Seal of the Board of Governors of the Federal Reserve System BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551
DIVISION OF BANKING
SUPERVISION AND REGULATION
SR 01-7 (SUP)
April 2, 2001

TO THE  OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE SUPERVISORY STAFF AT EACH FEDERAL RESERVE BANK AND EACH DOMESTIC AND FOREIGN BANKING ORGANIZATION SUPERVISED BY THE FEDERAL RESERVE

SUBJECT:   Revisions to Article 9 of the Uniform Commercial Code

                     On February 28, 2001, the Federal Reserve, along with the other member agencies of the Federal Financial Institutions Examination Council, issued an advisory regarding major revisions to Article 9 of the Uniform Commercial Code (UCC) that will become effective on July 1, 2001.1  Article 9 provides a statutory framework governing most secured lending arrangements that are collateralized by personal property.  Financial institutions and their legal counsel need to understand and comply with the requirements of the new law in order to protect security interests on new transactions and to ensure that existing rights are not lost.  In addition to affecting the enforceability of security interests, the revisions may also affect an institution's procedures, systems, and documentation.

                     The revisions to Article 9 will change, among other things, the rules for public filings that are generally required for lenders to perfect their security interests in collateral.  This legal transition creates a potential bank safety and soundness issue.  The risks are most significant in the case of multi-state or multinational borrowers.  Prior to the revisions, Article 9 prescribed that, for entities created by registration (e.g. corporations, limited liability companies, limited partnerships), a filing should be made in the state where the collateral is located (in the case of tangible collateral) or where the borrower's chief executive office is located (in the case of intangible collateral).  Under revised Article 9, secured lenders are required to make public filings in the borrower's state of registration, rather than the state where the chief executive office is located, regardless of collateral type.  For foreign entities operating in several states, filings are to be made in the federally defined "home state."  These revisions clearly change the jurisdiction where a filing must take place in many instances from where it would have been filed under the prior applicable law, creating the potential for loss of perfected security interests.

                     In addition, most Article 9 filings are only effective for five years, at which time they automatically lapse.  To avoid automatic lapse, a secured lender must file a continuation statement, which extends the filing for another five years.  After revised Article 9 takes effect, banking organizations that are unprepared for the changeover may inadvertently file continuation statements in the same office where the original filings were made, thereby losing their security interests if the state of registration is not the same as the state where the chief executive office, or collateral, is located.

                     Many banking organizations track these filings, including continuation statements, on an automated basis.  If a bank's tracking systems do not recognize the new requirements, a significant portion of its lending portfolio might lose its perfected security status.  In addition, the filing of continuation statements is frequently outsourced to law firms.  Banking organizations must ensure that these firms make the proper adjustments to comply with each of the applicable requirements to maintain their security interests, particularly during the transition period.

                     A further complication may arise because the revisions to Article 9 have not been adopted uniformly in all fifty states.  Lenders will need to consider the extent to which they must comply with the rules of both existing Article 9 and revised Article 9.  In addition, since filings recorded before the revisions take effect can remain valid until June 30, 2006, financial institutions will need to conduct UCC searches under both the current and revised rules until all of the pre-revision filings have expired.

                     The February 28, 2001, guidance was intended to alert institutions to these concerns, as well as to heighten awareness of the full range of new and revised Article 9 rules that will be taking effect.  Under this advisory, each financial institution is expected to:

  • Become fully aware of the changes to Article 9 and determine what effect the changes will have on the institution.
  • Determine the need for revised policies, procedures, systems, and forms, and implement the revisions as necessary.
  • Review secured transactions entered into under existing Article 9 to ensure that existing rights are protected under revised Article 9 and make changes as necessary.
  • Provide adequate training to ensure that staff understands the revisions and can effectively implement revisions to existing policies and procedures.

                     Reserve Banks are asked to send this letter and the FFIEC statement to domestic and foreign banking organizations supervised by the Federal Reserve.  If you have any general questions regarding the revisions to Article 9, please contact Dave Adkins, Supervisory Financial Analyst, at (202) 452-5259 (david.adkins@frb.gov).


Richard Spillenkothen
Director


Attachment (288 KB PDF)



Notes:

1.   The revised Article 9 was drafted with a uniform effective date of July 1, 2001, although it does not become law within a particular state until it is adopted by the state legislature.  To date, thirty states have adopted the revised Article 9.  Return to text


SR letters | 2001