Searching For Love: 7 Search Types That Lenders Will Fall For

What this is: It’s Valentine’s Day and you know what that means: We’re all out there searching for that special someone to make us feel loved and secure. If you’ve been trying to figure out if your date is “the one,” then you’ve probably already done a little due diligence to learn more about their overall character, trustworthiness and perhaps even their financial status to determine if you’d be a good match. It’s really no different for a lender looking to ensure that a potential borrower is a good risk for them to pursue.  

What this means: Let’s take a look at 7 types of searches that are important for lenders to keep in mind for a comprehensive due diligence strategy. Can you feel the love yet? 

What is Lending Due Diligence? 

Due diligence is a vital process across a plethora of business settings that involves inspecting the public record for outstanding liens, litigation and bankruptcy cases that could impact the assets pledged as collateral in a transaction. In the lending world, specifically, due diligence searches are necessary to verify that a borrower is a practical risk for the lender. 

Today we’ll cover 7 types of searches that lenders should have on hand when putting together a thorough due diligence game plan. 

1. UCC Search 

Why is the Uniform Commercial Code Important to Lenders? 

The Uniform Commercial Code (UCC) is a group of statutes that governs secured transactions (among other things) in a streamlined manner across many US states. Lending professionals rely on the framework of the UCC to ensure their security interests in a borrower’s assets are accurately established and protected.  

A UCC search is carried out to determine if a business’s assets are collateral for a prior debt. This is key for lenders, creditors and other interested parties to evaluate the risk correlated with extending credit or entering into financial agreements. UCC searches are also conducted after filing to ensure the lender’s filing was properly indexed, ensuring the creditor’s security interest is “perfected” and has the intended priority among other creditors. Additionally, these searches are conducted throughout the life of the loan to make certain that a lender maintains priority over a borrower’s collateral. 

2. Tax Lien Search 

Federal and state tax liens are legal claims against property for unpaid taxes. A search for tax liens can reveal unpaid taxes only if the IRS or local tax office has taken the steps to file the lien. These liens are important for lending due diligence because they point to financial instability or hinder the property being used as collateral. A potential borrower may have hidden tax debt which can be uncovered through a more thorough look into the IRS records. 

3. Judgment Search 

A judgment is the official decision of a court of law granting or denying a plaintiff’s claim and is found in the court records. A judgment search reveals court judgments against a borrower, providing critical insight into their financial and legal status while potentially revealing unresolved financial obligations including settlements or unpaid debts. These judgments could lead to liens, threatening the ability to recover funds in the event of default. 

Important note: A request for a judgment search during the due diligence process must differentiate between a judgment and a judgment lien as, contrary to popular belief, the results of a judgment search do not always include judgment liens. More on judgment liens below. 

4. Judgment Lien Search 

A judgment lien is nonconsensual and can be best described as a liability or security interest placed on a debtor’s property to satisfy a judgment issued in court. A judgment lien search uncovers legal claims on a borrower’s property. 

Summary of the Difference Between a Judgment Search and a Judgment Lien Search 

• A judgment lien search centers around whether those liabilities have brought about secured claims against personal property and/or real property assets. 

• A judgment search provides a broad rundown of a borrower’s legal and financial liabilities via court rulings. 

5. Pending Litigation Search 

Pending litigation pertains to unresolved and active legal disputes within the judicial system. A search of these records uncovers active lawsuits or pending legal actions against a seller, borrower or guarantor, highlighting potential risks to their ability to repay a loan. Such searches also have the potential to reveal litigation that could affect the value of collateral.  

Where Should Litigation Searches Be Conducted? 

For entities, searches should be conducted in the jurisdiction where the entity has its principal place of business or chief executive office. For individuals, searches should be performed in the state of the debtor’s residence or where their assets are situated. 

Additionally, it may be beneficial to search for pending litigation, not only against the potential borrower, but also against other individuals connected to the transaction, such as officers or members. 

6. Bankruptcy Search 

The purpose of a federal bankruptcy search is to identify if a prospective borrower has filed for bankruptcy due to an inability to repay their debts. Bankruptcy searches reveal a borrower’s financial distress history to the lender, helping to assess risk.  

By understanding a borrower’s financial stability, lenders can make more informed credit decisions and prevent potential losses before approving credit and/or determining the terms. 

Where Are Bankruptcy Cases Filed? 

Bankruptcy cases for business entities are filed in the federal bankruptcy court located in the debtor’s state of formation, principal place of business or where the primary assets are found. For individuals, cases are typically filed in the federal bankruptcy court of the debtor’s state of residence or where their assets are located. 

7. Self-Service UCC Search 

Lenders interested in conducting UCC preliminary and name variation searches on their own should consider working with a service provider that offers an online search tool that provides clients the ability to search for UCCs and other liens filed with a central filing office. An individual performing these searches on their own has control over how the searches are conducted and how the results are displayed. 

Lenders Love Due Diligence Searches! 

And there you have it, 7 types of searches that are important to keep tucked away in a lending due diligence repertoire, because just like anyone else in this season of love, lenders are also out there searching for a sense of security and trust.

Other Reads You Might Enjoy 

What is a tax transcript? 

A tax transcript is used to assist underwriters in verifying a borrower’s sources of income and typically includes taxpayer information (name and Social Security number), filing status, adjusted gross income, taxable income, tax liability, credits, payments and account details. Transcripts report sources of income shown on a given tax return, such as wages, tips, self-employment income and retirement income. Most tax transcripts are available for the current year and the previous 3 years. To learn more about tax transcripts, read our article, Tax Transcripts and Their Value in Lending Transactions.   

What are some limitations of typical UCC and lien searches? 

IP falls within the scope of “general intangibles” as defined in Section 9-102 of Article 9 of the Uniform Commercial Code. As such, searching for UCCs that may include IP as collateral is necessary but limiting your due diligence to a typical UCC and statutory lien search may not be enough. A UCC may only provide a general collateral description, which may not indicate if IP is included because these specific details are only required in the security agreement. Security agreements are rarely found in the public record. Therefore, a thorough public record due diligence investigation should also include a search of the USPTO and USCO. Only by conducting these additional searches can you determine who has the rights to the IP and whether other liens exist. To learn more, read Federal Intellectual Property Due Diligence: Beyond UCC and Lien Searches. 

How are statutory liens searched in the US? 

In the US, typically, statutory liens (particularly tax liens) have priority over consensual liens and can attach both personal property and real property. Tax liens can be filed at the federal, state, county or municipal level, depending on the type of tax and the type and location of the property. Federal and state tax liens are filed either at the state or local level or both, depending upon the rules of the particular state. If you’d like to read more on this topic, refer to our article, Understanding the Basics of International Lien Searches. 

This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice..