In this video, 20.01 – Secured Transactions – Lesson 2, Roger Philipp, CPA, CGMA continues Lesson 1 and describes types of assets that can serve as collateral for a loan. There are three ways for a creditor to protect its claims against a borrower: by obtaining security, called collateral, by obtaining a guarantor through suretyship, or by forcing the debtor into bankruptcy and hoping to get paid as either a perfectly secured creditor or a generally unsecured creditor.

Secured transactions involving tangible and personal property, as regulated in Article 9 of the Universal Commercial Code, are the subject of this lesson. In addition to inventory, equipment, and consumer goods, chattels (or documents that demonstrate both a monetary obligation and a security interest in specific goods or equipment) can serve as collateral for a loan. The creditor legally takes the asset as collateral for the loan and will take physical possession of the asset if the debtor defaults on its payment obligations.

In addition, by obtaining a security interest, a creditor protects itself from DOTS – the debtor, other creditors, a bankruptcy trustee, and any subsequent purchaser of the debtor who is unaware of the perfection. To protect itself from the debtor, the creditor need only attach. To protect itself from third parties, the creditor must attach and perfect the security interest.

Roger concludes the video with a definition and description of PMSIs or Purchase Money Security Interests.

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Preview the video transcript:

Here are a few other points. Movable securities are documents that both document a monetary obligation, such as the purchase of equipment on credit. The loan agreement then becomes security for another loan from the previous creditor and a security interest in certain goods.

It could be intangible assets like accounts receivable, claims for payment for goods or services, or it could be negotiable securities like warehouse receipts or bills of lading. So it could be a tangible or intangible security. But the key point is this: I'm lending you money or giving you a loan so you can buy this asset.

What happens is we then take the asset as collateral for the loan. Example: I go to the store. This is Sears, this is RP, I go to Sears and I say, "Hey, I like that TV, how much is it?" They say $3,000, "Wow, I love this new 147-inch TV," right, they just keep getting bigger, so I go in and I say, "Okay, let me get that," so I give you my credit card, for example. And I give you my credit card so I can buy the TV. I give you my credit card, you swipe it, and basically you give me the loan to buy the asset.

And let's say this is a television. What is the asset for me, the television, a consumer good? You then take the television not physically but legally as collateral for the loan. That is, if I default and stop paying, you come to my house and take my television back. My kids won't like you, but you take my television back. The same goes for appliances: you lend me money, I buy an appliance, legally you take that appliance, and if I don't pay, legally you come and take the appliance back. So that's the concept we're dealing with.

To do that, who were you trying to protect yourself from, who were the creditor trying to protect themselves from? You were trying to protect yourself from DOTS, DOTS. You were trying to protect yourself from the debtor, from other creditors, from a bankruptcy trustee (circle B means bankruptcy in the next few sections), or ultimately from a subsequent purchaser of the debtor, OK? Let me show you that example.

All right, they want to protect themselves from the debtor, which means you gave me the money or the loan to acquire the asset. They want to protect themselves. If I don't pay you, you want it back. From other creditors. You loan me money to buy the TV. I don't have the TV anymore, but I have other assets or I have other creditors. Now, let's take a step back.

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