October 2009 Legal Briefs

FDIC’s Final Rule Extends TAG Program 6 Months to June 30, 2010; Participating Entities Can Opt Out of Extension by November 2

Working Around the October 1 Reg Z Changes

Changes to HUD’s Reg X (RESPA) Go In Effect January 1, 2010

Special Risks Surround Using Farm Products as Collateral

FDIC’s Final Rule Extends TAG Program 6 Months to June 30, 2010; Participating Entities Can Opt Out of Extension by November 2

                In the midst of the liquidity crisis in October 2008, the FDIC established the Temporary Liquidity Guarantee Program (TLGP). One component of the TLGP is known as the Transaction Account Guarantee (TAG) program. Insured depository institutions were given the opportunity in 2008 to opt-in to the TAG program, which provided unlimited account insurance for funds held in qualifying non-interest bearing transaction accounts at participating deposit institutions. This insurance was originally slated to expire at December 31, 2009. In exchange for the unlimited insurance guarantee, participating deposit institutions were assessed an additional annualized 10 basis point assessment on any deposit amounts that exceeded the existing deposit insurance limit.
                One unfortunate consequence of this program has been that at least one insurer who used to provide excess deposit insurance has been forced out of the market. Thus, as the TAG program is slated to expire, some depository institutions find themselves in a difficult position. In response to many requests, and following a proposed rule which would have extended the TAG program at a significantly higher assessment premium of 25 basis points, the FDIC published its final rule on September 1, 2009. The final rule amends various provisions of 12 CFR Part 370 and has the following features: (i) it extends the expiration of the TAG program by 6 months, to June 30, 2010; (ii) it increases the assessment fee during the 6 month extended period to within a range from 15 to 25 basis points; (iii) it provides that currently participating entities may opt out of the extension period; and (iv) provides a sample disclosure statement for those entities that opt out.
Increased Assessment
                Beginning on January 1, 2010, a participating bank that does not opt out before the deadline will pay an additional assessment quarterly in accordance with its Risk Category rating. Banks that are assigned to Risk Category I under the risk-based premium system will be charged an annualized fee of 15 basis points on deposits insured through the TAG program. Banks assigned to Risk Category II will be charged 20 basis points. Banks assigned to Risk Category III will be charged 25 basis points. The assessment fee for the TAG program will apply only to deposit amounts in excess of the existing deposit insurance limit of $250,000.
Participating Banks May Opt Out: Deadline is November 2
                Participating banks may opt out effective January 1, 2010. Any currently participating bank wishing to opt out must submit an email to dcas@fdic.gov by NO LATER THAN November 2, 2009. Any bank wishing to opt out should refer to 12 CFR § 370.5(g)(2) for a complete list of information that must be included in the bank’s email to the FDIC.
                If a currently participating bank opts out as described above, the final rule also provides that the institution must give notice to its customers that they no longer participate in the TAG program. The rule provides that an opting-out bank must post a prominent notice in the lobby of its main office and each branch (and on its website if it offers Internet deposit services) by no later than November 16, 2009, clearly indicating that after December 31, 2009, funds in non-interest bearing transaction accounts will no longer be guaranteed in full under the Transaction Account Guarantee Program, but will be insured up to $250,000 under the FDIC’s general deposit insurance rules.
Working Around the October 1 Reg Z Changes
A great deal of last month’s Legal Update was dedicated to the changes to Reg Z effective October 1, 2009, especially the creation of the new category of “higher priced mortgage loans” (“HPMLs”). This new regulation has caused a tremendous amount of angst, as it affects one of the most common residential lending products offered by community banks: 3- and 5-year balloon notes. If you have not done so already, please review last month’s Legal Update concerning HPMLs.
                We have had an enormous amount of questions and comments about the HPML provisions of Reg Z. Although there is no perfect solution to this new regulation, there are several possible work-arounds that you may want to consider for complying with the new Reg Z when the APR triggers HPML coverage (or where HOEPA is triggered by either APR or amount of closing costs):
1.            ARM Loans – The central benefit to a balloon note is that it limits interest rate risk for a lender as it relates to a fixed rate loan. With a balloon note, when the balloon payment comes due (usually after 3 or 5 years), the lender can evaluate the interest rate and adjust it if necessary. One of the more obvious alternatives for dealing with the same risk is to move to an adjustable rate product. The examples provided in the Official Staff Interpretations to Reg Z specifically discuss ARMs in the context of an HPML. The positive news that can be garnered from the examples, is that a lender need not assume that rates will increase when making an ARM for purposes of evaluating the borrower’s ability to make all payments over the first seven years. Rather, the regulation provides that a lender must take into account the highest SCHEDULED payment over the first seven years as of consummation. (See Examples (iv) and (v) from the Examples provided at 12 C.F.R. Pt. 226, Supp. 1).
