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Broker Requirements of Allegiant-Partners

"Why do They Need That?"

By Christopher A. Enbom, CLP

Reprinted from Spring 2006 Newsline, United Association of Equipment Leasing
with permission of the author

Since the transactions Allegiant is evaluating are on the cusp of not being credit-worthy, we are especially careful in making sure we have enough quality information with which to make a credit decision. Allegiant and other full package funders, especially those in the story credit market, sometimes require a stack of documents and somewhat laborious closing procedures. We thought it would be worthwhile to review some of the rationale behind the documentation and procedures we follow when closing transactions. Understanding the rationale behind the request may make for an easier sell with the customer.

Broker Application and Agreement

Allegiant reviews broker references, pulls credit reports and does Internet/industry searches. We want to work with honest brokers who are professional and take a long term view. In a broker agreement, the broker pledges to Allegiant that it will pass on all of the information it has with regards to the transaction and will not withhold any information from Allegiant.

Application Supplemental Form

Allegiant requires that all brokers fill out a simple form to provide essential information we need to evaluate a transaction. This includes whether (i) the transaction had already been declined or offered to other sources or (ii) up-front payments have been collected on this or related transactions. We can generally ascertain the other funding sources who have inquired on a transaction through reports, but the information regarding deposits paid to brokers is especially important to us. We have seen a number of situations where lessees paid amounts to brokers that were not revealed to Allegiant. When it came time for the first payment to be made on the lease, we have had lessees refuse to pay on the grounds that they have made payments to the broker which they assumed would be applied toward rent. Lessees have also refused to make payments in situations where brokers, working on more than one transaction for a customer, have collected deposits for equipment with Allegiant is not financing then refused to return the deposit even though the transaction was not successfully placed. We also get information such as where the broker sourced the transaction and the funding sources who have turned the transaction down. It is especially crucial to know if sub-brokers are involved, as we would need to approve the sub-broker as well as the broker.

Lease Application

The most common information we have seen withheld includes: (i) weak guarantors or owners, (ii) a strong operator fronting for a weaker operator (especially in trucking, contracting and logging), (iii) not revealing a fact that has a significant bearing on the transaction (such as the lessee intending to sell the business) or (iv) more egregious fraud such as assisting a lessee in over-finance or double financing equipment. Allegiant has seen all of these situations. We need credit applications and personal financial statements that are signed and dated. We need authorization to pull credit reports and personal guarantees.

Information on Affiliates

Often brokers do not understand why we want information related to an affiliate that is not involved directly with the credit we are evaluating. We sometimes find, however, that companies with several affiliates hide losses in companies we are not evaluating. In other situations the affiliate may provide the essential credit strength we need. Without the affiliate information, we may not have a complete and accurate picture of the entire financial situation of the lessee.

Interviews

As part of the credit process Allegiant interviews principals from each company we finance. We often catch inconsistencies between information presented in writing and information gleaned during the interview. On the other hand, a good interview may help us to approve a transaction which looks weak on paper.

IRS Form 4506T

This form allows Allegiant to go to the IRS and request copies of filed tax returns for applicants, guarantors and affiliates. It is easy for an applicant to give a funding source fraudulent tax returns, and this form allows Allegiant to check the tax returns actually filed and compare them with the tax returns shown to Allegiant.

Bank Statements

Many times people claim to have hundreds of thousands in the bank whereas actual statements reveal much less. We may also need to verify real estate values if real estate makes up a large percentage of net worth. Document Request forms Allegiant has a form that the broker fills out prior to documentation that provides us with the details we need to prepare documents accurately and quickly.

Copy of Drivers Licenses

It is required under the Patriot Act that we document evidence of our customer's identity. Obtaining the licenses is also useful as a fraud check and provides us with signatures to compare with the signatures on the documents.

Original Signed Documents

Allegiant's creditors (our banks) require us to deliver original chattel paper (i.e. original signed documents) to them when we borrow money. Not all lessors have this constraint, but many do.

Officer's Certificate

There is often confusion regarding the officer's certificate. Most often the confusion occurs when the lease document signatory signs at the bottom of the Officer's certificate as well. The purpose of the officer's certificate is to provide us with assurance that the person who signed the contracts on behalf of the company had authority to do so. We therefore ask a different officer or director (not the contract signatory) sign at the bottom of the officer's certificate thus confirming the authority of the contract signatory. Unfortunately the signatory of the contracts cannot confirm his or her own authority.

Inspections

We send inspectors to photograph all equipment we have financed to verify its existence, check serial numbers and general condition. The inspector also ascertains the delivery date of the equipment to make sure Allegiant has a purchase money security interest in the equipment. If the equipment was delivered more than 20 days prior to our funding, Allegiant may need a lien release or subordination from blanket lien holders since we would otherwise lose our priority security interest in the equipment.

Allegiant often puts tags on equipment it is financing which can add a day to the inspection time. We have found in workout situations that a clear identifier of the lien holder helps to clear up confusion with other creditors regarding the validity of a claim on the equipment. This requirement can be waived if necessary.

Verbal Confirmation

Even with an acceptance certificate signed by the lessee, we want to make sure they are ready to have the vendors funded and begin the lease. This also allows Allegiant to have additional contact with the lessee prior to starting the lease, thus assuring us that the lessee is a real company. We also go over the primary terms of the lease to avoid any confusion later.

Re-Approval

Allegiant's approvals expire after 30 days. All funders have some period after which a lessee needs to be re-approved. Most of the time, a re-approval requires simply that we run a few credit reports to make sure the business and personal scores have not materially deteriorated. If the scores have declined significantly, we will need to do more credit investigation, including a review of updated and interview the applicant again. This will determine if the approval can be renewed. Allegiant also takes these steps behind the scenes:

Corporate Name Verification Allegiant always verifies corporate names to make sure we have the correct legal name and thus a binding contract. In addition, Allegiant wants to be sure a lessee has taken all steps necessary to maintain its corporate status.

Internet Searches Basic Internet searches of a company and its principals can reveal articles about misdeeds. For example, a simple Google search on the principals of Norvergence revealed that the brother of the founder had been previously involved with an illegal scheme and we declined the transaction.

Other Criminal Search Tools Allegiant runs background checks on principals that sometimes reveal previous criminal activity.

Brokers may not always agree with everything a funding source does, but understanding the reasons behind the process may make the sales process to the customer easier. In Allegiant's case, the lessee generally knows that its credit is somewhat outside the box, so gathering the additional information is not a problem. In certain situations, some of the steps outlined above may be waived if the transaction merits special treatment. Communication between the funding source and the broker is key, and those who understand the nuances of leasing the best are the most effective! Thus we encourage brokers to be educated through the UAEL, the CLP process and by asking questions and being involved.

About the author:

Mr. Enbom is the founder of Allegiant Partners and has been the company's chief executive from its inception in 1998. Allegiant Partners is a story credit lessor that purchases transactions between $70,000 and $250,000 in size from brokers and other leasing companies. Mr. Enbom has been involved in structuring, marketing and closing leases and structured transactions since 1988 with such companies as D'Accord Financial Services (now Dresdner Securities), Bank of America Leasing & Capital Group and CIBC World Markets in both Japan and San Francisco. Mr. Enbom has a B.A. in Political Economy from the University of California, Berkeley. Information regarding Allegiant Partners can be found at www.allegiant-partners.com.