What stage of due diligence are we at when we put a loan into pending status? What ‘Legals’ still need to be concluded before it can go in Funding? How long will the loan take to Fund? When is the loan likely to be interest-bearing? We take you behind the scenes of Proplend loan origination.
When a new loan is added to our ‘Pending’ list, the Borrower(s), securing property and general financial viability have already been subject to a number of due diligence and credit checks. We have made an indicative offer on our Lenders behalf that has been accepted by the Borrower, but whilst we’re far enough into the process to bring this future opportunity to your attention, there are still a number of legal and administrational hurdles to clear by the legal representatives on both sides before Funding and Drawdown.
Even at the Pending stage, loans have survived a number of cuts. For every loan that we expect to bring to Platform, there are a number that didn’t make the grade. We could just bring the vast majority of enquiries to Platform and let Lenders determine the high-risk and unconvincing exit strategies but instead, as most Proplenders take great comfort from, our model is one of comprehensive screening and erring on the side of caution. We’ve considered commercial loans totalling more than £300m in the first three quarters of 2019 – Funding £25m of those.
What stage do loans go into ‘Pending’?
We want to make sure loans are highly likely to come to Platform before we share them with Lenders via the ‘Pending’ section of their Lender Dashboard. For us, that point is typically following internal sign-off by our Credit Committee, once we’re in a position to start producing our detailed ‘Full Loan Request’ (FLR) document.
Lenders will of course need time to review the comprehensive information we share (and potentially to do their own due diligence and reasonability checks). Albeit, at this relatively early stage in the Legals process, Pending does not mean that the loan is a fixed period from Funding.
We’re often asked why we don’t provide an estimated Funding date for our Pending loans. The honest answer is that the process is just too fluid and there are too many moving parts and contributing parties for us to be in full control of the delivery date. Any indicative date provided, however well intended, would be just as likely to mislead as it would to inform and could be subject to almost daily change.
Where there are Borrower target dates and deadlines, the exact timescales for Funding are still unknown. Even having an agreement in principle in place and having completed significant due diligence on the Borrower, the property and any leases – there’s still plenty of work to do on both sides before we’re at an advanced enough stage to fund the loan.
How long before a Pending loan goes into Funding?
It’s not uncommon for loans to move swiftly into Funding in a matter of days (with an impending purchase or refinance deadline). Conversely, we have also seen loans stall and even removed from Pending due to unforeseen complications and changes of circumstances. But typically, loans take two to six weeks from Pending listing before we ask Lenders to start committing funds.
Just because one approved loan request came to us before another, it doesn’t mean that they’ll reach the Funding stage in that order. The circumstances around one loan may be inherently more complicated than another and in contrast to a refinance, borrowing to help fund a commercial property purchase can only move as quickly as the property transaction itself.
Whilst we endeavour to fund loans in the order that they’re ready to fund, it may be that if there’s a delay or even no imminent prospect of Drawdown – another loan may go into Funding first. We also get two loans that are ready to fund at the same time or are linked and may have to fund in a certain order. In these circumstances we make a call based on discussions with the Borrowers and on the advice of our Solicitors.
We never bring a loan to platform that we don’t think our Lenders will have an appetite for and will be able to fund. Whilst the terms of our Members’ Agreement give us up to 30 days to fund a loan, the longest a Proplend loan has taken to fill so far is two weeks.
Proplenders will be aware that the majority of our loans fill on the first day and often within the first hour of funding. Auto-Lend may have completely funded Tranche A before the loan becomes available for manual investment from midday. But we can’t always assume this will be the case. We can normally predict the larger, lower rate loans that will take a bit longer to fund, so that needs to be factored in if we’re working to a Borrower completion deadline.
Whatever the specific and relative considerations for the order that loans go into Funding, it’s only when we have received the Report on Title (where solicitors outline the results of their checks and searches) and updated Valuation Report (where the current value of the securing property has been expertly established), that we’re at an advanced enough stage to fund the loan.
We notify Lenders around 24 hours in advance of the funding day to enable them to fund their own accounts and modify any Auto-Lend settings should they wish to.
How long before loans Drawdown and become interest-bearing?
As a rule, we try to leave the Funding of loans as late as possible, albeit for property purchases we must ensure that Funding doesn’t delay completion unnecessarily. Typically, new loans do not become interest-bearing until they have drawn down, so the ideal scenario is Drawdown within a day or two of Funding.
Whilst this is commonly the case, with Legals continuing in tandem with Funding (right through to Drawdown), there’s still potential for the odd ‘googly’ to come your way and that’s when you may see a funded loan take longer than usual to draw down. With most of the key hurdles cleared by this stage of the process, it tends to be just a matter of time rather than something that could jeopardise the loan proceeding – but we would ‘pull’ a loan if new information came to light at any stage of the process.
It’s rare for a Proplend loan to not be ready to draw down two weeks after Funding has completed, but where this does occur, we will typically notify Lenders that the loan has become interest-bearing before Drawdown – with a further notification when the loan officially commences. This helps ensure that Lenders aren’t waiting too long for their investment to start bearing fruit.
We’ve definitely seen the regulatory and compliance burden increase for SRA (Solicitors Regulatory Authority) and RICS (Royal Institute of Chartered Surveyors) professionals over the last 5-10 years and the reality is that the experience and bandwidth of Borrowers’ representatives can vary considerably – as does the urgency of the Borrowers themselves.
With three new loans a month on average in 2019 and an expected four a month next year, we’re liaising with dozens of commercial Brokers, Borrowers, Solicitors and Valuers on an ongoing basis. Whilst loans rarely go from Pending to Drawdown exactly how we’d hope, it’s certainly never dull.
We won’t compromise on our standards, but a degree of patience and persistence have been essential to getting many loans over the line. As has the faith of our Lenders in the Proplend model over our first five years and almost £80m lending funded.
Thank you to all Proplenders for trusting that we’re working hard behind the scenes every day on their behalf to deliver attractive, well-backed, commercial lending opportunities.
Related to this post …
Proplend loan volume and return statistics
Blog article (August 2019) – Five loans in five days this August Bank Holiday
Blog article (July 2019) – What can go wrong with Peer to Peer property loans
Loan Investment Comparison – A list of our funded loans to date and current statuses