2.            7-Year Balloons – All that is required to fall within the presumption of compliance is that the lender evaluate the borrower’s ability to make all payments for the first 7 years of the loan. Thus, a 7 year balloon note is permissible under the new HPML rules. This is also made clear in the examples provided by the Official Staff Interpretations. Unfortunately, a 7-year note does contain a great deal of interest rate risk for a fixed rate loan, especially for lenders who are used to making 3-year balloons.
3.            3.5- or 4-Year Renewable Balloon Notes – The Official Staff Interpretations to the new Reg Z make clear that if a lender is unconditionally obligated to renew a balloon-payment loan at the consumer’s option or subject to conditions under the control of the borrower, that in determining the length of the loan for purposes of the presumption of compliance, it is appropriate to count the term of the renewal in evaluating the term of the note for purposes of the presumption of compliance.   See Official Staff Interpretation to 226.34(a)(4)(iv). The Official Staff Interpretations further provide: “Examples of conditions with a consumer’s control include requirements that a consumer be current in payments or continue to reside in the mortgaged property. In contrast, setting a limit on the rate at which the lender would be obligated to renew or reserving the right to change the credit standards at the time of renewal are examples of conditions outside of the consumer’s control.” See Official Staff Interpretation to 226.17(c)(11). Absent the freedom to change the interest rate upon renewal, however, this probably does not offer a solution for purposes of limiting interest rate risk.
4.            Need for Clarification of Presumption of Compliance Rules – As reflected in last month’s Legal Update, one of the larger problems surrounding the new HPML rules is confusion caused by conflicting statements made by different regulators regarding what each think the Reg Z rules mean. Specifically, the FDIC’s statements indicate that because balloon notes of less than 7 years cannot fall within the presumption of compliance, they are effectively prohibited in almost all cases. Whereas the Federal Reserve has stated that if a loan falls outside of the presumption of compliance, it will be evaluated under all the facts and circumstances. I have spoken with several banks that have raised these issues to their regulators. The uniform answer that has been received to date is that the regulators have not given the Reg Z changes a good look yet. Please keep us at the OBA advised if you receive any further interpretation on this. Further, our office is trying to reach out to the Federal Reserve for assistance.
Another issue that many bankers have asked as balloon payments become due after October 1, is whether banks may renew those loans in a way that is not subject to new disclosures as a “refinance” under 12 CFR § 226.20, and thereby avoid HPML treatment altogether. There is no clear answer on this point either. I am skeptical of this approach, as it appears clear to me that this would not work in the context of a brand new renewable balloon note, unless the lender is unconditionally obligated to renew the note, as described above. Again, this is an area where some clarification by the regulators would greatly assist.
Please keep the OBA advised as you get insights on the handling of these new Reg Z changes. This is an area where our collective experience can help all of us. In addition, the new Reg Z changes reflect a classic example of good intentions having unintended negative consequences. We encourage our members to send us concrete examples of how the new HPML rules, that were intended to “protect” consumers, are severely hurting both Oklahoma banks and the customers that they serve.
Changes to HUD’s Reg X (RESPA) Go In Effect January 1, 2010
                Byron’s Quick Hit: HUD’s Reg X, interpreting RESPA, applies to most residential loans made by federally insured institutions (with the exception of temporary loans, including construction loans). Beginning January 1, 2010, the revisions to Reg X described here require the use of a new Good Faith Estimate Form and new conforming HUD-1 and HUD-1A forms, which are intended to facilitate comparison shopping around lenders. In addition, the revised Reg X will restrict lenders to charges reflected on the new GFE, within prescribed tolerances.
On November 17, 2008, the Department of Housing and Urban Development (HUD) published a final rule to amend HUD’s Reg X, which implements the Real Estate Settlement Procedures Act (RESPA). Portions of the final rule became effective on January 16, 2009. The larger portions of the final rule are effective January 1, 2010.
                The stated rationale for the revisions to Reg X is to make it easier for consumers to comparison shop among lenders for their home mortgage loan decisions. As a result, the revised Reg X: (i) prohibits a lender or broker from charging a fee for an appraisal, inspection, or other settlement serviced as a condition for providing a Good Faith Estimate (GFE), (ii) other than passing through the cost of a credit report, it prohibits charging any fee until after an applicant has received the GFE, (iii) mandates changes to the form of the GFE, and (iv) binds the lender to stay within defined tolerances for charges shown on the GFE, with limited exceptions for changed circumstances. For a list of the most current FAQs published by HUD as of this article, visit http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf.
Review of Changes Effective January 16, 2009
1.            Use of New Mortgage Servicing Transfer Disclosure Form
Effective January 16, 2009, Reg X required use of a new, simplified Mortgage Servicing Transfer Disclosure form. The new model form contains several changes. First, it eliminates the previous “history of transfers” quantified to the quartile percentage. Second, it no longer requires the borrower’s signature. Third, it alters the timing of giving the model form. Lenders may now give the model form at the time of application or with 3 business days after receiving an application.
2.            Changes to Four Key Definitions
Also as part of the early round of changes, Reg X updated four key definitions: (i) Application; (ii) Changed Circumstance; (iii) Tolerance; and (iv) Mortgage Broker. Under the new rule, “application” is defined as “the submission of a borrower’s financial information in anticipation of a credit decision…” An application will include the borrower’s name, monthly income, social security number, the property address, an estimate of the value of the property, the amount sought for the mortgage loan, and any other information deemed necessary by the prospective lender. The rule further provides that an application bay be either in writing, electronically submitted, or may be a written record of an oral application.
“Changed circumstances” is defined to mean (i) Acts of God, war, disaster, or other emergency; (ii) information particular to the borrower or transaction that was relied on in providing a Good Faith Estimate (GFE) and that changes or is found to be inaccurate after the GFE has been provided, (iii) new information particular to the borrower or transaction that was not relied on in providing the GFE; or (iv) other circumstances particular to the borrower or transaction, including boundary disputes, the need for flood insurance, or environmental problems.
“Tolerance” is the “maximum amount by which the charge for a category or categories of settlement costs may exceed the amount of the estimate for such category or categories on a GFE.”
“Mortgage Broker” means a person, other than an employee of a lender, or an entity “that renders origination services and serves an intermediary between a borrower and a lender in a transaction involving a federally related mortgage loan…”
3.            Allowance of Use of Average Charges
The revised Reg X permits the use of an average charge, rather than an actual charge, by a settlement agent on a settlement statement with respect to settlement services. An average settlement charge is not permissible for any service for which the charge is based upon the loan amount or the property value. Examples of charges for which charging an average charge is not permissible include transfer taxes, interest charges, reserves or escrow, and any type of insurance. The provisions for use of average cost pricing is located at 24 C.FR. § 3500.8(b)(3). It is fairly complex, and contains requirements for periodic recalculation and long-term storage (at least 3 years) of records showing the average prices are accurate.
Amendment of Good Faith Estimate (GFE) and HUD-1/HUD 1A Settlement Statement Forms
                The largest change of the final rule is the complete reconfiguration of the GFE model forms for RESPA-covered transactions. The new form is to be used for the GFE no later than January 1, 2010. It can be used before that time (but see discussion of risks associated with early implementation below). The new form is available at: http://www.hud.gov/content/releases/goodfaithestimate.pdf.
The new GFE is three pages long and contains significant changes designed to assist in the stated goal of assisting consumers in (i) understanding the proposed transaction and (ii) facilitation of comparison shopping between lenders. The GFE consolidates all closing costs into major categories, which correspond to designated lines that are used at settlement with the HUD-1/1A forms.
1.            The Application Process and the New GFE
The new regulation sets forth a much more structured application process than has existed up until now under Reg X. HUD’s stated rationale is to promote the goal of promoting consumer shopping among mortgage originators.
                Timing Requirement – Once an applicant submits all information deemed necessary by a loan originator to process a GFE, the loan originator is required to deliver or mail a GFE to the applicant within three business days.
                Limitation on Fees – Loan originators will be strictly limited on charges that can be charged to a potential borrower for providing the GFE. The only charge that a loan originator may charge associated with providing a GFE is a “bona fide” and reasonable fee for obtaining the consumer’s credit history. Loan originators are expressly prohibited as a condition for providing a GFE, any fee for an appraisal, inspection or any similar settlement service. Further, other than the credit history fee, a loan originator may not charge any other fees until the applicant has received the GFE. The GFE may be given by hand delivery or by mail, or if the applicant agrees, by fax, email, or other electronic means.
                Gathering Other Information – Although a loan originator may gather whatever information it deems necessary to process an application, it may not require submission of further information beyond the application as a condition for providing a GFE. For example, it is not permissible to require that an applicant submit tax returns or verify the income reflected in an application as a condition for providing a GFE.
2.            Availability of Terms Described in GFE
With the adoption of the revised Reg X, HUD is imposing much greater restrictions on the tolerances and disclosures associated with the terms described in the GFE. HUD’s stated intent is to protect the public against “bait and switch tactics” and to allow consumers a window within which to comparison shop between lenders.
10-Day Guarantee – In general, lenders must make the terms described in the GFE available for at least ten business days from when the GFE is provided (the lender may make this period longer). However, the following terms are excepted from this requirement: (i) the interest rate, and (ii) charges and terms dependent upon the interest rate (including the charge or credit for the interest rate chosen, adjusted origination charges and per diem interest). Thus, the charges that may not change in the first 10 days include: (i) required services selected by the lender or borrower, (ii) title services, (iii) lender’s title insurance, (iv) owner’s title insurance, (v) government recording charges, (vi) transfer taxes, and (vii) initial escrow deposits. The exception allowed for interest rate is in recognition that interest rates cannot be guaranteed without a rate-lock. Thus, lenders should specify in the GFE how long an interest rate will be available.
If the borrower does not express an intent to continue with an application within 10 days (or longer if specified by the lender), the loan originator is no longer bound by the GFE. If the borrower later renews interest, a new GFE may be provided.
Tolerances – In addition to the 10-Day Guarantee, loan originators will also be prohibited from exceeding at settlement certain amounts listed on the GFE, absent “changed circumstances.” Charges on the GFE will be subject to one of three tolerance limit: zero tolerance (no change allowed), ten percent tolerance, or no tolerance limitation (any change will be allowed).
Absent changed circumstances, the following GFE charges are subject to zero tolerance, and thus cannot be changed upward: (i) origination charges, (ii) credit or charges for the interest rate chosen (while the interest rate is locked), (iii) adjusted origination charges (while the interest rate is locked), and (iv) transfer taxes.
Absent changed circumstances, the SUM of the following charges at settlement may not exceed 110% of the sum of the amounts listed on the GFE: (i) lender-required settlement services (if the lender selects the third-party settlement service provider), (ii) lender-required services, title services and required title insurance, and owner’s title insurance (when the borrower uses a settlement service provider identified by the loan originator), and (iii) government recording charges.
The amounts charged for all other settlement services included on the GFE may change at settlement.
3.            Changed Circumstances and Revised GFE
Generally, subject to the tolerances described above, a loan originator is bound to the settlement charges listed on the GFE. However, a lender may create a new GFE if there are changed circumstances or for borrower-requested changes. The definition of “changed circumstances” is contained above. Absent things such as Acts of God, the most common changed circumstances will result from the borrower’s inability to corroborate information on the application upon which the lender has relied in providing the GFE. Because a lender is prohibited from requiring verification of a borrower’s application information, it is likely that lenders will find that the information stated by the borrower is incomplete or inaccurate. In addition, changes to the amount of the loan, the estimated value of the property are other examples that can cause changed circumstances. Specifically EXCLUDED from the definition of changed circumstances are market price fluctuations (without more).
 A loan originator must provide a revised GFE within three business days of the changed circumstances. The revisions can only reflect increases in charges to the extent the changed circumstances actually result in higher charges. In addition, in each instance the lender must document the reason that new GFE was provided and must retain documentation of the reasons for at least 3 years after settlement.
If a lender later locks an interest rate with the borrower, a new GFE must be given to the borrower to show the revised interest rate dependant charges and terms. Unless there have been other changed circumstances, no other changes may be made on the new GFE.
4.            Special Disclosure for New Home Purchases
In the case of a new home purchase, there can often be significant delay between a loan application and the eventual funding of the loan. In recognition of this fact, the final rule provides that a loan originator may provide a clear and conspicuous disclosure to the borrower that a revised GFE may be provided at any time up until sixty calendar days prior to the closing. If a loan originator fails to give this disclosure, the standard rules apply, and a lender will be bound by the GFE (again unless changed circumstances apply).
