Car loan missouri refinancing

Perfecting liens to prevent losses

Auto lenders were surprised by a recent U.S. Supreme Court decision. The decision says you must perfect liens within 20 days of the date the borrower takes possession of the vehicle you finance. If you're tardy by only one day (as the lender was in Fidelity Financial v. Fink, 118 S. Ct. 651), you could lose your vehicle if the borrower files bankruptcy within 90 days of the date you perfect. In the Fink case, the debtor took possession of a vehicle on Aug. 17. Twentyone days later, on Sept. 7, Fidelity mailed the application necessary to perfect its security interest to the Missouri Department of Revenue. The Bankruptcy Code gives Fidelity 20 days; Missouri law gives 30 days. The Supreme Court resolved a conflict among the Circuit Courts of Appeals as to whether federal or state law governed by ruling that the Bankruptcy Code prevails, not state law.

The loss occurred because the purchaser/borrower filed bankruptcy around Nov. 7-two months after the perfection occurred. Under bankruptcy preference doctrine, the trustee has the right to avoid late perfection if it occurred within 90 days of bankruptcy. Had the borrower waited 91 days to file bankruptcy, there wouldn't have been a problem.

It's important to note that the rule applies only to purchase-money transactions. If the debtor already owns the vehicle (such as in a direct loan or a refinancing), the lender's vulnerability is even worse. In such cases, the Bankruptcy Code gives a 10-day grace period. There generally is no grace period at all in nonbankruptcy situations by virtue of your state law (your version of the Uniform Commercial Code).

This means that under most state laws, you might lose your vehicle on a direct loan if you don't perfect immediately. If, for example, you make a loan on June 1 on a vehicle already owned by the debtor, and you perfect on June 6, your lien in most states will be inferior to the lien of a judgment creditor who levies on your vehicle on June 3.

Most car lenders are surprised by these rules because they rarely find judgment creditors seizing their vehicles. They've also rarely had problems in bankruptcy, because Chapter 7 trustees haven't been very aggressive. The lack of aggression changed under the 1994 amendments when Congress increased the commissions paid trustees for recovering collateral.

The Supreme Court didn't address the practical problems lenders face in perfecting within the required time. If delays are the lender's fault, the lender should get its house in order. If delays are the member's fault (as when the member buys from another individual), the credit union shouldn't disburse until the documents are presented for filing.

If the problem is a recurring one with a particular car dealer, the credit union should consider using a draft system or asking the dealer to sign a blanket indemnification agreement holding the credit union harmless for any loss caused by dealer delays. At the very least, lenders should type or stamp indemnify ing language on the back of the check that's sent to the dealer. Be forewarned, however, that dealers' attorneys can generally devise ways to cash the check without being contractually obligated to indemnify. There's always a simple way to avoid potential loss: Don't disburse until you receive all loan documents.

William R. Mapother is a consultant who counsels credit unions throughout the country on bankruptcy. Contact him at (502) 587-5451.