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Best Practices for Originators Seeking New Funding Sources

March 04, 2015, 07:00 AM

Partnering with a new funding source can be a rewarding but tedious task for both the originator and the lender.  Low cost, aggressive financing is certainly available for those originators that enjoy a solid reputation, dependable volume and proven metrics of efficiency and portfolio performance. Both parties desire to enter into the relationship with an anticipated “fit” and have certain expectations going forward. However, the process of creating a new relationship can be time consuming and the amount of due diligence required today is more than ever. This article addresses a “best practices” approach to garnering new funding partnerships and to shed light on the perspectives of both the funding source and the originator.

Funding Source Perspective

Heightened regulatory compliance pressure, portfolio performance, fraud and operational inefficiencies have caused funding sources to reevaluate their approach to the indirect origination platform. Most lenders have stepped up their due diligence requirements and some have even ceased adding new originators.  Let’s explore this a bit deeper from the lender’s perspective.

Generally, all funding sources have some method of evaluating new originator relationships.  In most cases, the new originator is subject to an underwriting process, much like an applicant would for the extension of credit. Depending on the size and scope of the relationship, audited financials may be required as a due diligence item. Once the financials, company information, references and documents have been collected, a review process takes place and a decision is made by management to accept or decline the new originator. Once an approval is granted, the process of boarding the new relationship takes place, which may involve several departments and staff within the funding source. The entire process of approval, review and boarding can be quite extensive for the funding source.

The Impact of Regulatory Compliance
Increased regulatory compliance pressure has caused FDIC-insured banks to step up their due diligence and tracking methods related to all third party vendors. Banks are required to “know your customer” and to demonstrate that they have completely evaluated third party relationships. Many banks conduct a “third party risk assessment” for each origination source. This assessment documents the due diligence conducted for each new origination source and records the various aspects of the relationship (servicing, documentation, agreements). Regulators carefully scrutinize the banks’ internal processes and approach to managing third party relationships via the bank’s risk assessment analysis. The result of all this is that bank is required to collect a substantial amount of information from its prospective originator to review and maintain in order to satisfy its regulators.

Fraud Prevention and Portfolio Performance
Although fraud can be perpetrated by any party to a transaction--vendors, dealers, borrowers and even internal bank personnel—funding sources need to keep a keen eye on new origination sources to ensure they are a reliable source of clean business and doing their part in fraud prevention. Lenders also need to know that an originator’s history of portfolio performance is within satisfactory tolerances. High delinquency and defaults with past and present funding sources is a certain show stopper.   Finally, for the funding source to maintain reasonable efficiencies, the originator needs to be capable of producing transactions that are approvable by the lender (in accordance to the lender’s published underwriting guidelines) and be successful in closing a high percentage of those transactions that are approved.

The Originators’ Perspective

Most established originators know that a careless funding source doesn’t exist for long. These funding sources are disruptive to the marketplace and are unreliable for the long term. When a funding source is selective of their origination relationships and thorough in their practices, the originator can put a high level of reliance on the long term possibilities of the impending relationship.

Know Your Funding Sources
The due diligence process isn’t a one way street. The originator should ask several questions about the lender’s management team, source of capital and funding, it’s long term commitment to the third party space and its other origination channels (vendor, direct, syndications, etc.).

Be Prepared to do Business
The due diligence process is a perfect opportunity for an originator to demonstrate its expertise and credibility to the new funding source. By presenting its value proposition and a complete due diligence package (I will go into this in more detail later in the article), the funding source’s initial impression of the originator is that the originator is well prepared to do business and will make a sound partner going forward. This is your opportunity to present your company in the best light possible—take full advantage to shine!

Create a ‘New Funding Source Package’

One of the hassles of bringing on a new funding source is collecting all the due diligence items required for approval. I recommend creating an electronic file that includes all the items most sources will need to consider in a new relationship. This not only saves time, but presents the originator as being prepared and organized. Some of the items I recommend are:

  • Two years’ financial statements or tax returns,
  • A company overview that outlines the principles/management team; a description of the sales and marketing focus (including any niches or special programs); company history and transaction types (typical transaction size or range, term, credit quality),
  • List of funding references,
  • Transaction documents in Word format,
  • Portfolio performance reports from past and present funding sources,
  • Recent credit reports on all principals,
  • Association membership and participation.

Concluding Thoughts

The endeavor of taking on a new funding relationship can be one of opportunity and growth for the originator. When each party understands the other’s perspective and challenges, the process is bound to be less strenuous. The current regulatory environment and mistakes of the past have put pressure on those that remain in the third party funding business to know their originators and monitor them closely.  Those originators that are prepared for the task will be highly attractive and experience much higher success than those that lack an appreciation for the process. I have always viewed my origination relationships as critical partners to my business: not only generating loan volume, but in fraud prevention, portfolio quality and maintaining high levels of efficiency.

Mike Coon
Vice President | LCA Financial/LCA Bank
Mike Coon has over 25 of experience in banking and equipment finance, most recently as Vice President with LCA Financial, a wholesale funding division of the LCA Group. He has worked in most areas of the industry including credit, collections, marketing and funding.

Coon is very committed to the equipment finance industry, actively participating in the leasing industry associations and often speaking on best practices issues. He was Chairman of the 2009 NAELB Annual Conference, a panelist on the 2009 Monitor Magazine Funding Source Round Table and is a member of the National Equipment Finance Association’s (NEFA) Board of Directors.
Comments From Our Members

Rodger Garrison
Great article Mike: One area that you did not cover are the Long term executives/professionals as originators that act as Consultants to their Client base over the years and are Independent professionals and or formed either an S Corp or C-Corp & or LL C. The financial data you mentioned have to do with an actual company usually with 3 or more folks. Most individual Professionals like my self work with Banks & or Independent funding sources that we have a professional relationship already. The question here is that the Independent Originators biggest fear as it has been warranted is Non-Circumvention protecting an Originators relationship. On my end each package presented my clients are under an MNDA that includes a Non Circumvent Clause which my clients honor. Financials are not available. Our Ethics , Credibility & References support the efforts. Each lender who receives a package has a cover page that includes a confidential statement + Non-Circumvention statement plus agree to a fee that will be earned. All whom I work with honor the relationship on both ends. Does LCA work in this way where you protect the professional originator whom has the experience. Your comments are welcome. Rodger Garrison Note: Mike glad you are doing well & best to you.
3.16.2015 @ 10:07 AM
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