The security package: UCC-1 liens, lockboxes, DACAs and cash dominion
The security package: UCC-1 liens, lockboxes, DACAs and cash dominion
Saying a loan is "secured" tells you very little. The protection comes from a specific set of legal tools, together called the security package. Each tool does one job. A strong package uses them together so there's no gap between the asset, the cash it produces, and the lender.
This article covers the four tools you'll see most often in US asset-based and private credit lending.
UCC-1 financing statement
A UCC-1 is a public filing, usually with the secretary of state where the borrower is organized, that says a lender has a security interest in certain assets of the borrower.
What it does: It perfects the lender's security interest in many types of collateral, which means the lender's claim holds up against later creditors and in bankruptcy. It also establishes priority. In general, the first to file wins.
What it doesn't do: It doesn't give the lender any control. The borrower still holds the assets and still receives the cash. And for some types of collateral, including bank deposit accounts and certain digital assets, filing isn't the strongest way to perfect, or isn't enough on its own.
A UCC lien search, checking the registry for existing filings against the borrower, is a basic step before any secured loan. It shows whether someone else already has a claim.
Lockbox
A lockbox is a bank-operated arrangement where the borrower's customers send payments to an address or account the borrower doesn't directly manage. The bank processes the payments and deposits them into a designated account.
What it does: It routes customer payments away from the borrower's day-to-day operating accounts and into an account the lender can monitor.
What it doesn't do: By itself, a lockbox doesn't stop the borrower from moving money out of the receiving account. That's what the next tool is for.
Deposit account control agreement (DACA)
A DACA is a three-party agreement between the borrower, the lender, and the borrower's bank. The bank agrees to follow the lender's instructions about the account without needing further consent from the borrower.
What it does: Under UCC Article 9, control is the only way to perfect a security interest in a deposit account as original collateral. The DACA provides it.
DACAs come in two forms:
- Springing (or shifting). The borrower operates the account normally until the lender sends a notice, usually after a default. Then the bank stops taking the borrower's instructions.
- Blocked (or full control). From day one, the borrower can't withdraw. Funds move only at the lender's direction.
Cash dominion
Cash dominion is the arrangement where collections are swept, usually daily, from the controlled account to pay down the loan. The borrower then draws again as needed against its borrowing base.
What it does: It means every dollar collected from the collateral reduces the lender's exposure before the borrower can spend it.
Like DACAs, cash dominion can be springing, triggered by a default or by availability falling below a threshold, or full-time from the start.
How they fit together
- UCC-1 stakes the lender's public claim on the collateral and sets priority.
- Lockbox directs customer payments to a specific account.
- DACA gives the lender legal control over that account.
- Cash dominion uses that control to apply collections to the loan.
Remove any one and there's a gap. A UCC-1 without account control means the lender has a claim on cash it can't reach. A DACA on an account customers don't pay into protects nothing.
Why it matters
The security package is what turns "secured" from a word into a remedy. When you review a secured credit, ask for each tool: is it in place, what type is it, and when does it trigger? Then ask how anyone would know if cash started arriving somewhere else. That last question is where continuous verification earns its place.