Indiana UCC Contents of Financing Statement Revealed – Crucial Information Unveiled

09/08/2024

Module 3 Assignment – Secured Interests

• Explain what the purpose of a promissory note is; be sure to identify who the payor and payee are. (4 points)

The promissory note is a legal agreement that outlines the terms for repaying substantial purchases, such as a vehicle, boat, or RV. It is a binding legal document for the person making the purchase (the payor) to make a promise to the recipient of the promissory note (the payee). The payee holds the title of unsecured collateral until the payor fulfills the entire payment as specified in the promissory note.

• How are promissory notes and mortgages different and why are both required when obtaining a loan to purchase real estate? (5 points)

A promissory note is an unsecured loan for which the borrower is legally obligated to repay. The exact loan amount, interest rate, down payment, repayment start date, and maturity date are specified in the contract. The lender’s payment address is provided in the documents, and there are consequences if the borrower fails to repay. The lender holds the title to unsecured property until all payments are satisfied. The credit score factor per individual is different; the requirement will reflect the loan terms, including the interest rates.

On the other hand, a mortgage loan is secured by real property, protecting the lender. The legal documents convey the title of the property to secure a debt. The property owner can use real property as an investment to generate income. The term of a mortgage is generally calculated in years and depends on factors such as the loan amount, interest rate, loan costs, lender fees, and the repayment process. The credit score plays a big part in the terms and conditions required by the underwriters to determine whether the loan is approved. The loan process is more involved, requiring bank statements, tax returns, and other documents based on each individual.

Payments for a mortgage loan are not made directly to the lender but are directed to a processing center for the mortgage company. Additionally, personal property is moveable, while the mortgage is a type of real property affixed to the unremovable land. Each contractual document of a secured and unsecured loan is collateral. The other difference is that the interest can be higher on unsecured loans than on secure loans held collateral of real property.

• Provide the five (5) requirements for a valid mortgage. Why do you think those are required? (7 points)

1. Borrower/s information- Application with personal information of all borrower/s, including social security number with employment history. The lender requires borrower information for everyone’s application process and runs a monitor credit bureau with three agencies for creditworthiness on each person that manages their obligation to pay their bill on time. Looking at their employment history will show the length of time with their current employer and past employment; this will show their employment stability. Having inaccurate borrower information can affect the ability to locate the file.

• Income stubs and tax returns require the borrower to verify income for the last three months’ pay stubs. An underwriter to validate borrower income will determine the amount on the property the borrower can purchase and afford. The underwriter needs the last three years of tax return with their total income showing their AGI with deductions and investments.

• Bank and Investment statements- the underwriters look at three months’ bank statements to show a pattern of how the borrower/s takes care of the financial obligation. They also look at their investment accounts to see how they invest or save.  

• Monthly debts and assets-reviewing debts will establish a pattern if the borrower can control debt by not over-extending more than their monthly income. Reviewing debt versus assets can show how the borrower can increase assets by saving, not increasing debt.

• Loan amount and down payment- the underwriters look at the loan amount, the income, and assets, including debt-to-ratio income, to see if the borrower can afford the price of the home and the amount of down payment toward the selling price of the property.

• Review Exhibit 11-1, a uniform mortgage instrument, found in Chapter 11 of the textbook on page 324.\

• Read Covenants #s 3, 5, 6, 10, and 22. If you do not understand some of the terms used, review Chapter 11 or Google the terms. Then, for each paragraph (in order), discuss what the paragraph provides/requires and why a lender would want such a clause. Think about this from the lender’s perspective. Be sure to do these tasks in order and clearly label each, e.g. 3. and then discuss….; 5. and then discuss. (15 points)

#3 Funds for Escrow Items: An escrow account is established at the beginning of the loan, and the borrower must deposit two months’ worth of payments. This requirement is essential to cover the property’s monthly and yearly expenses, including property taxes, homeowner insurance, and mortgage insurance premiums (MIP). The monthly mortgage payment will incorporate the total amount for these expenses. Throughout the year, payments are made to the homeowner’s insurance company and property taxes in the county where the property is located. These payments over the loan term protect the lender in case the property is lost. By handling the taxes through escrow, the lender or servicer ensures that property taxes are paid, thus preventing any liens due to non-payment. Additionally, mortgage insurance premiums (MIP) are paid through this account to cover the lender in case of borrower default.

#5 Property insurance: is mandated by the lender to protect their investment in case of catastrophic loss such as fire and hazards. If the property owner fails to provide coverage, the lender will arrange structural insurance to cover the property. In the event of a loss, the borrower must notify the lender to restore the property. Following restoration, the lender will inspect to ensure the work meets their standards. Sometimes, the lender may require additional insurance for wind/hail, flood, or tornado. If the loss exceeds a certain amount, the lender will need the contractor’s and homeowner’s names to be jointly written on the payment check to ensure the work is completed and the property is restored.

#6 Occupancy: The lender requires the primary owner to reside in the home for a specific period. Particular requirements may exist if the property owner wants to rent the property. Once the homeowner starts renting the property, the lender will require different insurance, and property taxes will increase. Most lenders do not permit using your home as a rental property or may require you to refinance your mortgage into a business mortgage.