5.            Opportunity to Cure
If the lender finds itself in the unfortunate position of having delivered a GFE which underestimated the charges, outside the range of the tolerances allowed above and without the benefit of changed circumstances, the loan originator will be deemed to have violated Section 5 of RESPA, UNLESS the loan originator reimburses the borrower any amount by which the tolerances were exceeded. Such reimbursement may be made at settlement or within 30 calendar days of settlement (mailing within 30 days is sufficient).
6.            New HUD-1 and HUD-1A Forms
Along with a new GFE form, Reg X provides new HUD-1 and HUD-1A settlement forms that must be used on or before January 1, 2010. The new rule completely modifies these forms to conform to the new classifications, and a number of modifications to match classes of charges between the new GFE and HUD-1/1A forms. This will facilitate not only comparison between lenders but also comparison between the estimated charges on the GFE to the actual settlement charges charged at closing. There is also a new third page added to the new HUD-1 that has the purpose of directly comparing the estimated charges in the GFE to the final settlement charges used on the HUD-1. To obtain copies of the new HUD-1 and HUD-1A forms, go to: http://www.hud.gov/content/releases/hud-1.pdf and http://www.hud.gov/content/releases/hud-1a.pdf.
Deciding When to Begin Using the New GFE, HUD-1 and HUD-1A Forms
                As stated above, the final rule requires the use of the new GFE and HUD-1/1A forms on or before January 1, 2010. Loan originators are allowed to use the forms prior to January 1. However, lenders should be aware that if they choose to use the new forms prior to the mandatory compliance deadline, they will become subject to all of the new provisions that go with the forms, which are not otherwise mandatory until January 1, including the restrictions on tolerance limits and the restrictions on the provision of revised GFEs.
Special Risks Surround Using Farm Products as Collateral
                Most lenders understand and use terms that originate from the Uniform Commercial Code (UCC). Some examples include “security agreement,” “perfection,” and “secured creditor.” Many hours and pages are dedicated to how a lender may protect itself when it loans money by taking a security interest in collateral offered by a borrower and what the UCC has to say about it. You may be very familiar with some of the general rules that flow out of the UCC, like “first in time, first in right.” Of course, for every rule, there seems to be exceptions, even within the UCC. However, there are instances where focus solely upon the UCC can lead to an incomplete picture of the law of secured transactions. One instance was discussed in an article written here in the August 2009 Legal Update, entitled “After the Loan: Don’t Lose Your Priority to a Federal Tax Lien.” (If you haven’t read the article, you should).
                This article will discuss another instance where a federal statute supersedes the provisions of the UCC: the Food Security Act (the “FSA”). The FSA applies to “farm products,” including crops and livestock. Lenders who use farm products as collateral must be aware of the provisions of both the FSA and the UCC in order to obtain and maintain a priority security interest in their collateral.
                The central provision of the Food Security Act is contained at 7 U.S.C. § 1631(d), which states:
Except as provided in [Section 1631(e)] and notwithstanding any other provision of Federal, State, or local law, a buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected; and [even though] the buyer knows of the existence of such interest.
Wow! This is exactly the opposite result of the typical scenario under the UCC. Generally, under the UCC, a buyer of goods in the commercial context is responsible to search and make sure that the goods they are buying are not subject to an existing security interest placed upon it by the seller. Normally, if a buyer ignores this responsibility, he will take the property purchased subject to the existing security interest in the goods purchased. Here, however, the FSA prescribes the opposite result. Unless the Act provides an exception, even if a buyer has actual knowledge of an existing security interest in farm products, he will take free of any existing security interest, even one that has been properly perfected under the UCC.
When a Perfected Security Interest Will Follow the Farm Products Collateral
Prior to the enactment of the FSA, a buyer of farm products from a person engaged in farming operations would NOT take free of a security interest created by the farmer under UCC § 9-320. In 1985, Congress overrode the result of the UCC, by adoption of the FSA. The FSA contains three exceptions to the rule provided at Section 1631(d). If the creditor fits into any of the three exceptions, its security interest will carry over against the buyer. As discussed below, two of the exceptions depend on a state’s enactment of a central filing system (“CFS”), as specified in the FSA. In the absence of a CFS in a particular state, a creditor must give the actual buyer in question written notice of its security interest, as provided under the FSA, or the buyer will take free of the creditor’s interest.
1.            State Adoption of Central Filing System and the Exceptions Thereunder
The FSA provides that any state may enact a “Central Filing System” for purposes of the Act. In order to have a CFS, the state must provide a system for filing effective financing statements or notice of such financing statements on a statewide basis and the system must be certified by the U.S. Department of Agriculture. A CFS under the FSA IS NOT the same as the central filing system that is discussed for purposes of UCC filing and perfection. In addition, a CFS may be established for all farm products within a state, or only for selected farm products.
