Distinguish between a security agreement and a financing statement.

Distinguish between a security agreement and a financing statement.

• A. Financing statement creates the security interest.
• B. Security agreement creates the security interest; financing statement is a public notice filed to perfect and establish priority.
• C. Security agreement is voluntary; financing statement is mandatory by law.
• D. Financing statement records the existence of lien; security agreement records payment terms.

Answer: (B)

In secured transactions, the lien comes from two different pieces of the puzzle: creation and perfection. The security agreement is the contract between debtor and secured party that actually creates the security interest in the specified collateral; it must be signed and describe what is encumbered, and the security interest attaches to the collateral when those conditions are met. The financing statement, on the other hand, is a public notice filed with the appropriate filing office to perfect the security interest and to establish priority against other creditors. It does not create the lien by itself. Perfection (and priority vis-à-vis third parties) comes from filing the notice, in combination with the security interest having attached. So the correct idea is that the security agreement creates the security interest, while the financing statement is a public filing used to perfect that interest and determine priority.

In secured transactions, the lien comes from two different pieces of the puzzle: creation and perfection. The security agreement is the contract between debtor and secured party that actually creates the security interest in the specified collateral; it must be signed and describe what is encumbered, and the security interest attaches to the collateral when those conditions are met.

The financing statement, on the other hand, is a public notice filed with the appropriate filing office to perfect the security interest and to establish priority against other creditors. It does not create the lien by itself. Perfection (and priority vis-à-vis third parties) comes from filing the notice, in combination with the security interest having attached.

So the correct idea is that the security agreement creates the security interest, while the financing statement is a public filing used to perfect that interest and determine priority.