Termination Statement

Termination statement is a statement that releases a lender's claim on property or collateral owned by a borrower. The lender issues this statement when a loan is repaid, and the borrower has satisfied all obligations to the lender related to that loan. A termination statement also effectively concludes or cancels out the financing statement created by the loan.

A termination statement officially clears the borrower's name of the lien in public records. In most cases, as part of the typical process to obtain a secured loan, a borrower must prove that the property they plan to use as collateral is free and clear, meaning unencumbered by liens, judgments or other claims. Termination statements are important because they provide a borrower with proof that they now own that property outright, free and clear without any claims from other parties.

The Uniform Commercial Code mandates that all secured lenders sign termination statements for loans that are repaid in full. Unsecured lenders are not required to sign this form. The UCC requires that lenders generate and file termination statements in a timely manner, so this paperwork is recorded as soon as possible after the loan has been repaid.

Once a termination statement has been signed, the assets that were pledged as collateral under the previous obligations cannot be used to reassure the payments of future loans without a new loan agreement and approval by both parties.

In some reported cases, unethical borrowers have themselves filed termination statements that wrongly indicate the loan has been terminated and the property securing the loan is now owned free and clear. These borrowers submit this illegitimate paperwork so they can they obtain financing from another lender, who upon doing a cursory search may mistakenly assume the property they plan to secure as collateral is not subject to a claim by another lender or creditor. These borrowers are of course committing fraud, but the new lender may not realize that. Occasionally, an employee of a lender may also file a termination statement by mistake before the loan has actually been satisfied and the hold on the collateral should be released. For these reasons, many lawyers and banking experts recommend that lenders be alert for any red flags that may indicate the termination statement may be suspect. Lenders who have any concerns should confirm that termination statements are in fact valid, especially for those that have been filed in the fairly recent past.