If the bank has an enforceable security agreement with the borrower, it has a security interest in the vehicle regardless of what the vehicle’s certificate of title states. However, the bank will not have a perfected security interest until the bank files for an amended certificate of title on the vehicle with the Secretary of State. With a security interest, the bank has rights in the vehicle as against the borrower; if that security interest is perfected, the bank will have priority rights in the vehicle as against the borrower’s other creditors.

Attachment of the Security Interest

A security interest attaches as of the date of an enforceable security agreement giving the bank rights in the vehicle. 810 ILCS 5/9-203(a). A security agreement is considered enforceable if the bank gave value to the borrower, the debtor has rights in the collateral, and the security agreement adequately describes the collateral. 810 ILCS 5/9-203(b). These requirements are minimal: where a borrower signed an application for a vehicle’s certificate of title that noted the bank’s lien, without signing a formal security agreement, a court held that a bank had an enforceable security interest in the vehicle. Peterson v. Ziegler, 39 Ill.App.3d 379 (5th Dist. 1976).

Perfection of the Security Interest

If a vehicle’s certificate of title is issued by Illinois, the perfection of a security interest in the vehicle is governed by the Illinois Vehicle Code. 810 ILCS 5/9-303(c). The Vehicle Code states that a security interest in a vehicle is perfected by “delivery to the Secretary of State of the existing certificate of title, if any, an application for a certificate of title containing the name and address of the lienholder and the required fee.” 625 ILCS 5/3-202(b).The certificate of title is prima facie evidence of the facts appearing on it, including the fact that a bank has a security interest in the titled vehicle. 625 ILCS 5/3-107(c).

However, if a loan officer executes a release of the security interest and delivers that to the owner of the vehicle, the bank’s security interest is no longer perfected. 625 ILCS 5/3-207In re Lortz, 344 B.R. 579, 585 (C.D. Ill. Bankr. Ct. 2006). And, once a security interest becomes unperfected, that secured creditor loses priority to other creditors. UCC Section 9-317, Official Comment 4.