What does 'perfection by possession' mean in collateral priority?

• A. Perfection by possession occurs when the borrower has possession of the collateral
• B. Perfection by possession occurs when the lender takes physical possession of collateral
• C. Perfection by possession requires state registration
• D. Perfection by possession is identical to perfection by filing

Answer: (B)

Perfection by possession means the secured party perfects its security interest by taking physical possession of the collateral. This is a direct, tangible form of control over the asset, typically used for tangible goods or negotiable instruments. When the secured party has possession, it establishes a clear claim to the collateral and helps ensure priority over other creditors who don’t have an equivalent perfected interest. It differs from perfection by filing, which relies on publicly recording the security interest rather than custody of the asset, and from perfection by control for certain asset types (like deposit accounts or investment property) where possession isn’t the mechanism used. The core idea is that control is achieved through the lender’s physical possession of the collateral.