Underwriting and Servicing

Every facility begins with a written credit memorandum: the borrower and its principals, the purpose, the collateral or cash flows and their valuation under stress, the proposed structure and covenants, the risks and their mitigants, and the recommended limit. It is reviewed by a credit committee that includes people not involved in originating the deal, and it is approved, declined or returned with conditions. No facility is approved by the person who sourced it.

Before the memorandum is written the borrower is identified. Know-your-business review confirms that the entity exists and is in good standing, identifies its beneficial owners and screens them and the company against sanctions and adverse-media lists, and checks the principals’ backgrounds and litigation history. Public-record searches cover federal and state tax liens, judgments, bankruptcies and pending suits, any of which would rank ahead of or compete with the lender’s claim. Financial information is taken at source wherever possible: bank statements are pulled through a permissioned data connection to the bank rather than accepted as PDFs, processor settlement data is read directly from the processor, and tax filings are obtained through the borrower’s authorization from the tax authority. Where a document must be accepted as a document, it is tested for authenticity against the metadata, formatting and arithmetic of the genuine article. Most credit fraud is a document that looks right.

A security interest that is not perfected is a promise, not a lien. Perfection is what makes the interest good against other creditors and a bankruptcy trustee, and for most business collateral it is achieved by filing a UCC-1 financing statement with the secretary of state of the borrower’s state of organization, naming the debtor exactly as its formation documents do, naming the secured party and indicating the collateral. Priority among perfected interests runs by date of filing, so the search that precedes the filing is where the position is won or lost: every existing financing statement is reviewed, and is either terminated by the prior secured party against a payoff letter, amended by UCC-3 to release the collateral Wesvel needs, or made subject to an intercreditor or subordination agreement. Deposit accounts are perfected by control under a deposit account control agreement, titled vehicles by lien on the certificate of title, and equipment financed at purchase by a purchase-money filing within the statutory window. Financing statements lapse after five years unless continued in the last six months of their term, and the servicing calendar carries every continuation date. Searches are repeated through the term, because a new filing against a borrower is the earliest visible sign that it has taken on another lender.

Credit fraud takes a small number of recurring shapes, and the controls are built around them. Fictitious debtors are caught by verifying invoices directly with the account debtor through contact details found independently of the borrower. Duplicate invoices, the same receivable financed twice with Wesvel or with two lenders, are caught by invoice-number sequencing, by matching across every facility in the book and by the lien search that shows another receivables lender. Round-tripping, deposits that are the borrower’s own money cycled through customer accounts to inflate revenue, is caught by tracing deposits to their originating accounts in the bank data and by matching them to invoices and to processor settlements. Related-party receivables are excluded by ownership cross-checks against the beneficial ownership record. Stacking, a borrower taking new positions on the same revenue, is caught by new financing statements and by new recurring debits in the bank data. Behind the controls sit the guarantees: a personal guarantee that puts the principal’s own assets behind the debt, a validity guarantee that makes misrepresentation of the collateral a personal liability even in a non-recourse structure, and cross-default and cross-collateralization clauses that bring every facility with the group into play if one is defrauded.

Approved terms are papered by counsel: the facility agreement, security documents, control and account agreements, guarantees, and any vehicle documents. Conditions precedent, including perfection of security, delivery of insurance and completion of due diligence, are satisfied before funding. A facility that cannot meet its conditions does not fund.

Facilities report on the schedule their documents require: borrowing base certificates weekly or monthly, financial statements monthly or quarterly, a compliance certificate with each set of financials showing the calculation of every financial covenant, and collateral reports such as agings and inventory listings. Coverage ratios, leverage and liquidity are tested against the covenant levels, and every report is read against the credit memorandum’s assumptions, so that a business drifting from its credit case is seen before it breaches. Permissioned bank and processor data run continuously between reports and are screened for new funder debits, falling deposits and rising returns. Field examinations and appraisals verify what reports assert. Each facility carries an internal risk rating that is reviewed on a schedule and on any material event, and a watch list is maintained for facilities whose rating has moved.

Collections, payments, fees and reporting are handled by a servicing function separate from origination, with cash flowing through lockboxes and controlled accounts and applied under the payment waterfall in the documents: fees and expenses, then interest, then principal, then reserve, with any surplus remitted to the borrower on the agreed remittance schedule. Missed payments accrue default interest at the rate the documents set. When a facility deteriorates, a workout plan is written: engagement with the borrower, an amendment that resets covenants or terms against a fee and additional security, a forbearance agreement in which the lender agrees for a defined period not to enforce an existing default in exchange for a paydown, reporting and a plan, or enforcement where those would not recover more. Recoveries are pursued through the security, the guarantees and any recourse; the outcome is recorded and fed back into underwriting.