state + local

Banks, auto dealers, farm implement dealers, new business start-ups and other enterprises are bracing for a significant disruption in commercial lending in the event of a government shutdown this week.

"I truly believe that commercial lending is going to come to a halt," said Gene Hennig, a leading business lawyer with Gray Plant Mooty in Minneapolis.

According to Hennig, the shuttering of the secretary of state's office will prevent lenders from recording their security interests in collateral other than real estate, which will put a halt to many commercial loans backed by "personal" property such as factory and office equipment, intellectual property and other valuables. (Real estate titles are handled at the county level, so are not affected by the closure of the secretary of state's office.)

The problem will carry over into some consumer finance transactions as well, Hennig said. Lenders won't be able to record liens against car titles. Car dealers will find it difficult to use unverified titles on incoming trades to obtain inventory financing. Farm implement dealers won't be able to record liens against tractors. And yacht dealers won't be able to record financing statements as required with the Department of Natural Resources, he said.

"These shutdowns are going to have serious impact on ordinary folks," Hennig said. "It sure is a mess."

Tess Rice, general counsel for the Minnesota Bankers Association, agreed. Collateral that secures a considerable amount of commercial lending, if it's not real estate, must be "perfected" by recording a Uniform Commercial Code (UCC) document with the secretary of state's office, she explained. If that can't be done, then banks would have no protection in the event a borrower files for bankruptcy, and there would be no way to ensure that one lender had priority over another.

The UCC filings contain state and federal tax liens as well as financing statements that show collateral used to secure loans, said Pat Turgeon, spokeswoman for the secretary of state's office. In addition, the office has a method for buyers of farm products to get information about liens against the farm products they buy, she said.

In 2010, the office averaged 17,029 requests a month for information about UCC, farm product and tax lien filings.

In addition, the state's database of financing statements would be unavailable during a shutdown, Rice said, so lenders couldn't check to see if another lender had already filed a lien against the collateral of a prospective borrower.

"I don't think most banks would make a loan if they couldn't perfect their security interests," Rice said. "Short-term, I guess they would just be putting off these loans and just hoping this shutdown is not of a lengthy duration."

Scott Lambert, executive vice president of the Minnesota Automobile Dealers Association, said car dealers expect to keep operating, but a shutdown of the state's driver and vehicle services operations will make the process of selling cars much more difficult.

During a shutdown, dealers won't be able to look up car titles online, Lambert said, which will make it much harder to verify that a customer trading in a car actually owns it, or that the title is clean.

"We're kind of going back to the Pony Express days, is what we're doing," he said. "We can probably get by a long weekend, but this is going to get harder as time goes on."

Some deputy registrars will remain open and would continue processing title and registration transactions, Lambert said. But only the state can issue a car title. Dealers who sell a car will issue the buyer a 21-day permit, but if the shutdown persists past three weeks, they'll be driving illegally, he said.

Paul Rubin, who owns the Buick and GMC Superstore in White Bear Lake, foresees other problems, too. He said if dealers can't get the titles on trade-ins, "We can't borrow money on the car to put it into inventory. And so, if it was a prolonged thing, potentially you would have dealers that will have cash-flow problems."

Rubin said he can only hope that elected officials will see the damage that the budget stalemate may cause and come to a resolution.

"I think the whole thing is ridiculous," he said.

Dan Browning • 612-673-4493