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What Is a Security Interest?
A security interest explained in less than 4 minutes, definition and example of a security interest, how does a security interest work, secured loans vs. unsecured loans.
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A security interest is a legal claim to any collateral you put down to get a loan. It’s what allows your lender to take possession of the collateral if you stop making your loan payments.
A security interest reduces your lender’s risk since they can sell the collateral to recoup some of the money lost. Understanding a security risk will help you make better decisions when using it in a loam agreement.
A security interest is a legal claim your lender has to any collateral you put down to obtain a loan. If you agree to a security interest and eventually default on your loan, your lender has the right to take possession of your collateral.
It’s common to grant a security interest on loans that come with collateral requirements, like mortgages and auto loans.
For instance, if you take out a mortgage, your closing documents will grant your lender security interest in the home you’re purchasing. This security interest gives your lender the right to repossess the house if you default on your mortgage.
A security interest can benefit both the lender and the borrower. It gives the lender greater confidence that you’ll repay your loan, allowing them to charge you a lower interest rate .
A security interest allows your lender to take possession of the collateral if you default on your loan. However, the lender can only do that if the security interest is valid.
The Uniform Commercial Code (UCC) outlines three criteria a security interest must meet to be considered legally valid:
- You signed a security agreement granting rights to the secured party (lender)
- A value is assigned to the collateral by the secured party
- You (the debtor) have ownership of the collateral
The lender must also perfect the security interest, which means they ensure that no other creditors have a claim to the collateral. The exact steps your lender takes to perfect the security interest can vary depending on where you live.
If you’re getting ready to close on a mortgage, familiarize yourself with some of the documents you’ll be signing. Knowing what to expect at closing will help you understand what to look for on your closing documents.
A secured loan is backed up by some type of collateral . For instance, if you take out an auto loan, the car you’re purchasing is used as collateral.
So if you stop making payments on your auto loan, your lender can repossess the car and sell it to recoup any lost money. The collateral requirements make secured loans less risky to your lender, so they often come with lower interest rates.
In comparison, an unsecured loan, like a credit card, doesn’t have collateral requirements. If you default on your credit card, your lender can start the debt collection process, but there’s no collateral to repossess. This lack of collateral makes unsecured loans riskier to your lender and often results in higher interest rates.
Key Takeaways
- A security interest is a legal claim your lender has to the collateral used to secure a loan.
- If you default on your loan terms, your lender can take possession of your collateral to recoup some of the money lost.
- A security interest makes the loan less risky for your lender, so you will likely receive a lower interest rate.
- If you apply for a mortgage or auto loan, your closing documents will outline the lender’s security interest in the collateral.
Consumer Financial Protection Bureau. “ What Is a Security Interest? ” Accessed Dec. 21, 2021.
Uniform Council Code. “ Uniform Commercial Code Revised Article 9. Secured Transactions .” Page 56. Accessed Dec. 21, 2021.
Consumer Financial Protection Bureau. “ Differentiating Between Secured and Unsecured Loans .” Accessed Dec. 21, 2021.
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Collateral assignment of beneficial interest definition
Related to collateral assignment of beneficial interest.
Collateral Assignment of Interest Rate Cap Agreement means that certain Collateral Assignment of Interest Rate Cap Agreement, dated as of the date hereof, executed by Borrower in connection with the Loan for the benefit of Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.
Assignment of Benefits means an arrangement whereby the Plan Participant assigns their right to seek and receive payment of eligible Plan benefits, in strict accordance with the terms of this Plan Document, to a Provider. If a provider accepts said arrangement, Providers’ rights to receive Plan benefits are equal to those of a Plan Participant, and are limited by the terms of this Plan Document. A Provider that accepts this arrangement indicates acceptance of an “Assignment of Benefits” as consideration in full for services, supplies, and/or treatment rendered.
Collateral Assignment Agreement has the meaning set forth in Section 10.05.
Form of Assignment and Transfer means the “Form of Assignment and Transfer” attached as Attachment 3 to the Form of Note attached hereto as Exhibit A.
Collateral Assignment means, with respect to any Contracts, the original instrument of collateral assignment of such Contracts by the Company, as Seller, to the Collateral Agent, substantially in the form included in Exhibit A hereto.
Assignment of Contracts shall have the meaning assigned thereto in Section 6.1(b)(iv).
