Why does lender due diligence matter?
Because the lender you choose stays with you for the whole loan. Recent lender failures in the bridging market have made borrowers ask, rightly, which lenders are safe to use.
When a lender runs into difficulty part-way through a loan, further drawdowns can stop, extensions become harder to agree and decisions slow down. For a development or a refurbishment that depends on staged funding, that can put the whole project at risk.
A low rate is worth little if the lender cannot complete, fund the next stage or deal sensibly with a delay. Checking the lender is as much part of the job as checking the deal.
What do we check before using a lender?
Five things: where the lender's funding comes from, its track record, how it handles valuations and extensions, its industry memberships, and how openly it discloses fees and default terms.
- Funding lines and backing: whether the lender lends its own balance sheet, bank lines, institutional funds or forward-flow money, and who stands behind it.
- Track record and time in market: how long it has been lending in this product, and how it has behaved through changing market conditions.
- Valuations and extensions: how it instructs valuers, whether it will consider a reasoned challenge, and how it has treated borrowers who needed more time.
- Membership of industry bodies: whether it belongs to the relevant trade associations and recognised industry bodies for its market.
- Transparency on fees and default terms: whether arrangement, exit, extension and default costs are set out clearly before the client commits.
We review this when we first use a lender and keep it under review on live cases.
What won't we do?
We will not place a client with a lender we have not checked, and we will not recommend a lender on headline rate alone.
- Place a case with a lender that has not been through our checks.
- Choose a lender purely because it offers the lowest rate on paper.
- Leave fees, extension terms or default rates unexplained before you sign.
- Keep a concern about a lender to ourselves once we have it.
What should borrowers ask any broker?
Ask how the broker chose this lender, where the lender's money comes from, and what happens if you need more time. A good broker will answer all three plainly.
- Why this lender, and which others did you consider?
- Where does the lender's funding come from, and who backs it?
- How long has it been lending in this product?
- What are the extension terms and the default rate?
- How does it handle a valuation you disagree with?
- How are you paid on this case, and by whom?