Depending on the country where it is physically located, the artwork used as loan collateral may remain in the borrower’s possession or it may have to be transferred to the lender.
In the USA, the art collateral is often left with the borrower and the lender registers its security interest under the Uniform Commercial Code. This way other creditors are put on notice and the lender’s interest takes priority over those of other creditors. France, Belgium and Spain have enacted laws based on the US model, while in other (art market) European countries such as Switzerland, dispossession remains the only choice. In Greece, the Greek Civil Code (article 1214) and the special Law 2844/2000 provide for the creation of a pledge without dispossession with registration of the lender’s security interest in public books (πλασματικό ενέχυρο). However, the special Law which would establish the creation of the public books is still pending, rendering the current legislative provisions inactive.
Regardless of the jurisdiction, in order for a work of art to qualify as loan collateral, the lender must be satisfied that some basic requirements are met.
For one, the borrower must have valid legal title in the artwork. This may be considered self evident, but in the art world title risks abound even for good faith possessors. Authenticity of the work of art also goes without saying but more often than not questionmarks are posed. Provenance for both valid title and authenticity is key. It is the case that for the purposes of using art as collateral, only artworks with so-called ‘pedigree’ (strong, undisputed provenance) can be eligible.