Survival of the lending market largely depends on the borrowers, their borrowing capacity and repayment of debts. There are several options available for a debtor finding it difficult to keep up with their monthly repayments such as debt settlement, debt consolidation and other forms of debt relief. However, all are governed by the same Act and rules and therefore needs amendments from time to time.

This results in the latest trends in the regulatory climate which ideally every borrower should be well aware of to be better off while taking on a loan and making the payments or what to do if they are failing to pay as the case may be.

Features of the market

Most of the secured loans offered in the United States are subject to sub-investment grade borrowers. It is seen in the past year that there has been a significant contraction in the lending market leveraged for these specific borrowers. This is due to the enactment of the reviewed leveraged lending direction by the prudential bank regulators.

• This has further resulted in pulling back by several banks from some credits that were previously underwritten.
• On the other hand, the nonbank direct lenders have somewhat filled up the void but there is still a notable decline in the sub-investment grade secured lending segment in the past twelve months.

However, it is seen that the investment grade syndicated lending which mainly deals with unsecured loans has persisted to be robust.

The regulatory activity

It is important for a borrower to know whether or not a secured lending is a regulated activity in their jurisdiction. Ideally, any secured lending will typically implicate both federal as well as state laws where in the terms and conditions of the loan documents are usually governed by the state law.

• It is seen that in almost all large transactions the lenders and borrowers tend to choose a jurisdiction that has the governing laws that are more favorable for adjudicating disputes as well as availed different debt management and relief programs through different credit counseling agencies or reliable sources such as com and others.
• In addition to that there is a need to create security interest and perfect it especially in most personal property.

Usually such improved security interests enforced outside bankruptcy is governed by Article 9 of the Uniform Commercial Code. On the other hand, for the non-personal property collateral that may be included in the security package it depends on the types, other applicable laws such as non-uniform real estate laws of the state for real estate collateral as well as the location of the real property.

Specific regulatory issues

Borrowers must also be well aware of the specific regulatory issues if any with the security loan facility.

• There are specific regulatory regimes that may be applicable to the borrower while arranging or entering into such a loan facility. For instance, casino gaming companies, telecommunications providers and broker dealers have limited ability to provide collateral and must have regulatory approval to grant such security on specific assets.
• In addition to that, borrowers must also consider carefully the potential tax implications and issues especially if the corporate structure of the borrower includes any non-US corporate entity.

Under Section 956 of the Internal Revenue Code It will fetch undesirable US federal tax penalties if the transaction is not structured properly.

Similarly, there could be specific regulatory issues with the prospective lender as well during such secured loan facility but it will largely depend on whether or not the lender is actually a regulated entity. If so then there are a number of regulatory requirements that are extensive but may not be applicable to the non-bank lenders.

Change in the asset class

There are also a lot of changes in the asset classes used for collateral security. If you opt to offer real estate as security then you must know the most common forms of real estate security, the process followed to grant it as well as the partial interests and leaseholds.

• The state law exclusively governs the creation and enforcement of security interests in real property and therefore this law may vary from one state to another.
• The most common practice is to grant real estate security after the borrower signs and acknowledges a promissory note as well as a mortgage. It must describe the property in all possible detail.

If the lender wants to make your security interest perfect and fully secured then the law allows the lender to file the mortgage with the recording office of the local real estate.

Other forms of assets

There are also other forms of assets that a borrower may grant as collateral security to get a loan.

• Sometimes, borrowers offer equipment and machinery as security which once again falls under the scope of Article 9 of the Uniform Commercial Code. The lender can perfect such type of security by filing the UCC-1 financing statement.
• Similarly most receivables can be granted as security as well under the same scope of Article 9 of the Uniform Commercial Code following the same process.
• Financial instruments and cash can also be pledged for collateral security as per the Uniform Commercial Code. The type of financial instrument will determine the way to perfect the security interest. The most common ways is to filing a UCC -1, executing a control agreement, and taking possession of it.
• There can be security interest created and perfected on cash deposit accounts as well by control of the secured party, depository bank and obligor by creating and executing a tri-party control agreement of the deposit account.
• Lastly, intellectual property can also be granted as security but appropriate UCC-1 along with federal filings must be made with the Copyright Office or with the Patent and Trademark Office in US as applicable.

No matter whichever form of security collateral you want to pledge, it is recommended that you know about the significant component as well as the legal issues and implications that involves the particular type of collateral package.