#10 Mortgage Insurance: MIP is typically required by the lender if the loan is from the Federal Housing Administration (FHA). If the borrower has low credit scores and little or no down payment, the loan will be protected and backed by FHA. Some lenders will require private mortgage insurance (PMI) for a conventional loan if the down payment is less than 20%. There are specific conditions for property owners who want to drop the MIP or PMI, but this will vary based on the loan and the lender’s requirements. Nonetheless, the lender must ensure they are protected from risky loans to prevent financial difficulties for individuals.

#22 Acceleration; Remedies: Under these clauses, the lender can notify the borrower if they do not comply with the agreement. Non-compliance includes failing to maintain insurance, missing payments, or neglecting financial responsibility. The lender will give the homeowner time to address the issues specified in the clause, including a specific time frame for rectifying any problems. The lender’s remedy will outline the requirements in the covenant clause in the Security Instrument signed by the borrower(s). Depending on the circumstances, the lender may require full loan payment. These remedies are in place to protect the property and the lender and serve as the initial step before further legal action, such as foreclosure, is taken against the property owner.

• Using Lexis or the Indiana General Assembly website, locate Indiana’s UCC (Title 26) and review Article 1, to find the statute which outlines the contents of a financing statement. (Hint: Remember, this is a secured transaction.) According to that statute, in order to be considered sufficient, what three things must be included? Be sure to cite to the specific statute. You may find it helpful to review Indiana’s State Form 50181. For an online PDF fillable form, see: IN Form 50181 Financing Statement.

According to the Indiana General Assembly, IC § 26-1-9.1-502 (a) Content of financing statement three things must be included in the contents of a financing statement the following procedure:

1. Debtor Name: When filing with the Secretary of State for a UCC document, it’s essential to include the debtor’s middle name when typing their name. It is crucial because anyone searching for their record from the UCC office will use the debtor’s name to find it. Getting the name right is essential.
2. A business representative can sign as a secured party: on the UCC financing statement in Indiana. This means the agent representing the company with an interest in collateral holds a lien on the car title due to a loan.
3. The collateral covered in the financial statement: The collateral listed in the financing statement is the debtor’s personal property. When the UCC financial statement is filed, the interested party with a collateral interest will list the vehicle description from the debtor when the agreement is executed.

Indiana General Assembly

IC 26-1-9.1-502 Contents of financing statement; record of mortgage as financing statement; time of filing financing statement

     Sec. 502. (a) Subject to subsection (b), a financing statement is sufficient only if it:

(1) provides the name of the debtor;

(2) provides the name of the secured party or a representative of the secured party; and

(3) indicates the collateral covered by the financing statement.

IC 9-17-5-5 Security agreements; notation of lien on certificate of title

     Sec. 5. (a) A security agreement covering a security interest in a vehicle that is not inventory held for sale is perfected when:

(1) the record of the lien is electronically received by the bureau, if the application for certificate of title is received electronically; or

(2) the application for certificate of title is submitted to the bureau, if the application for certificate of title is submitted in physical form.

Except as otherwise provided in subsection (b) and section 1 of this chapter, IC 26-1-9.1 applies to security interests in vehicles.

     (b) The secured party, upon presentation to the bureau of a properly completed application for certificate of title together with the fee prescribed, may have a notation of the lien made on the certificate of title to be issued by the bureau. The bureau shall:

(1) enter the notation and the date of the notation; and

(2) note the lien and date of lien in the bureau’s files.

• Links to an external site. (10 points: 2 for locating the statute; 2 for correctly citing the statute; and 6 for providing the three requirements)

• In the case of a car loan, where would the financing statement need to be filed in order to perfect the loan? (2 points)

The agent representing the business will file a financing statement using UCC Form 1 with the Secretary of State of Indiana.

IC 26-1-9.1-501 Filing office

     Sec. 501. (a) Except as otherwise provided in subsections (b), (c), and (d), if the local law of this state governs perfection of a security interest or agricultural lien, the office in which to file a financing statement to perfect the security interest or agricultural lien is:

(1) the office designated for the filing or recording of a record of a mortgage on the related real property, if:

(A) the collateral is as-extracted collateral or timber to be cut; or

(B) the financing statement is filed as a fixture filing and the collateral is goods that are or are to become fixtures; or

(2) the office of the secretary of state, in all other cases, including a case in which the collateral is goods that are or are to become fixtures and the financing statement is not filed as a fixture filing.

     (b) The office in which to file a financing statement to perfect a security interest in collateral, including fixtures, of a transmitting utility is the office of the secretary of state. The financing statement also constitutes a fixture filing as to the collateral indicated in the financing statement which is or is to become fixtures.

• Why is it so important to correctly identify the debtor? (2 points)

As the lender, the company possesses a vested interest in the debtor’s personal property, which is subject to a security interest. The accurate provision of three specific pieces of information is imperative. Failure to correctly identify the debtor will result in the inability to notify others and perfect the loan. The act of filing this financing statement secures the creditor’s priority rights in the collateral, encompassing the personal property outlined in the document. Accurately identifying debtor information is critical for disclosing to third parties the existence of a lien on the collateral, thereby perfecting the loan.

Written by: Greg MD