Those familiar with this business will probably have heard the phrase ‘rebrokered transaction.’ It refers to a scenario in which a customer is passed from broker to broker in search of a final funding source, often leaving the finance or leasing company oblivious to the true origin of the deal and many of the pertinent details.
The part of my job that I enjoy the most is that I often get to speak with brokers all over the country who have customers in our funding region. Speaking with people with diverse experiences helps give much needed perspective on the differences in how people do business. One of the most common questions we field from our brokers, then, is the age old: “Will you accept a re-brokered transaction?”
The problem, from our side of things, is that rebrokered transactions are often ‘washed,’ where relevant facts are omitted to increase the chances for approval. In a bilateral relationship between a single broker and funding source, Broker Agreements and a standing rapport often prevent this from happening. When a transaction is passed between brokers, on the other hand, a cloak of anonymity helps hide glaring inconsistencies while disguising the culprit responsible for hiding them.
This series of events is usually a recipe for disaster: an applicant that looks good on paper can quickly begin to transform into a very different kind of applicant. It’s not always a matter of fraud, sometimes something as simple as the fact that the applicant is married or the broker is related to the vendor can be hidden. Our credit department relies on completely accurate information to inform the decisions we make. When we issue an approval, we don’t take it lightly.
Recently, one of our sister companies from the midwest told me about a transaction that reminded me why we steer clear of rebrokering. An application on unfamiliar letterhead that had been covered with whiteout (unsuccessfully) came over to their office, along with bank statements and a credit report. The credit report looked good, with both applicants having scores in the high 700’s. The bank statements were outstanding, as well: plenty of cash flow to support the mid-sized transaction they were looking to get funded.
After they had submitted an approval, the owners started thinking about the unfamiliar letterhead (which looked different than what the broker would normally have sent over.) The next morning, one of them called the broker up and inquired about the origin of the transaction. Then, it was discovered that the transaction had already passed through three brokers or more. To clear their conscience, the owners did some more due diligence and found some astounding discoveries.
Not only were there no such credit files on the two applicants when they attempted to pull credit themselves, but the bank listed on the bank statements claimed they had no relationship with them either. When confronted, the broker said he nothing about the misrepresentations, but, by then, there was no way to tell who had forged the documents.
We’re very careful about who we do business with, but there is no way to be sure we’re getting complete and accurate information without knowing where the information is coming from. So when I hear, “Do you all do rebrokered transactions?” I answer succinctly, “Nope.”
One of the most common misconceptions with respect to credit scoring is the idea that one’s credit score is an indicator of how well they pay their bills on time. Sure, that’s part of it, but credit scoring algorithms are substantially more nuanced than people are led to believe. I can’t tell you how many times I’ve had an applicant vehemently swear that they should have a near perfect credit score, only to see the credit score come back in the mid 650’s. The reason has less to do with people not managing their credit as well as they think they are, and more to do with how truly detached the modern consumer is with the formula that determines what their credit score actually is.
For example, many people carry a small balance on their cards each month due to the longstanding belief that carrying a small balance is better than carrying no balance. The truth is, even if they’re small balances, most credit scoring formulas (including the widely popular Fair Issac–or FICO–models) penalize a consumer for having too many accounts with a balance. In the same way, sometimes people pay their cards in full each month but do so after the statement closing date, so that a group of credit cards which actually have no balance report as though they do have a balance each month.
Another issue I run into frequently is that there is often a disparity in credit between husband and wife. The fact is, the Fair Credit Reporting Act has guaranteed that accounts in which an individual is designated an ‘Authorized User’ are still to be scored just as they are for the primary accountholder. Many individuals don’t realize that by simply adding their spouse to their existing credit card accounts, they can pad their spouse’s file and close any gap between their credit scores.
A basic rundown of the most commonly used lender score formulas is as follows:
– Payment History – (35%)
– Utilization/Capacity/Balances Owed – (30%)
– Length of Credit History – (15%)
– Types of Credit – (10%)
– New Credit – (10%)
What makes all of this interesting is that because of the respective weights assigned to different categories, there are people who have had late payments in the last few years with credit scores higher than those who pay all of their bills on time always. Because personal credit is key to strengthening your ability to personally guarantee a transaction, we believe it’s important to educate our consumers on credit matters. For more information, please check out our free guide to Understanding Your Credit Score here.
In the equipment finance world, we take a lot of things for granted. One of those things is that a private party transaction with a titled piece of equipment is every bit as safe as a similar transaction with a vendor. Sure, vendors can have internal corporate hierarchies that can be difficult to deal with, but at least with a vendor there’s no mistaking that they’re able to pass a clear title. Typically, as part of our due diligence when we complete a transaction, we ask for a copy of the title (front and back) before funding. Verifying that there are no liens or brands on a title is central to protecting our collateral interest in a transaction; however, we often forget that when it comes to private party deals all bets are off.
After funding a recent truck and trailer transaction, we were in the process of performing our standard title transfer protocol, when we discovered that a title which we held (and which was completely unbranded) would have to carry a salvage brand. Apparently, years ago, the trailer had been in an accident that left it totaled. In our State, notification to the DMV isn’t sufficient to result in the issuing of a new title. In this particular case, the trailer was rebuilt and never changed hands, leaving the physical title clear of any brands that could tell the real story, but leaving the VIN flagged permanently.
Long story short: don’t assume you know anything about a title. In a private party transaction, it is important to ask the seller to attest to material facts about the equipment in addition to providing a Bill of Sale and clear title. After all, what you have in front of you may not tell the whole story. For more information on titling and registering your vehicle in the State of Oregon, visit the DMV website here.
When companies providing commercial equipment financing—in the form of leases or finance agreements—say that the landscape of lending to businesses has changed over the past five years, it’s not just talk. Business owners who haven’t sought funding for a business purpose for quite some time often find themselves bewildered at the array of requirements to attain an application approval in today’s world. What comes as perhaps the biggest surprise is that most banks and financial institutions require a personal guarantee—even when the contract is drawn up in the name of a business.
Just yesterday I found myself talking to an applicant who had a serious tax lien (think five figures) on his personal credit. The lien, he explained, was the product of confusion over how much rental income he had earned over the past few years. Unfortunately, a tax lien that serious presents a problem for lenders in our marketplace. After I gave him an explanation on why we probably wouldn’t be able to do the transaction, his wife called in to our office. She explained politely, but firmly that the tax lien should have no bearing on whether or not we approve their application. In her mind, a personal financial matter shouldn’t hold back a business which, on paper at least, appeared to be performing fairly well.
Her rationale makes logical sense, except that funding transactions in a post-recession (or present recession depending on what you believe) economy requires protecting interest in not only the business, but the individuals guaranteeing the business. A tax lien might not mean there is a garnishment on wages or a freeze on assets, but it could spell the beginning of a process that eventually leads to those things. Moreover, a company like ours is simply not able to accept a diluted personal guarantee, knowing there is a risk that adverse action by a party higher on the totem pole might lead to a default scenario.
The best way to handle a tax lien is to make arrangements with the IRS or State government responsible for its placement. Often times, a payment plan can eventually lead to a lien release. Simply not resolving a lien, contrarily, can haunt you in your financial dealings for decades. Being proactive just might salvage your ability to attain financing even if a lien has already been filed. You can find more information on how to handle receiving a Notice of Federal Tax Lien here.