Beneficial Interest means the opportunity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, to profit, or share in any profit derived from, a transaction in the subject Securities. A Covered Person is deemed to have a Beneficial Interest in Securities owned by members of his or her Immediate Family. Common examples of Beneficial Interest include joint accounts, spousal accounts, UTMA accounts, partnerships, trusts and controlling interests in corporations. Any uncertainty as to whether a Covered Person has a Beneficial Interest in a Security should be brought to the attention of the Compliance Officer. Such questions will be resolved in accordance with, and this definition shall be subject to, the definition of “beneficial owner” found in Rules 16a-1(a)(2) and (5) promulgated under the Securities Exchange Act of 1934.
Collateral Assignments means, collectively, the Assignment of the Development Agreement, and the Assignment of Management Agreement, the Assignment of the Right to Receive Tax Credits, Capital Contributions and Partnership Interests, each in form and substance satisfactory to the Significant Bondholder and the Financial Monitor and as each may be amended or supplemented from time to time with the prior written consent of the Significant Bondholder.
Regulation S Transfer Certificate A certificate substantially in the form of Exhibit I-1 or Exhibit I-2 hereto, as applicable.
IP Assignment Agreement means the Intellectual Property Assignment agreement set forth as Exhibit D hereto.
Pledge Certificate means a Pledge Certificate in the form attached to this Appendix "C" as Schedule 1 executed by a duly authorized officer of the applicable Fund and delivered by such Fund to the Custodian by facsimile transmission or in such other manner as the applicable Fund and the Custodian may agree in writing.
Pledged Interests Addendum means a Pledged Interests Addendum substantially in the form of Exhibit C.
Assignment of Lease means the Assignment of Lease, Rents and ------------------- Guarantee dated as of the Release Date from the Lessor to the Collateral Agent for the benefit of the Securityholders and the Certificate Holders, as amended, supplemented or otherwise modified from time to time in accordance with the terms thereof or of any other Operative Agreement.
Assignment of Earnings shall have the meaning provided in the definition of “Collateral and Guaranty Requirements”.
Assignment of Agreements means, with respect to each Property, that certain first priority Assignment of Agreements, Licenses, Permits and Contracts dated as of the date hereof, from the applicable Borrower, as assignor, to Lender, as assignee, assigning to Lender as security for the Loan, to the extent assignable under law, all of such Borrower's interest in and to the Management Agreement, if any, and all other licenses, permits and contracts necessary for the use and operation of such Property, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.
Trademark Assignment Agreement has the meaning set forth in Section 2.5(b).
Individual Note A Note of an Original Note Principal Balance of $25,000; a Note of an Original Note Principal Balance in excess of $25,000 shall be deemed to be a number of Individual Notes equal to the quotient obtained by dividing such Original Note Principal Balance amount by $25,000.
Contract Assignment means, with respect to the Mortgaged Property, the Assignment of Contracts, Licenses, Permits, Agreements, Warranties and Approvals, dated as of the Closing Date and executed by the Borrower.
Assignment of Leases With respect to any Mortgaged Property, any assignment of leases, rents and profits or similar agreement executed by the Mortgagor, assigning to the mortgagee all of the income, rents and profits derived from the ownership, operation, leasing or disposition of all or a portion of such Mortgaged Property, in the form which was duly executed, acknowledged and delivered, as amended, modified, renewed or extended through the date hereof and from time to time hereafter.
Global Intercompany Note means the global intercompany note substantially in the form of Exhibit F pursuant to which intercompany obligations and advances owed by any Loan Party are subordinated to the Obligations.
Supplemental Interest Account As defined in Section 4.07 hereof.
Assignment of Leases and Rents With respect to any Mortgaged Property, any assignment of leases, rents and profits or similar instrument executed by the Obligor, assigning to the mortgagee all of the income, rents and profits derived from the ownership, operation, leasing or disposition of all or a portion of such Mortgaged Property, whether contained in the Mortgage or in a document separate from the Mortgage, in the form that was duly executed, acknowledged and delivered, as amended, modified, renewed or extended through the date hereof and from time to time hereafter in accordance with the Credit and Collection Policy.
