Security transfer of title

What it means

A security transfer of title is a way of securing an obligation in which the debtor or another person transfers ownership of an asset, or another right such as a receivable, to the creditor. If the debtor repays properly, the right is transferred back. If not, the creditor may satisfy its claim from the transferred right.

Unlike a pledge, where the owner remains owner and the creditor only has a right to be paid from the collateral, in a security transfer the creditor becomes the owner for the duration of the security. The debtor, however, usually continues to use the asset.

The agreement must be in writing. For property, the transfer is entered in the land register and takes effect only on registration. For receivables it resembles an assignment, but with the aim of securing rather than selling.

How it works in practice

Security transfers appear more often with loans between companies or from private lenders than with banks, which prefer pledges. We explain the differences and risks of both forms to clients before they sign.

In the debtor’s books, an asset transferred as security is generally still shown as its asset, because it uses it and bears the risks and rewards. We disclose the transfer in the notes as a restriction on the asset and the related liability.

For companies that have provided security for someone else’s debt, we monitor the debtor’s position and disclose the security as a contingent liability. If the creditor is likely to enforce against the transferred asset, we consider a provision or impairment.

What to watch out for

The debtor carries more risk with a security transfer than with a pledge, because ownership formally belongs to the creditor. The agreement should therefore state clearly when the right is returned, how value is determined on enforcement and that any surplus belongs to the debtor.

Disproportionate terms, such as transferring valuable property for a small loan with no obligation to pay back the difference, may be void or open to challenge. Even stricter debtor protection rules apply to consumers.