down search just prior to closing, and post-closing searches to confirm the correct lien position. The costs associated with three sets of lien searches on all loan parties can make closing costs burdensome for small business borrowers. Further, the time it takes to obtain these lien searches can cause delays in closing, and gaps in search cover dates can result in intervening liens which may impair the lender's lien position and the SBA Guaranty.

A more efficient method for conducting lien searches is for the lender to pre-file its financing statements against the borrower prior to ordering its lien searches. Under the Uniform Commercial Code, a lender may pre-file a financing statement against a borrower if the borrower authorizes the filing of the financing statement in an authenticated record. An authenticated record can be the security agreement or simply an agreement signed by the borrower which authorizes the lender to pre-file a financing statement against its personal property. Often the agreement also states that the lender is being authorized to pre-file the financing statement in anticipation of the lender making a loan to the borrower, and if the lender does not make the loan, then the financing statement will be terminated. This pre-filing authorization can be added to a commitment letter or can be a separate agreement to be signed by the borrower at the beginning of the deal. Once a pre-filing authorization agreement is signed, lenders may immediately file financing statement(s) in the appropriate governmental offices against the borrower.

After filing, lenders should then order their UCC searches. By pre-fling before ordering searches, the lender will obtain lien search results that include its own financing statement. It eliminates the need to worry about any intervening liens that may be filed from the time the initial lien search was conducted and the closing date. This also eliminates the need to order any bring down lien searches prior to closing and may also remove any need for post-closing searches.

If the UCC searches show prior liens on borrower's assets that are to be terminated in connection the lender's financing, then lender should make sure it obtains the correct lien releases from those prior secured creditors. Ideally, the lender should be authorized to terminate the lien(s) of the prior secured creditors, but if not, then lender should also order a post-closing lien search to confirm that all prior liens have, in fact, been terminated.

For more information on pre-filing UCC financing statements, and other closing and documentation issues, contact the author at krayer@starfieldsmith.com or (215) 542-7070.