Secured Party Representative Services. Paul Hodnefield Associate General Counsel CSC

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1 Secured Party Representative Services Paul Hodnefield Associate General Counsel CSC

2 Secured Party Representative Services The UCC security interest offers significant benefits for lenders and borrowers alike. A perfected security interest reduces the risks for the lender if a debtor defaults because the lender may satisfy the unpaid obligation from assets pledged by the debtor. The lower risk for lenders makes them more willing to provide financing and offers borrowers more access to credit, often on better terms than they could get with other types of credit. However, the security interest also has a downside. To perfect its security interest, the lender normally must file a UCC financing statement. By doing so, the lender effectively puts its customer list into the public record for competitors to see. In certain lending markets, especially merchant cash advance, factoring and other non-bank business lending, competitors will use this information to target the customers of particular lenders. This article explains the challenges lenders in these highly competitive markets face when putting their information in the public record, what tactics lenders have used to prevent competitive losses, and offers a solution that balances the need to prevent use of the public record for sales solicitations with the needs of those who search the record for due diligence purposes. The public record as a source of sales leads A UCC financing statement generally contains the name and address of the debtor, the name and address of the secured party, and an indication of the collateral. This information is intended for use as part of commercial transactions due diligence. Most filing offices permit retrieval of these records only through a search by debtor name or by file number. Nevertheless, some filing offices do provide search systems that permit UCC searches by secured party name. Secured party searches are also available from third-party providers that buy UCC data from the filing offices. Consequently, competing lenders can easily conduct UCC searches by secured party name. The competitor can then use the secured party search results to effectively reverse engineer the targeted lender s customer list. Effects of targeted marketing using UCC records A competitor s use of secured party searches can be costly for the targeted lender. Lenders have reported a variety of aggressive sales and marketing activities by competitors using information obtained through UCC secured party searches. These include interference with post-filing closings and loss of future business opportunities with borrowers. In some cases, competitors have even suggested that they are affiliated with the borrower s current lender and that they will handle the borrower s future loan needs. Debtors named on UCC records also suffer the effects of targeted sales and marketing campaigns based on public record data. At a minimum, it simply may be a nuisance. After closing a loan, the debtor may find itself subjected to an unrelenting barrage of unwelcome sales solicitations from multiple lenders. Secured Party Representative Services Page 2

3 Secured party search defenses Concerned lenders have used a variety of methods aimed at frustrating their competitors secured party searches. The most obvious solution is to not file a UCC financing statement at all. However, that is not always an option. Skipping the financing statement will leave the lender unperfected. In many cases, that will create an unacceptable level of risk. Moreover, the lender s funding sources may insist that the lender always file UCC records to protect their investment. Some lenders try to frustrate competitive searches by filing UCC records under a trade name or even an entirely fictitious name. The filed UCC record will only provide the substitute secured party name and a mailing address. Typically the record will not include a phone number or other identifying information for the secured party. While using a fictitious name generally works well, at least initially, competitors eventually will figure it out. When that indicate the capacity of the representative secured party. As a result, concerned secured parties can file under the name of a secured party representative to thwart competitive searches. Competitors find it much more difficult to identify financing statements filed by a lender under a secured party representative name. It takes time for the competitor to identify the name (or names) used by the representative secured party. Even if the representative s name later becomes known, there is no guarantee that the competitor will be able to link a filed UCC record with a particular lender. A third-party representative will typically serve multiple lenders that all file under the same name. There is strength in numbers. In fact, in some states so many records have been filed under a representative name that secured party searches can time out and provide no results to a competitor. Consequently, a competitor cannot connect a financing statement with a particular lender based on the secured party representative name alone. Perhaps the best defense against competitive secured party searches is for the lender to use a third-party representative s name on the UCC financing statement. happens, the lender must come up with a new name or it is no better off than before. As a result, some lenders have gone through a long list of fictitious names, which makes administering the UCC portfolio much more complex. The solution: Use a third-party representative Perhaps the best defense against competitive secured party searches is for the lender to use a third-party representative s name on the UCC financing statement. When a lender files records under the name of a third-party representative, competitors have a much harder time conducting secured party searches. The use of a representative of the secured party on a financing statement is expressly permitted by UCC Article 9. A sufficient financing statement must include the name of the secured party or a representative of the secured party (emphasis added). Moreover, the financing statement is not required to Secured Party Representative Services: How they work The process of using a representative secured party is relatively simple. It begins with a service agreement between the lender and the provider to establish the representative relationship and define the parties responsibilities. The secured party representative must establish a reliable communications channel for interested parties to submit communications and inquiries regarding financing statements filed under the representative s name. This would include a unique mailing address and, ideally, a dedicated address. Financing statements filed under the representative s name would include this information to permit faster communications. Upon receipt of a communication from an interested party, the representative simply forwards it to the actual secured party in accord with its prior instructions. The represented secured party may then respond as necessary. Secured Party Representative Services Page 3

4 Secured party benefits The use of a secured party representative name on UCC records provides immediate benefits for the lender. These include: Reduced competitive losses Less interference with closings More repeat business Improved process for communications from interested parties At the same time, using the secured party representative does not interfere with due diligence searches conducted under the debtor name. Interested parties will still find the records and have notice of the lender s claimed security interest. Maximizing the effectiveness of a secured party representative Secured party representative services cannot entirely prevent competitors from identifying a targeted lender s financing statements. However, the services can make the process so difficult, costly, and time consuming that competitors shift their efforts to easier targets. And there are additional measures lenders can take to make the use of a representative secured party even more effective. Some marketing data companies are able to compile sales leads based on unique collateral descriptions. Therefore, lenders should consider using more general collateral descriptions rather than any unique text. Using the secured party representative does not interfere with due diligence searches conducted under the debtor name. Borrower benefits The use of a secured party representative name on the financing statement certainly benefits the lender. However, borrowers receive multiple benefits as well, including: Reduced volume of unwanted sales solicitations Quicker communications with actual secured party (if they don t connect the UCC record with the prior transaction) Less-visible benefits for borrowers include better access to credit and better credit terms because the lenders that use a secured party representative have lower risk. Using a rotation of multiple secured party representative names is also an effective measure. It dilutes the effectiveness and multiplies the cost for a competitor to identify records, even if it knows all the representative names the lender uses. Conclusion Secured party representative services offer an effective and cost-efficient method for avoiding competitive losses and other problems resulting from placing borrower and secured party information in the public record through the filing of UCC financing statements. Lenders can use representative services to raise the cost of generating sales leads from UCC records to such an extent that it discourages targeting by competitors. About the Author Paul Hodnefield is Associate General Counsel for Corporation Service Company (CSC ) and a frequent speaker/writer on UCC, lien and real property service issues. Please feel free to contact him with questions or comments at phodnefi@cscinfo.com or , ext Secured Party Representative Services Page 4

5 For more information Please contact Corporation Service Company (CSC ) for more information about how Secured Party Representative Services can help your company prevent competitive losses. Request a consultation from a CSC sales representative today cscglobal.com Copyright 2015 Corporation Service Company. All Rights Reserved. CSC is a service company and does not provide legal or financial advice. The information presented here is for informational purposes only. Consult with your legal or financial advisor to determine how this information applies to you.