As of this article, only 19 states have a CFS certified by the U.S. Department of Agriculture: Alabama, Colorado, Idaho, Louisiana, Maine, Minnesota, Mississippi, Montana, Nebraska, New Hampshire, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Utah, Vermont, West Virginia, and Wyoming. A review of this list shows that Oklahoma does have a certified CFS, and it does relate to all farm products. However, of the six states directly adjacent to Oklahoma, only Colorado and New Mexico have certified CFSs (Colorado covers all farm products; while New Mexico covers only selected farm products). As discussed below, this makes it problematic for Oklahoma lenders to use farm products as collateral if there is any chance that a borrower could take his harvested crops or livestock to another state for sale.
For farm products produced in a state with a certified CFS, a secured party may take steps to protect its security interest by registering its security interest with the Secretary of State in the state where the farm products are produced. Specifically, Section 1631(e) provides that a buyer will be subject to an existing security interest created by the seller of farm products if:
i)             the buyer has failed to register with the Secretary of State prior to the purchase of the farm products AND the secured party has filed an effective financing statement or notice that covers the farm products being sold; or
ii)            the buyer receives from the Secretary of State written notice that specifies both the seller and the farm product being sold by the seller as subject to an effective financing statement or notice AND if the buyer does not secure a waiver or release of the specified security interest.
Information about the Oklahoma Central Filing System, including forms and guides is available at: http://www.sos.state.ok.us/cfs/aglien2.htm. Generally lenders must either record its security interest with the Central Filing System and/or give written notification to all potential buyers. Written notification is effective for one year. If a loan is repaid, the lender must file a termination with the Oklahoma CFS within 20 days, unless otherwise agreed to by the farm producer.
2.            Exception Where Buyer Receives Written Notice from Secured Party
Whether farm products are produced within a state having a CFS or not, a secured party can maintain its security interest by giving the actual buyer written notice of the security interest within 1 year prior to the sale of the farm products in question. The requirements of the notice are described at 7 U.S.C. § 1631(e)(1). Information that must be included includes the name and address of the secured party, the name and address of the person indebted to the secured party, the social security number or tax i.d. number of the debtor (or other unique identifier of the debtor), and a description of the farm products subject to the security interest, including the amount of such products where applicable, crop year, and the name of each county or parish in which the farm products are produced or located. The notice must also specify the payment obligations imposed on the buyer as a condition for the waiver or release of the security interest. In addition, any such notice must be amended in writing within 3 months of any material changes.
What Is a Lender to Do?
                There are several practical issues which make it very difficult for a lender to protect itself in relation to farm products as collateral. For farm products located or produced in states without a CFS, the only way for a secured party to protect itself is to obtain an exhaustive list of potential buyers of the farm products in question and give the written notice required under the Act to each potential buyer. Even under the best of circumstances, this is a suspect solution. Lenders may have to rely upon their borrower to provide them a list of prospective buyers in certain instances. Even if borrowers do so in good faith, it is certainly possible that a borrower would find a new buyer that it did not disclose to the lender.
                In addition, even where farm products are produced in a state like Oklahoma that has a CFS, most farm products are movable and can be relocated across state lines. For example, suppose your bank makes a loan secured by cattle. Even if the cattle was born or was purchased within Oklahoma, it is not at all uncommon for cattle to be moved across state lines to different feed lots or to be put to pasture in another state. Where was a cow that was born in Oklahoma, but spent the last 3 months of its life on a feed lot in Kansas produced? Even if the answer is Oklahoma, who is to say that anyone at a cattle auction in Kansas, Missouri, Texas or Arkansas is checking to see where the cattle was “produced.” (Notice none of these states have a Central Filing System).
                These issues may make it problematic to depend upon farm products as collateral, especially where a borrower has products that are easily moveable or where they live near enough to the state border to transport products to another state.
                ONE IMPORTANT NOTE: It is never sufficient to depend on the Food Security Act Central Filing System alone, even in Oklahoma. The FSA only gives effect to a security interest that exists under state law. Thus, a lender must continue to get the traditional financing statement and should be continue to file its UCC where appropriate to perfect its security interest as against other secured creditors. However, in the case of farm products, lenders should carefully evaluate the special risks associated with this type of collateral.