General Assignment means, in respect of each Vessel, the deed of assignment of its earnings, insurances and requisition compensation executed or to be executed by the relevant Owner in favour of the Security Trustee in such form as the Agent and the Majority Lenders may require in their sole discretion and in the plural means both of them;
Form of Note means the “Form of Note” attached hereto as Exhibit A.
Guarantor Security Agreement means any security agreement executed by any Guarantor in favor of Agent securing the Obligations or the Guaranty of such Guarantor, in form and substance satisfactory to Agent.
Certificate of Beneficial Ownership means a certificate substantially in the form of Exhibit H.
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Document Updates: IL Security Assignment of Beneficial Interest in Land Trust (Cx4936)
As previously announced, FHLMC published Bulletin 2017-28 announcing new guidance concerning land trusts (see https://compliance.docutech.com/2017/12/15/compliance-news-fhlmc-bulletin-2017-28-updates-land-trusts-texas-home-equity-loans/ ). Among these changes included ones permitting lenders to use FHLMC Form 50 as a collateral assignment for land trust mortgages. We created this form and have assigned it to print for loans which will be sold to FHLMC, while still retaining our generic “IL Security Assignment of Beneficial Interest in Land Trust” (Cx4936) for use with loans not sold to FHLMC (see https://compliance.docutech.com/2018/03/19/new-document-il-collateral-assignment-of-beneficial-interest-in-land-trust-cx22151/ for details).
Because it is possible for clients to not know for sure at closing whether their loan will be sold to FHLMC, Cx4936 may still be used for loans which ultimately are sold to FHLMC. If Form 50 is not used, FHLMC does require a collateral assignment to contain the following elements:
“Each beneficiary of the Land Trust who is a Borrower must execute a Collateral Assignment under which the beneficiary:
- Grants the lender named in the Security Instrument and the Note and the lender’s successors and assigns (the ‘Lender’) a security interest in all of the beneficiary’s rights, title, powers and interest in, under and to the Land Trust, the property held in the Land Trust (including any rights to earnings or proceeds from that property), and the Land Trust agreement (including any powers of direction or control over the trustee of the Land Trust or the property) (collectively, the ‘Collateral’);
- Certifies that no prior security interest in the Collateral has been granted;
- Agrees not to make any further assignment or take any other action by which all or any part of the Collateral is transferred in any way without the written approval of the Lender; and
- Agrees that the Collateral Assignment is for collateral security only, that no liability under the Land Trust agreement accrues to the Lender by virtue of the Collateral Assignment, and that signing the Collateral Agreement does not relieve the beneficiary of any responsibility or liability under the Land Trust agreement.” (FHLMC Single-Family Seller/Servicer Guide ch. 5103.7[b][ii][A])
To meet these elements, we will be modifying Cx4936 in the following ways:
- Because the trustee of the land trust is not required to sign the promissory note under FHLMC requirements, we will be revising the recitals to the document to only reference the beneficiary(ies) as being the signatories to the promissory note, when new field “Exclude Land Trust Signature Lines from Note” (FI 121714) equals “Yes.” If this field equals “No”, the current language of the recitals will print.
- Revising the last clause of the first sentence of the first paragraph, revising the last sentence of said paragraph, and revising the second paragraph to expand upon what interests are being conveyed by the collateral and what the beneficiary(ies) liability is under the terms of the Security Agreement as a result of the assignment.
- Adding a new, third paragraph wherein the beneficiary(ies) certify that there is no prior lien on the collateral. This paragraph will only appear when “Lien Position” (FI 1041) equals “First Lien”.
- Adding another sentence to the (current) third paragraph specifying that the undersigned beneficiary(ies) will not make any assignment, or transfer, the collateral without the written approval of the lender.
These changes will take effect immediately to complement the recent land trust signature software changes. If you have any questions or concerns about these changes, please contact Client Support at 1.800.497.3584.
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Security Assignment of Beneficial Interest in Trust: Business - Secured Transactions, Legal Forms Book Paperback – May 15, 2018
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- Print length 204 pages
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- Publisher : CreateSpace Independent Publishing Platform (May 15, 2018)
- Language : English
- Paperback : 204 pages
- ISBN-10 : 1719177074
- ISBN-13 : 978-1719177078
- Item Weight : 1.33 pounds
- Dimensions : 8.5 x 0.46 x 11 inches
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Q&A: Lender Considerations In Perfecting Security Interests in Illinois Land Trusts
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Q: What steps should a lender take to properly perfect lender’s security interest where the collateral for the loan is held in an Illinois land trust?
