I recently attended a seminar on Revised Article 9 and am a little confused about something I heard. Is is true that after July 1, a bank will no longer be able to take a savings or money market account as collateral? If it is true, what is the reasoning behind it?

Thanks in advance.

This has been a major pain in the *** for banks taken by surprize by the change in the UCC. Basically, the definition of "collateral" for purposes of perfecting a security interest under Article 9 specifically EXCLUDES a deposit account securing a consumer loan.

What this means is - if you take an assignment of a deposit account as collateral for a consumer loan, you will not have a perfected security interest under the UCC-Article 9. So - your security interest may be vulnerable to other claims against it.

Why this happened is a good guess - I was told that the consumer protection groups lobbied to have this put in so that banks could not deceive a consumer into signing away their lives savings. Did it occur to them that some people WANT to borrow against their savings - or that some people don't qualify for credit any other way? I don't know.

But this leaves banks with a risk management decision. Proceed with business as usual and figure that a court will uphold the bank's security interest over other claims such as IRS or bankruptcy trustee? Or hope that a correction will be made to remedy the situation.

Or go back in time 20 years and re-surrect the negotiable CD and use that anytime a consumer wants a deposit secured loan? Negotiable instruments ARE included in the definition of collateral, and by taking physical possession of the negotiable item along with the security agreement, you have a perfected security interest. Of course, you then walk back down the path of operational nightmares with the negotiable CD's - so I guess you get to choose your poison.

Bonnie, does your state's version of existing Article 9 have a nonuniform provision which addresses security interests in deposit accounts? The uniform version of the old (current) Article 9 doesn't apply to any type of deposit accounts (consumer or commercial)except proceeds - see current (9-104(l)). The change is to include within the scope of Revised Article 9 assignments of commercial deposit accounts, not remove any coverage of consumer deposit accounts.

The current version of Article 9 in California is Division 9 which has a provision for taking a security interest in a deposit account.

The material I have shows that the new UCC Article 9 intentionally leaves out consumer deposit accounts:
The following transactions will not be covered by Article 9 - An assignment of a deposit account in a consumer transaction, but Sections 9315 and 9322 apply with respect to proceeds and priorities in proceeds. UCC Section 9109(d)(13)

In California, savings secured loans are quite popular. Many people use them to establish (or re-establish!) credit. Also, the net borrowing cost is cheaper because most banks charge about 3 to 6% above the rate being paid on the account.

I know that other states don't allow this type of borrowing although I'm not sure why. I have one of these loans myself because I would rather pay a net cost of 5% to borrow the money than pay an unsecured rate of 15% to 21%, or take a cash advance on a credit card with all of those associated fees. And there's something psychological about not wiping out your savings account to pay for an emergency expenditure.

However, since California adopted the new UCC without any changes, many lenders face an uncertain issue with this type of lending.

Revised Article 9 does not apply to "an assignment of a deposit account in a consumer transaction".

The exclusion, however, does not prohibit or prevent a lender from taking a deposit account as collateral in a consumer transaction. It only means that law outside of Article 9 governs the transaction, and that law must be used to acquire the deposit account as collateral - not Article 9.

Former Article 9 excluded any "transfer of an interest in any deposit account". Nevertheless, lenders could, and frequently did, take deposit accounts as collateral in consumer transactions. Adoption of revised Article 9 was not intended to change that. It was only intended to extend Article 9 to deposit accounts as collateral, but not in consumer transactions.

For a loan to be a "consumer transaction" under revised Article 9 two parameters must be met. First, the loan must be primarily for a personal, family or household purpose. Second, the collateral must be held or acquired primarily for a personal, family or household purpose. If either parameter is not met, the loan is not a "consumer Transaction" under revised Article 9. Therefore, revised Article 9 would apply to the transaction.

Commercial loans secured by consumer deposit accounts are covered by revised Article 9.

Less likely (but still a possibility), a consumer loan secured by a commercial deposit account is covered by revised Article 9.

A consumer loan secured by a consumer deposit account is governed by law outside of revised Article 9 (contract law, property law and assignment law) with respect to acquiring the deposit account as collateral.

Please note well!! It is possible for states to deviate from the uniform version of Article 9 and to adopt other laws applicable to the transaction. This discussion is based on the uniform version of revised Article 9.

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Jack McElroy