Secured Transactions Reform Movement Encouraging Capital Flows into your Economies with a UCC AIBA Conference Bismarck ND November 34 2016 Presented by Sue Woodrow Center for Indian Country Development ID: 559801
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Tribal Nations and the Global Secured Transactions Reform Movement~~~Encouraging Capital Flows into your Economies with a UCC
AIBA Conference
Bismarck, ND | November 3-4, 2016
Presented by Sue Woodrow
Center for Indian Country Development
Federal Reserve Bank of MinneapolisSlide2
The views expressed in this presentation represent the presenter’s views and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System
2
Disclaime
rSlide3
The Importance of Legal Infrastructure Development to Support Sustained Economic DevelopmentUniform Commercial Code (UCC) and Secured TransactionsModel Tribal Secured Transactions ActImpact of Successful ImplementationFiling Systems
Other Issues
Agenda
3Slide4
Why is it important for sustained economic development?There is a difference between economic activity and sustained developmentInward and outward focused laws: what is the difference?Inward focusedOutward focusedWhen
is uniformity important?
Legal Infrastructure Development
4Slide5
Uniform Commercial CodeDrafted by the Uniform Law Commission (ULC) in partnership with the American Law Institute during the 1940s and 1950s and continually updated – a set of model codes addressing a wide range of commercial transactions A set of template codes developed as a resource for use and enactment by state legislatures to help establish a reasonably consistent commercial law environment within and across the United StatesEnacted by all 50 states and some U.S. territories - not exactly uniform but substantially uniform enactment
What is the UCC?
5Slide6
A collection of template codes governing commercial transactions of various kindsArticle 1 Definitions and General RulesArticle 2 SalesArticle 2A Leases
Article 2B Licenses
Article 3 Negotiable InstrumentsArticle 4 Bank Collections
Article 4A
Funds
Transfers
Article 5 Letters of Credit
Article 6 Bulk Sales
Article 7 Documents of Title
Article 8 Investment Securities
Article 9
Secured
Transactions
What is a UCC?
6Slide7
Economic development: Non-uniformity among state laws was hindering “cross-border” commerce, thus interfering with economic developmentSovereignty: Concern by states of federal legislative intervention/preemption if states did not act to address the non-uniformity issue
Now, substantial uniformity among the states’ commercial laws, including those governing secured lending, permits ease of transactions across state lines, enabling efficient “cross border”
commerce
Why did all the States adopt the UCC?
7Slide8
QUESTION: With regard to economic development and sovereignty, are there similar concerns about economic development and sovereignty in Indian Country?
Why did all the States adopt the UCC?
8Slide9
Article 9 governing secured transactions is far and away the most important of the commercial topics addressed in the UCCArticle 9 provides a unified structure covering an immense array of financing transactionsAt least tens of thousands of secured transactions occur every day
A secured transactions code is the single most important legal infrastructure for promoting access to
credit
Secured Transactions
9Slide10
A loan or credit extended by a seller of goodsUsing personal property, which is everything other than real property, as collateral securing the loan or extension of creditA security interest in personal property operates like a mortgage on land
What is a Secured Transaction?
10Slide11
Tangible property such as equipment, inventory, crops, standing timber, livestock, minerals/gas/oil removed from the groundIntangible property such as accounts receivable, bank accounts, and intellectual property
What is Personal Property?
