What is a Purchase Money Security Interest (PMSI)?
Purchase Money Security Interest (PMSI) is a critical legal claim that enables a lender to seize financed property or demand full repayment in case the borrower defaults. PMSI grants precedence over other creditors’ claims.
In simpler terms, PMSI provides initial rights to entities that finance a consumer’s or debtor’s purchases.
Key Takeaways
- A PMSI grants priority to retailers or suppliers for collecting on debt when a borrower defaults.
- The financed goods serve as collateral to secure the debt, ensuring they can be reclaimed for nonpayment.
- For inventory items, the lender must notify other parties with potential claims and file a UCC-1 legally.
- For non-inventory items, it is mandatory to file a UCC-1 supporting the collateral before or within 20 days after the borrower obtains the goods.
- PMSI offers a unique advantage by allowing creditors to secure priority ahead of others, even if they weren’t the first to perfect the lien.
Understanding Purchase Money Security Interest
Lenders have multiple strategies to safeguard their financial stakes if debtors default on obligations. These include sending debt to collections, taking legal steps, and enforcing liens. PMSI distinctly offers these creditors a right to financed property or its full cash value before others by proving their funds were used for the purchase.
PMSI benefits various commercial lenders, credit issuers, and retailers, enabling them to reclaim seized property if payment defaults occur. It spurs sales growth in B2B transactions by backing industry efforts to front the costs for new equipment and inventory purchases.
Most jurisdictions validate a PMSI once the buyer signs the agreement and the lender formally files a financing statement as per Article 9 of the Uniform Commercial Code. These standardized business rules adopted by most states ease cross-state business activities.
Purchase Money Security Interest Rules
PMSI rules fluctuate based on how lenders utilize loan proceeds for collateral. The fundamental standard is granting PMSI to the first creditor that files a financing statement or perfects its interest in collateral.
PMSI Rules: Inventory Collateral
Section 9-324(b) specifies how to perfect PMSI in inventory:
- PMSI must be perfected when the borrower possesses the inventory.
- Creditors must notify conflicting security holders before perfection.
- File a UCC-1 indicating the collateral sold within these framework imit-lines.
PMSI Rules: Non-Inventory Collateral
Non-inventory collateral rules are more lenient:
- Credit must be proven to have purchased the collateral.
- File a financing statement within 20 days post-possession.
As with inventory PMSI, a UCC-1 filing must be complete before or within 20 days of possession. If filed afterward, PMSI priority is lost to other perfected interests.
Establishing Security Interest as the Seller
To substantiate a PMSI, proving credit was used to purchase the collateral is crucial. For example, if a couch is bought on credit, the retailer holds property security, and legally enforce the PMSI.
Deposits also establish full loan values to avoid defaults, ensuring the retailer can demand reimbursement, including peripheral costs like shipping or taxes.
How to Obtain a Purchase Money Security Interest (PMSI)
A PMSI is gained through credit extended to finance goods, backed by security interests in these bought properties. Steps include filing a UCC-1 and, where required, notifying potential claims stakeholders.
What is a Purchase Money Security Interest under the UCC?
Under UCC, PMSI circumvents the first-come basis prioritization rule-through literacyation processes that meet mandatory filing protocols.
Can PMSI Surpass a Blanket Lien?
Yes, if statutory procedures are met, a PMSI can take precedence over a pre-existent blanket lien, primarily if processed within stipulated timelines.
Example: PMSI in Action
Consider a car loan where financial institutions loan funds ensuring the acquired automobile’s securing interest aligns with a PMSI for property leveraged rights.
The Bottom Line
Creditor prioritization often aligns with filing timing, though PMSI allows deviations that prime the the lender securing the purchase of valuables timely as per perfected prerequisites and statutory mandates.
Related Terms: secured interest, UCC-1, Perfected Lien, Blanket Lien, Inventory Collateral, Non-Inventory Collateral.
References
- Walters Kluwer. “What Is a Purchase Money Security Interest?”
- Cornell Law School. “9-324. Priority of Purchase-Money Security Interests”.
