Back to Basics, Continued — Electronic Contracts as Guarantee! | Dentons


Last week I wrote about taking consumer loan promissory notes and installment sales contracts in electronic format. See here. This week I discuss the implications of such electronic contracts serving as collateral for lenders to consumer credit companies and installment sellers.

Let’s get started.

Electronic contracts constitute “movable papers” under the Uniform Commercial Code (UCC); and, the UCC allows the movable papers to be a guarantee to guarantee the repayment of the debt. Thus, just as finance companies and credit sellers often take collateral on consumer goods to secure the repayment of their consumers / customers, so lenders of finance companies and credit sellers take collateral on notes and installment sales contracts to help secure repayment. of loans to their borrower – the consumer credit company or the credit vendor.

Now comes the fun part.

When the movable paper (the promissory note or the installment sale contract) is tangible, it is quite easy for the lender to either take physical possession of the paper contract or to place a restrictive statement on the paper contract indicating the security of the loan. lender in furniture paper. But what about when there is no tangible paper, when the transaction creating the movable paper is in electronic format?

In this scenario, the concept of “perfection through control” comes into play. Under the UCC, “control” of title to property is required to establish completeness of security for the purposes of Section 9 of the UCC. I wrote about “perfection” in a blog here.

Consequently, the lender to the creditor wants to perfect his interest in movable paper; and it does the same in the electronic format, asking the finance company or the credit vendor to enter into a controlling agreement with a company that agrees to “control” or hold the electronic collateral in a custodial relationship or deposit. This relationship is established by a control agreement. This agreement allows the flexibility that the creditor needs to deal with its customers, while completing the perfection of the security of its lender on the electronic contracts which serve as collateral.

Interestingly, the electronic contract monitoring agreement often refers to the custodian as an “electronic safe provider” and the holding of electronic contracts as being placed in an “electronic safe”.

And, now, you know more about the rest of the story …

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