11Slide12
Bill gives Sam a loan of $100Sam gives Bill his leather jacket (approx. value $100) to hold on to until Sam repays the loan as assurance that Sam will repay (the jacket is the collateral)
Secured Transaction Example:Possessory Security Interest
12Slide13
When Sam fully repays Bill, Bill returns the jacketIf Sam fails to repay Bill, Bill may sell the jacket to pay off the loan balanceBill would have to give Sam any extra proceeds from the sale
Secured Transaction Example:
Possessory Security Interest
13Slide14
Bill gives Sam a loan of $100Sam signs a security agreement (contract) giving Bill a security interest in Sam’s leather jacketBill now has a nonpossessory security interest in the jacket (the collateral)
Sam may continue to use his jacket
Secured Transaction Example:
Non-possessory Security Interest
14Slide15
Upon repayment, Bill no longer has a security interest in the jacketIf Sam fails to repay Bill, Bill may repossess and sell the jacket to pay off the loan balanceBill would have to give Sam any extra proceeds from the sale
Secured Transaction Example:
Non-possessory Security Interest
15Slide16
Common Examples:Inventory for saleEquipment (e.g. combine) needed to run a businessConsumer items (e.g. car purchased on credit)
Non-possessory security interests are very importantThey allow borrowers to continue to use collateral
Facilitating non-possessory security interests is one way that secured transactions laws improve access to credit
Non-Possessory Security Interests
16Slide17
Set of contract and property-based rules governing secured transactionsSecured Transaction: A loan that uses personal property as collateralSecured transactions laws govern:How a borrower gives a security interest in collateral
Lenders’ rights relative to third parties (e.g. other lenders)
Remedies available to lenders if a borrower defaultsProtections available for borrowers to make sure that lenders’ remedies are fairly applied
What is a Secured Transactions Law?
17Slide18
Most, if not all, free market economies around the world have secured transactions laws, or have initiatives to enact or modernize them, in order to facilitate the flow of credit for business development and some consumer purposesBecause access to credit is absolutely necessary for sustained business development, developing and emerging nations have made adoption of secured transactions laws
a priority
The Secured Transactions Global Reform Movement
18Slide19
Examples of the forty plus countries have recently developed, are currently developing, or are beginning to reform their secured transactions legal regimes:Middle East: Yemen, Jordan, Afghanistan, Palestine, Morocco, EgyptAsia: India, China, Sri Lanka, Lao PDR, Philippines, Indonesia, Viet Nam, Cambodia, MongoliaAfrica
: Ghana, Malawi, Nigeria, Burundi, Liberia, Sierra Leone, South Africa, Zambia, South Sudan, UgandaCentral Asia
: Azerbaijan, Belarus, Tajikistan, Uzbekistan, PakistanLatin America: Columbia, Haiti, Peru, Nicaragua, Mexico, Belize, Chile, Costa Rica, Dominican Republic, Trinidad, Tobago
The Secured Transactions Global Reform Movement
19Slide20
Many other countries have expressed interest The development of modern, comprehensive secured transactions regimes has become a global movement to help facilitate development through improved access to business and consumer credit
The Secured Transactions Global Reform Movement
20Slide21
U.N. Commission on International Trade Law (UNCITRAL)Identified secured transactions law as a key foundational building block for economic developmentDeveloped a legislative guide to help nations develop such laws and registry (filing) systemsPrinciples in the guide are highly consistent with Article 9In the process of drafting a model secured transactions law
Secured transactions legislative guide may be found at www.uncitral.org/uncitral/search.html?q=secured+transactions
The Secured Transactions Global Reform Movement
21Slide22
2010 World Bank Study Secured Transactions Systems and Collateral Registries at https://www.wbginvestmentclimate.org/uploads/SecuredTransactionsSystems.pdf
The Secured Transactions Global Reform Movement
22Slide23
Like other emerging economies around the world, Native nations in the United States have expressed the dire need for improved access to capital to spur economic developmentThere are several reasons for the lack of adequate access to capital in tribal jurisdictions. The lack of legal certainty is one of the most significant The need for this important legal infrastructure has been articulated in countless reports, studies, presentations, and articles – typically as the need to “adopt
UCCs”
What is the Relevance for Tribes?
23Slide24
The state of secured transactions laws in Indian Country is very confusing, sometimes significantly different from tribe to tribe, and often non-existentSome tribes have no secured transactions law – state law is the default (e.g., per boilerplate contract language)Some have comprehensive but unique secured transactions lawsSome have adopted the Official Text of UCC Article 9
Some have adopted Article 9 as enacted by the state in which their Tribe’s jurisdiction is located
What is the State of Secured Transactions Law in
Indian
Country Today?
24Slide25
Some Tribes have adopted by resolution the version enacted by the state in which their jurisdictions are located for single transactionsSome have only components, such as collection codes governing repossessionSome have adopted “pre-revision” model tribal versions or state versions (e.g., the Montana Tribal Secured Transactions Code – drafted 1997)
What is the State of Secured Transactions Law in
Indian Country Today?
