Warehouse Lines of Credit

The originator sells or pledges newly made loans into a special purpose vehicle that is the borrower under the warehouse. Wesvel advances against those loans up to a borrowing base. As the originator sells the loans on, or as they pay down, the advance is repaid and capacity revolves. The vehicle is bankruptcy-remote from the originator, so that if the originator fails the loans in the warehouse remain available to the lender.

Bankruptcy-remoteness is only as good as the paper. The transfer of loans from originator to vehicle is documented as a true sale, supported by counsel’s true sale and non-consolidation opinions, so that a court would not treat the loans as the originator’s property or fold the vehicle into its estate. Wesvel files UCC-1 financing statements against the vehicle as borrower and, as a precaution, against the originator as seller, and runs lien searches on both before the first advance and on every subsequent originator review. Loan files, the notes and security documents for each underlying loan, are held by an independent custodian under a custodial agreement and a bailee letter, so that possession of the paper sits with a party that answers to the lender. Collections flow into a lockbox or an account under a deposit account control agreement in the vehicle’s name.

The warehouse funds only loans that meet agreed criteria: type, size, term, borrower credit, collateral, documentation and performance. Loans that fall out of criteria, by delinquency, default or breach, are excluded from the borrowing base and must be replaced or repaid. The advance rate is a fraction of eligible loans, set from the historical performance of the originator’s book under stress and the liquidity of the underlying assets. Concentration limits apply to borrower, geography and collateral type, and balances above a limit are ineligible. The originator delivers a borrowing base certificate with every draw and on a fixed cadence between draws, showing eligible collateral, the advance against it, reserves and availability; if outstanding advances exceed the base, the over-advance is cured by paying down or adding eligible loans within a set number of days.

The originator is underwritten twice: as the source of the assets, on its origination standards and their evidence in the performance data, and as the servicer of them, on its collections and reporting. A backup servicer is identified so that servicing can move if the originator fails. Cash from the loans flows to a controlled account; in stress the lender takes dominion.

The documents set portfolio-level triggers on delinquency, default and cumulative loss rates, measured on the loans in the warehouse. Breaching one tightens the facility automatically: advance rates step down, cash that would have been released to the originator is trapped in the vehicle, and further draws stop. Breaching a more severe level is an amortization event, after which all collections repay the line until it is retired. The triggers are calibrated to the originator’s own history so that they fire when performance departs from what was underwritten, not when it is merely weak.

A warehouse is a bridge to permanent funding. The facility is sized and dated to the originator’s realistic exit, a forward-flow sale to a buyer, a securitization, or a term facility, and the documents address what happens if the exit does not arrive: amortization, tightened advance rates, or a wind-down in which collections repay the line.