When you finance the purchase of a cooperative unit, the loan you receive from the bank is not a mortgage, as the lay-person may believe. Rather, the loan is secured by a security agreement giving the lender a security interest in the stock certificate and proprietary lease. In order to “perfect” the security instrument, the lender files a UCC financing statement which becomes public information putting the world on notice that a lien exists on the apartment.
The UCC is analogous to recording a mortgage on a condominium unit with the county clerk. After the mortgage has been paid off, a satisfaction of mortgage is recorded. With a cooperative apartment, after the loan is paid off, the lender is required to file a UCC termination statement.
As those who have been involved in the purchase or sale of a cooperative apartment know, UCC financing statements are a constant source of trouble and delay for two reasons. The first is that the lender will often want to file a UCC before the loan is ever made. When the loan fails to never materialize, it is not uncommon for the lender to fail to terminate the erroneously filed UCC.
The second stems from the fact that many attorneys (specifically lender’s attorneys) are not following the “best practice” of terminating a UCC after a loan is paid off. This tends to happen when a borrower refinances their current loan and the lender fails to terminate the prior UCC representing the now paid off or consolidated loan.
As a result, there are countless inactive UCC financing statements out there falsely telling the world that a security interest exists on with respect to a cooperative apartment even though the loan has been paid off, or even worse, never originated. This becomes a source of delay and additional costs when a person is gearing up to buy or sell or refinance their loan because the new lender will want the property to be “free and clear of all liens.”
The lender’s oversight places a financial burden on sellers and borrowers in terms of attorneys’ fees and filing fees. In our experience, it has always taken at least a few phone calls and emails to track down the initial filer of a UCC on behalf of a client in preparation for their impending transaction. While we have been able to have the erroneous UCC terminated without a hitch, the situation has the dire potential to cost the client a substantial amount of money. For example, if the company or attorney who filed the initial financing statement goes out of business, we may have to spend more time and money tracking down the lender to receive authorization to terminate the financing statement. Or worse, if we cannot contact the filer in a timely manner, the closing may have to be adjourned, costing the client real money in terms of additional interest paid, adjournment fees or attorneys’ fees.
Why are the parties entrusted with perfecting a lien in accordance with the Uniform Commercial Code so careless and irresponsible when it comes to filing the termination statements? You do not see this magnitude of recklessness when it comes to recording satisfactions of mortgages. While the recording of both of these instruments has a similar effect, to put the world on notice that a lien no longer exists, they seem to be treated unequally in how they are administered and processed by the lenders.
In light of the lender’s indolence and ineptitude with regard to the administration of UCC financing statements, we suggest penalizing the lender who fails to correctly file a termination statement. A fine of at least $500.00 would seem adequate to get the lender’s attention. By invoking a financial consequence on lenders, the burden and cost associated with terminating erroneous UCC financing statements would be shifted from the individual borrower to the lender, where it belongs.
By Jerome J. Strelov and Ryan V. Stearns