25Slide26
The environment for supporting secured lending in Indian Country is significantly non-uniform, with the majority of Tribes having no reliable legal infrastructure to support and promote secured financing for business development and consumer purposes.
What is the State of Secured Transactions Law in
Indian Country Today?26Slide27
This confusing environment raises significant risk issues for lenders and other creditors that often result in what are perceived in Indian Country to be discriminatory lending practices (such as higher interest rates, shorter loan terms, or simply no deals), but which are more often than not risk mediation practices commonly and necessarily employed by regulated lenders in high-risk credit transactions.
What is the State of Secured Transactions Law in
Indian Country Today?27Slide28
Similar to many emerging economies, Tribes should consider which fundamental economic development building blocks they need to establish Among these should be a secured transactions law that is both culturally appropriate and that is based on principals that will be understood by lenders and other credit providers
Recommendation for Tribes
28Slide29
Cultural mismatchNot true. Consider all the countries and many different cultures across the globe that have secured transactions laws and/or are engaging in initiatives to adopt themFavors creditorsNot true. Secured transactions laws spell out the “rules” - both the rights and responsibilities – of creditors (lenders), debtors (borrowers), and possibly other parties (such as co-signors or good faith purchasers)
Sovereignty Issues
Sovereignty: self-governance, including making, executing and applying laws . . .
Common Myths
29Slide30
ULC Committee on Liaison with American Indian Tribes and NationsDrafting committee comprised of more than a dozen commissioners, including several that worked on 1999 revisions to Article 9 (adopted by all states), representatives from ten Tribes, other advisors with experience in Indian Country legal/development issues
Model Tribal Secured Transactions Act
30Slide31
Drafting effort took four years; completed in August 2005Largely based on revised Article 9, with key components of Articles 1, 2 and 8 (where UCC Article 9 incorporates provisions from these Articles by reference)Purpose: to draft a “stand-alone” code that will, if other Articles are subsequently adopted, still harmonize (or blend) with those Articles
Model Tribal Secured Transactions Act
31Slide32
MTSTA was drafted to provide a wide range of protections for Tribes, Native-owned businesses and consumers, but also for ease of use by lenders and other creditors who will be familiar with the core rulesIntended to help reduce “cross-border” transaction concerns
Model Tribal Secured Transactions Act
32Slide33
A few of the special considerations in the MTSTA:No affect on sovereign immunity “Fixtures” attached to trust land Possible exemptions from covered property
Consumer protections – limitation on choice of lawManufactured homes – interim financing
Coordination with other Tribal lawTribal customs and traditions
Treatment of self-help remedies
Choice of law and venue issues
Implication of tribal liens
Model Tribal Secured Transactions Act
33Slide34
ULC began MTSTA revision initiative in 2015Consideration of 2010 revisions to Article 9 – what is relevant in these revisions to the MTSTA?From comments, concerns and developments over the last ten years of experience with the MTSTA, what other provisions need to be revised, changed, added?Draft law is
complete; will be published on the ULC website soon
Revised MTSTA
34Slide35
Implementation Guide is also being revisedWill contain specific guidance for tribes that have already enacted the MTSTA to assist in reviewing and adopting the revisionsWill also contain guidance for tribes that are reviewing for enactment for the first time
Revised MTSTA
35Slide36
SO, a good model secured transactions law for tribes is available, and successful implementation can have great results, but implementing the law also requires a means by which a creditor can publicize a notice of its interest in a borrower’s asset.
