Electronic Chattel Paper : Invitation Accepted

In 1999, Revised U.C.C. Article 9 governing secured lending was updated to permit the creation “electronic chattel paper” (ECP). Traditional chattel paper is used widely in some sectors of the US economy to finance equipment purchases in part because a chattel paper lender who perfects by taking possession can achieve priority over a pre-existing secured lender who perfected by filing. Revised U.C.C. § 9-105 defined a new form of “control” over ECP that would be treated as equivalent to possession of traditional chattel paper, permitting chattel paper financiers to retain their super-priority status with electronic documents. Because chattel paper transactions often take place outside regulated financial institutions, and the risks of recognizing ECP were unknown, the drafters of Revised Article 9 decided to set a high technological threshold for showing control of ECP in order to manage novel risks indirectly. Since 1999, lenders have worked slowly and steadily to create the necessary infrastructure for ECP markets. Widespread use of ECP benefits lenders by reducing the cost and increasing the speed of their administrative processes, and also benefits investors by lowering the cost of securitizing loans and leases in the form of ECP. Nissan Motor Acceptance Corp. completed the first securitization of ECP in 2005, but the global financial crisis in 2008-2009 stalled adoption of ECP, especially in the US automobile industry which was hit particularly hard in resulting recession. By 2010, adoption rates for ECP in chattel paper finance markets were again growing. Amendments to Revised Article 9 finalized in 2010 lower the technological threshold required to establish control, which should further encourage increased use of ECP