Chapter 8 of the Compendium of Provisions, Systems and Controls for Senior Management (SYSC8) applies when an institution relies on a third party to perform operational functions that are critical to the performance of regulated activities, listed activities or, in particular, ancillary services. When regulated loans move to the lender`s balance sheet, the parties should carefully consider who, for example, serves or manages a regulated mortgage contract and whether these service or administrative arrangements comply with SYSC8. Not only does this apply to forward flow agreements, but remedies for breach or non-compliance with SYSC8 vary, and as a result, a financial institution may want to apply a higher degree of care to the service agreement and agreements. A term flow agreement is an agreement in which a lender offers to purchase loans in whole or in part from the promoter. A forward flow agreement is when an investor agrees to buy a series of loans issued by another party. As part of a forward flow agreement, the investor and the originator agree in advance on the price and eligibility criteria of the loans. While forward flows aren`t specific to fintech platforms, here we focus on fintech platforms as a case study. Forward and warehouse finance operations have different risk profiles that reflect the main difference between structures: forward flows are asset purchase agreements and warehouse financing is an asset-backed loan agreement. Underlying loans will typically undergo ongoing portfolio testing to ensure they meet performance measures and concentration limits. A test error typically relieves the lender of any obligation to purchase other loans in a term flow or, in the case of warehouse financing, results in early amortization or acceleration of the senior loan or bonds. It is clear that the premature termination of financing agreements will have a significant impact on the initiator and its ability to serve customers, and therefore needs to be closely considered during the negotiations. Other events that result in the premature termination of financing agreements may include: change of control, loss of key personnel, persistent breaches of covenants or guarantees, loss of regulatory approvals by the originator or manager that could affect the applicability and recoverability of mortgage assets, and events related to bankruptcy.
Servicing mortgage assets will also be a significant issue for lenders – this is particularly the case in a context of term flows or when regulated mortgage assets are financed, given the potential impact on non-compliance with consumer credit and mortgage laws and regulations such as the CCA or MCOB. Initiators should also expect to require detailed commitments and guarantees regarding the repairer and emergency or backup service contracts. Lenders will also want to ensure that all ownership documents relating to purchased loans are clearly kept in the name of the lender or (in the case of storage facilities) of the SPV, and that one of the most important decisions for any new entrant in the mortgage market is how to finance the crucial initial phase of the loan. Without the support of deep-pocket investors who are able to provide the capital needed to issue and serve a large volume of mortgages, new originators have traditionally opted for warehouse financing as their preferred method of financing. However, a notable recent trend has been the advent of forward flow agreements as a viable alternative. This note examines some of the characteristics of futures and warehouse financing structures from a new initiator`s perspective and explores why forward flows are gaining ground. It is worth taking into account the reasons why the forward flow has seen an increase in popularity. Below are some general views on some of the reasons why market participants view futures flows positively. It often happens that the lender`s ability to fall back on the originator, either by requesting a redemption or by having a claim for breach of guarantee, is more limited in a forward transaction. For example, the liability of the initiator may be subject to temporal and monetary limitations and may not cover changes in the law and certain other risks. After selling loans to the lender, the originator will want to minimize possible future claims or liabilities, especially given its more limited economic performance. Lenders in a warehouse finance usually finance a portion of the loans on the basis of a basic credit calculation, which can often be complex – this leaves the balance that can be financed by the originator via a subordinated loan or note or by a junior lender.
Sampling generally occurs less frequently than in the context of a forward flow and is invariably in larger minimum quantities. Warehouse financing is often structured with a renewable period of time, so that loans and related collateral can be regularly sold and transferred from the originator to the SPV during that period. A senior facility also generally allows the VPS to manage its borrowings and costs through a voluntary upfront payment of loans or debentures as required, subject to prepayment or termination fees. After the acquisition by the SPV, the loans provide a guarantee for the repayment of the storage line and the commitments of the other secured creditors. As expected, presentations under a forward flow agreement will be intensely targeted, particularly those given with respect to underlying loans. Term flow lenders may require a granular, in-depth and extensive set of representations that, in addition to and as an extension of the representations commonly used in specialized financing transactions, pay particular attention to the origination process (including any broker launch) and the status, nature and nature of the underlying borrowers. From a lender`s perspective, the nature of the term flow balance sheet may mean that it is more suitable for non-bank companies that are able to tie up part of their balance sheet without the same impact on regulatory capital as would be the case for bank financiers. The tailor-made nature of forward flow assets can also be potentially challenging. However, forward flow agreements can offer bank and non-bank lenders the opportunity to benefit from an existing lending platform and rapidly deploy capital across different markets and asset classes. So it`s perhaps not surprising that we`re seeing an increasing number of appointment transactions at a time when platforms are an important and growing sales channel. According to the FCA`s latest investment platform market research, the market has doubled since 2013, from £250 billion to £500 billion in assets under management.
Warehouse finance structures, on the other hand, are familiar territory for bank financiers and also accessible to non-banks. This can be seen as something more focused on traditional loan agreements that would include LMA-type covenants, default mechanism events, and some of the technologies (like a buyback mechanism) that you might find in a typical bilateral/small club agreement. Term agreements are a viable way to raise funds for the early stages of the mortgage. The right partnership between the originator and the lender can allow an originator to use the lender`s balance sheet to start or increase their mortgage, while the lender can use the originator`s existing lending platform to quickly deploy funds across different markets and asset classes. If the product is considered a pure asset purchase product, the architecture of the document is likely to be significantly different (and perhaps more personalized). Maintenance and maintenance contracts are examined differently, and the degree of care and negotiation to which the maintenance contract must be subjected can be a very negotiated point. Other areas of negotiation are discussed here. A combination of the fact that most of the credit economy would be taken over by the lender and the permutations of the redemption mechanisms already studied means that the care and control of the underwriting process become even more important. As a result, the underwriting process will be subject to a thorough review prior to the closing of the transaction and on an ongoing basis.
Extensive access rights are requested and generally granted. If the borrower has a seed pool that will be part of the forward flow agreement, the review of historical underwriting procedures and policies will be subject to the same level of scrutiny as future ones. The economic efficiency for the author varies considerably between the two structures. A term flow allows an originator to use the lender`s balance sheet to lend in exchange for issuance and service fees. .