Filing Systems:The Heart and Soul of ST Laws
36Slide37
If a creditor has a security interest (lien) in a borrower’s asset, and that asset is left in the borrower’s hands, it appears to the world that the borrower still owns the asset “free and clear” Who would want to know if the asset is encumbered by a lien or liens? Prospective buyers of the asset and subsequent lenders who want to use the asset as collateral
Filing Systems:
The Heart and Soul of ST Laws
37Slide38
A filing system (sometimes called a registry or central indexing system) is a system for giving public notice of security interestsEnables creditors and others to search for existing security interests in a debtor’s asset before agreeing to take the asset as collateral or to otherwise acquire the assetProvides a way to determine priority between creditors (borrowers may give security interests in the same collateral to multiple creditors
)
Filing Systems:
The Heart and Soul of ST Laws
38Slide39
Sam signs a security agreement (contract) giving Bill a security interest in Sam’s jacket to secure a loanA month later, Sam also gives Joe a security interest in the jacket secure a loan from Joe Sam fails to pay back both Bill and SamWho gets to repossess and sell Sam’s jacket?Filing systems provide a means to determine the answer
Creditor priority is often governed by which creditor filed the first financing statement
Filing System Example
39Slide40
Purposes of filing systems:Give notice to potential creditors when collateral is subject to security interestsDetermine the priority of various creditorsNOT to derive fee income for the filing system administratorWithout a reliable and accessible filing system, secured transactions laws are
not effective
Filing System Recap
40Slide41
Impact of ST Reform/Filing Systems on Credit Access41
World Bank Study, June 2013
*Collateral Registries for Movable Assets: Does their Introduction Spur Firms’ Access to Finance?
by
Inessa
Love, Sole
Martínez
, and Sandeep Singh; World Bank Development Research Group, June 2013
Variable
Effect
Access to finance
8 percentage points ↑
Access to a loan
7 percentage points ↑
% of working capital financed by banks
1 percentage points up ↑
Interest rates
3 percentage points
↓
Loan maturity
6 months ↑
Study also provides evidence that the impact of the introduction of “movable registries” (UCC filing systems) on businesses’ access to credit is larger among smaller businesses
who also report a reduction in subjective, perception-based measures of finance obstacles.
Collateral Registries for Movable Assets: Does their Introduction Spur Firms’ Access to Finance?
by
Inessa
Love, Sole
Martínez
, and Sandeep Singh; World Bank Development Research Group, June 2013Slide42
Example:In Columbia, a new ST law in 2013 and new centralized collateral registry in March 2014Impact: In 3 months after the system went into effect, more loans were registered than in the 30 years prior. More than 16,000 loans were registered for a value of US$6
billion
Impact of Collateral Registries
42Slide43
In Indian Country, lack of comprehensive, accurate and trusted public filing systems is a significant and all-too-common issue for Tribes that have adopted a secured transactions lawFor these Tribes, their secured transactions laws are essentially
ineffective
Filing Systems in Indian Country
43Slide44
Options available to tribes:Develop and self-administer own filing system
Multiple tribes develop and maintain a filing system as a consortium (multi-jurisdictional)
Enter into compacts with a state to use the state’s filing system (e.g. Crow Nation/Montana; Oglala Sioux (Pine Ridge)/South Dakota; Leech Lake Band of
Ojibwe
/Minnesota; Chippewa Cree (Rocky Boys)/Montana
);
Standing Rock Sioux/North Dakota
Potential pitfalls described in the next two slides
Filing Systems in Indian Country
44Slide45
Tribal secured transactions laws often specify “clerk of tribal court” or other tribal office as the “place to file.” Paper-based systems/non-electronicPROBLEM: Often, the clerk of the court or other staff are not aware of filing or search procedures and/or there are no specified means of actually filing or searching. OR
, even if there is a way to file, creditors do not trust that the Tribe’s system is reliable and/or timely (may be perceived or real)
Self-administer a
T
ribal
F
iling System
45Slide46
Some Tribes utilize a state’s UCC filing system, but do so informally without a compact or other type of agreement
Informally use a State Filing System
46Slide47
PROBLEM: Filing system and tribal law are not legally integrated.State filing systems depend on the use of standard forms, and the contents of those forms are dictated by the state's version of UCC Article 9. Because Article 9 has been significantly revised in recent years (most recently in 2010), its standard filing forms are likely to require information either not required by tribal law or in a different format (e.g., form of name) than is required by tribal law. This practice is “messy” at best and should not be considered a permanent solution by Tribes to support their secured transactions laws
