When is an automobile not a motor vehicle for compliance purposes? When it’s “inventory”, of course. Unsold cars are considered inventory assets and therefore are not subject to state laws that apply to vehicles that have been sold to consumers or another business. It is critical that lenders understand which assets qualify as collateral when it comes to securitizing auto loans and leases.
Commercial Lending Basics
When seeking business loans, car dealerships, like most businesses, routinely pledge “all business assets” as collateral, usually in the form of a line of credit used to fund operations. normal business. “All business assets” is an idea rooted in the Uniform Commercial Code (UCC) and generally includes all accounts, chattel papers, tort claims, custodial accounts, documents, equipment, fixtures, general intangibles, property, instruments, inventory, investments ownership, leases and rents of real estate, letter of credit rights, letters of credit, money and standby obligations.
Unsold cars waiting on the lot are therefore inventory assets of the borrower, and a lien on those assets is perfected by filing a financing statement with the appropriate office in the state where the business is located; this usually means filing a Form UCC-1 with the Secretary of State. So, while these cars may constitute security while in the field, they are not yet “motor vehicles”, in the sense that they are not subject to applicable title certificate laws ( COT) governing the titles and privileges to said cars. COT laws come into play once the automobile is sold to a commercial or retail buyer.
Securitizations of auto loans and leases and the magnitude of the market for these securities have been the subject of much discussion lately. But, when trying to make sense of these sometimes complicated instruments, it helps to go back to the basics of commercial lending. Before engaging in complicated structured finance programs – such as securitizations – or dealer-specific commercial borrowing plans – such as floor loans – it is important to understand which company or entity holds title to which assets and which assets are collateral for the corresponding indebtedness. . Also, as in consumer credit and especially commercial financing, auto finance lenders and borrowers can run into problems when there is uncertainty as to the priority of liens on cars that are on the lot. .
This often occurs in bankruptcy proceedings and is often the result of honest but misguided efforts by a dealership to sell the cars, generate revenue, and try to catch up on already delinquent loan obligations. A bona fide buyer who is not in default will generally take the vehicle, but resolution of the lien priority issue will be determined by who eats the loss between the floor plan lender, the borrowing dealer, and another creditor.
When evaluating the pool of assets to be securitized, investors and portfolio managers who trade auto asset-backed securities must consider many of the same issues that floor plan borrowers and lenders do when assessment of the pool of assets to be borrowed, such as:
- Market demographics;
- Fleet quality;
- Average time a vehicle is immobilized in the field;
- Initial term of the loan; and
- Loan-to-value ratio.
Additionally, if a securitization contains redemption tranches, it is important to know which tranche is subordinate to payment obligations, and why. Similarly, many financial borrowers or lenders need to understand the priority of lien when the same collateral has been pledged to secure different lines of indebtedness.
Just as floor lending and consumer credit models emerged in the first half of the 20th century and automotive asset-backed securities have exploded in size and value since their introduction in the 1980s, future products auto industry financing will invariably be developed.
Indeed, the auto finance industry is witnessing these developments today with the emergence of fintechs offering new lending models, as well as the rise of subscription-based services. An in-depth understanding of payment priorities in lot finance and auto loan securitization is essential to understanding the business in years to come – just as it was in 1926 or 1986.
As cars cost more but last longer than ever before, with corresponding long-term terms in new consumer credit transactions, understanding what collateral is pledged as collateral to pay a specific debt is critical to understanding the interaction between the different automotive lending activities. financial market.
Mike B. Schwegler is a Member (Partner) of McGlincheyof Nashville, who represents lenders and creditors in commercial lending issues, from transactions to litigation.
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