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FSM to launch new Secured Transactions Act

Palikir, POHNPEI (Department of Economic Affairs): August 30, 2006 - Congress passed a new law last November that will make it much easier and less expensive for businesses in FSM to get bank financing for start-up, purchase of new equipment and continuing operations.

The new Secured Transactions Act will make capital available to more businesses at lower rates than has been possible until now. Public Law 14-34 becomes effective on October 1, 2006.

One of the major problems facing FSM businesses is that they cannot get financing at reasonable rates of interests. The reason for the problem has been that the risk of lending has been so high that banks either cannot lend at all, or they lend less money than needed at very high interest rates.

The risk is caused by the inability of a lender to recover on a loan if the borrower fails to pay. Lenders have been unable to take collateral for loans because few small and medium-sized businesses have land and buildings they can mortgage, and there has been no way to secure loans with movable property.

The new Secured Transaction Act fixes the problem for movable property. It gives lenders a way to take security interests in movable property to secure payment of loans.

The property can be equipment, inventory, accounts receivable, or any other type of movable property. A lender and a borrower simply agree that the lender can take and sell the property if the borrower fails to repay. The agreement does not need to be notarized, and can even be done by an exchange of e-mails or faxes.

The law also reduces the risk to lenders by protecting them against other parties such as other lender or buyers of the collateral. The law establishes the priority of all parties that have competing claims to the property. In general, the first party to make its interest public has the highest priority in the property if the borrower fails to pay.

The most important way of making a security interest public is for the lender to file a simple notice in an electronic filing office via the internet. The notice includes only the name and address of the borrower, the name and address of the lender, and a description of the collateral. The description of the collateral can be very general, so the security interest can cover future collateral such as replacement inventory or future accounts receivable of a merchant. All that is needed to file notices and to search is an internet connection.

The filing office is established in the Department of Economic Affairs, and is found on the website at www.dea.fm/securedtransactions.

It includes instructions on how to file notices and to search for existing notices in the filing office database. There is no fee for searching, and the fee for filling a notice is $15.

The new law and the filing office give new opportunities to FSM businesses to grow and prosper with greater access to capital at lower interest rates.

For more information visit the Filing Office website: www.dea.fm/securedtransactions

or contact:
The Department of Economic Affairs
P: (691) 320-2646/5133
F: (691) 320-5254