Informally use a State Filing System
47Slide48
Several tribes have entered into (or are in the process of doing so) compacts, memoranda of understanding, or joint powers agreement with applicable state divisions, typically Secretary of State’s Offices, to utilize state UCC filing systems to support the tribes’ secured transactions laws (the states recognize the Tribes’ laws, and agree that use of the state filing system does not infringe on the tribe’s sovereignty or jurisdiction)These arrangements are working well, and are likely the best option currently available to most tribes
Examples: Crow and Chippewa Cree/MT; Oglala Sioux and Cheyenne River Sioux/SD; Leech Lake/MN; and Standing Rock Sioux/ND
Formally Use a State Syste
m
48Slide49
Concept is under developmentWould be privately managed on behalf of participating tribesNot under federal management or oversightState-of-the-art “all-electronic” system
Proprietary Multi-jurisdictional Tribal Filing System
49Slide50
When implementing a filing system, it is important to:Consider what may be the most appropriate filing system option for your tribe, an implementation plan for the filing system, and a maintenance plan (funding, trained staff, public search capabilities, etc.) – does your Tribe have the capacity to host its own robust filing system?Avoid adopting another Tribe’s law without careful consideration of cultural issues, date of enactment, and source of the law (for example, pre-revision state law)
Other Issues:
Law and Filing System Implementation
50Slide51
When implementing a filing system, it is important to:Avoid conflicts of interest in drafting , e.g. having a tribal judge who may have to determine a future legal dispute draft the secured transactions law (potential separation of powers issue)
Other Issues:
Law and Filing System Implementation
51Slide52
Benefits of UCC/MTSTA-based secured transactions laws include:Substantial uniformity among jurisdictionsCertainty in the lending/borrowing relationshipLow transaction costs
Lack of regional uniformity can limit effectiveness of secured transaction lawsLack of certainty in lending/borrowing relationship
High transaction costs
Other Issues:
Regional Uniformity
52Slide53
Three main components to successful secured transactions law:The law itselfFiling systemEnforcement Mechanism(s):Court system
Self-help repossession OR a process that works effectively in lieu of self-help
Other Issues:
Courts and Enforcement
53Slide54
Successful enforcement mechanisms must be:TimelyConsistentAccessibleAlternatives to tribal court system
Other Issues:
Courts and Enforcement
54Slide55
There is a difference between economic activity and economic development A nation may experience economic activity without a comprehensive legal infrastructure and supporting institutions in place, but experience shows it will likely not experience sustainable and robust economic development without it
A Final Note
55Slide56
For the Model Tribal Secured Transactions Act, go to www.uniformlaws.orgClick on Acts, then Find an Act in the drop down box
Go to Model Tribal Secured Transactions Act
for downloadable WORD and PDF versions of:
Model Act
(Revised Act to be published soon)
Implementation Guide
for comprehensive information about secured transactions laws, filing systems, legislative and judicial guidance (Revised Guide to be published soon)
Crow-Montana
Filing System Compact
Other related information
MTSTA Resources
56Slide57
Minneapolis Fed’s Center for Indian Country Development website: www.minneapolisfed.org/indiancountry/
for related articles and working papers
2010 World Bank Study: Secured Transactions Systems and Collateral Registries at
www.wbginvestmentclimate.org/uploads/SecuredTransactionsSystems.pdf
2013 World Bank Study:
Collateral Registries for Movable Assets: Does Their Introduction Spur Firms’ Access to Bank Finance
?
http://
elibrary.worldbank.org/doi/book/10.1596/1813-9450-6477
Other Resources
57Slide58
For Montana Secretary of State/Tribal UCC filing compacts, see http://sos.mt.gov/Business/UCCTribalNations/index.aspFor South Dakota Secretary of State/Tribal UCC filing system memoranda of understanding, see https://sdsos.gov/business-services/uniform-commercial-code/ucc-efs-information/oglala-sioux-tribe-compact.aspx
Other Resources
58Slide59
Sue WoodrowBranch Executive & Assistant Vice Presidentand Co-Director, Center for Indian Country DevelopmentFederal Reserve Bank of Minneapolis/Helena, Montana Branchsusan.woodrow@mpls.frb.org; (
406) 447-3806Steve
PowellAttorney, Federal Reserve Bank of Minneapolisstephen.powell@mpls.frb.org
;
(
612)
204-5019
Patrice Kunesh
Assistant Vice President and Co-Director
, Center for Indian Country
Development
Federal Reserve Bank of Minneapolis
Patrice.kunesh@mpls.frb.org
; (612) 204-5815
Contact Information
59