A: In order to properly perfect a lender’s security interest in collateral held in an Illinois land trust, a lender should take a “collateral assignment” of the beneficial interest in the land trust (“ABI”). Since the beneficial interest in an Illinois land trust is personal property, the Illinois Uniform Commercial Code (“UCC”), 810 ILCS 5/9-314, provides that a security interest in the beneficial interest in an Illinois land trust may be perfected by control of the collateral pursuant to 810 ILCS 5/9-107.1, which control is accomplished by service of a Notice of Collateral Assignment on the land trustee and obtaining a written receipt from the land trustee. Many trustees of Illinois land trusts have a standard form for lender’s use in securing the collateral assignment of the beneficial interest in the land trust, and the land trustee will sign the completed collateral assignment form to acknowledge lender’s collateral assignment of the beneficial interest in the land trust.
Q: Should a lender file a UCC-1 financing statement to perfect its security interest in an ABI?
A: 810 ILCS 5/9-312 provides that perfection of a security interest in an ABI may be perfected by filing a UCC-1 financing statement, but filing a UCC-1 financing statement is not necessary to perfect a security interest in a collateral assignment of a beneficial interest in a land trust. Although 810 ILCS 5/9-312 does not require a lender to file a UCC-1 financing statement in order to perfect the lender’s security interest in the beneficial interest in an Illinois land trust, by filing a UCC-1 financing statement, a lender puts third parties on notice of lender’s security interest and better protects lender’s security interest against other parties which may claim a security interest down the road.
Q: What is the benefit of having a collateral assignment?
A: With a collateral assignment in place, the trustee of the land trust is not able to transfer title to the property held in the land trust or otherwise mortgage or encumber the property held in the land trust without the written consent of lender, as collateral assignee.
In addition, the Illinois Mortgage Foreclosure Law (“IMFL”), 735 ILCS 5/15-1106(a)(3) provides that any collateral ABI may be foreclosed under the provisions of the IMFL; and 735 ILCS 5/15-1106(b) provides that a secured party under Article 9 of the UCC may elect to enforce its security interest in a foreclosure under the IMFL if the security interest was created by a collateral assignment of a beneficial interest in a land trust.
Q: What can a lender do to enhance security?
A: As belt and suspenders, lenders should also require the land trustee to execute and deliver an original signed and notarized mortgage to be recorded against the real property in the county where the real property is located in order to put third parties on notice of lender’s security interest and to allow lender to foreclose out any subsequent liens on the real property.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
Locations in Illinois & Wisconsin
Chicago : 216 S Jefferson St, Suite 504, Chicago, IL 60661 • (312) 382-1600
Milwaukee: 250 E. Wisconsin Avenue, Suite 1800, Milwaukee, WI 53202 • (414) 276-4080
Pleasant Prairie: 10411 Corporate Dr, Pleasant Prairie, WI 53158 • (262) 857-1600
Chapter 14: Beneficial interests
14.2 The ASC 325-40 model
Favorited Content
- 14.1 Beneficial interests
- derivatives subject to ASC 815 (see DH 2 ),
- debt securities subject to the guidance in ASC 310-20 (see LI 3 and LI 6 ) and the impairment guidance in ASC 326-30 (see LI 8 ) or ASC 326-20 (see LI 7 ),
- loans subject to the guidance in ASC 310 (see LI 4 ), or
- other accounting guidance.
Definition from ASC 860-10-20
- Senior and subordinated shares of interest, principal, or other cash inflows to be passed-through or paid-through
- Premiums due to guarantors
- Commercial paper obligations
- Residual interests, whether in the form of debt or equity
ASC 860-20-35-2
Financial assets, except for instruments that are within the scope of Subtopic 815-10 , that can contractually be prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment shall be subsequently measured like investments in debt securities classified as available for sale or trading under Topic 320. Examples of such financial assets include, but are not limited to, interest-only strips, other beneficial interests, loans, or other receivables. Interest-only strips and similar interests that meet the definition of securities are included in the scope of that Topic. Therefore, all relevant provisions of that Topic (including the disclosure requirements) shall be applied. See related implementation guidance beginning in paragraph 860-20-55-33 .
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