How to Prepare for a Capital Partner's Due Diligence

To prepare for a capital partner's due diligence, build a data room before anyone asks for it: corporate and licensing documents, financial statements, a loan tape with your full performance history (including delinquencies, defaults and losses), written underwriting and servicing policies, loan document templates, insurance, and references. Then rehearse the hard questions.

Our guide to how capital partners evaluate a private lender covers diligence from the funder's side. This one takes the lender's side: what you'll be asked for, how to present it and how to get ready in 30 days. Lender-level diligence applies to almost every source of institutional capital, from loan buyers to credit lines; our warehouse line of credit alternative page compares those options, and how private lenders fund more loans explains where each fits as you grow. Expect partners to test individual loan files too, against items like those in our lender due diligence and underwriting checklist.

Key takeaways

• Capital partners diligence the lender as well as each loan: its entity, licensing, finances, track record, policies, servicing, documents, insurance and people.
• Build a data room with a consistent index before the first request.
• Present a complete loan tape, including delinquencies, extensions, defaults and losses, with a short narrative of how each problem loan was resolved.
• Have written underwriting guidelines and a documented exception process.
• Licensing varies by state. Know what you hold, where, and why; consult counsel.

What does a capital partner's due diligence on a lender cover?

It covers whether you are a business the partner can rely on over many loans, not just whether one loan is sound. A partner funding loans you originate depends on your underwriting, your documents and, if you keep servicing, your servicing.

Banks treat the lenders they buy from in a similar way. The OCC's Mortgage Banking handbook says that before entering into agreements with brokers and correspondents, banks should establish a framework for their initial approval and ongoing monitoring. Private capital partners don't follow bank rules, but many run a version of the same process. Expect it at the start of the relationship and again periodically.

What corporate documents should you have ready?

Have your formation documents, ownership and authority documents ready in one folder, current and signed:

• Articles of organization or incorporation, and the operating agreement or bylaws
• Certificates of good standing in your formation state and the states where you lend
• An ownership chart showing every owner above a threshold the partner sets, and any affiliates
• Resolutions or an incumbency certificate showing who can sign for the company
• A short organization chart with key people, their roles and their experience
• Any material litigation, regulatory actions or complaints, with status (disclose these yourself)

What licensing will a capital partner ask about?

Expect to show which licenses you hold, in which states, and why you believe your lending is covered, or why no license is required where you hold none. Licensing for business-purpose real estate lenders varies widely by state and by loan type, so a short memo from counsel is often the cleanest answer. This is general information, not legal advice; consult counsel.

Where state licenses apply, many are managed through the Nationwide Multistate Licensing System. The Conference of State Bank Supervisors describes NMLS as the system of record for non-depository financial services licensing or registration in participating state agencies, and the system companies use to apply for, amend, renew and surrender licenses. If you hold licenses there, include your NMLS ID and a current list of license authorities.

Be ready to show your loans are business-purpose. Federal Truth in Lending rules exempt credit extended primarily for a business, commercial or agricultural purpose, and credit to other than a natural person (12 CFR 1026.3(a)). State rules differ, so show the partner how you document purpose: entity borrowers, business-purpose certifications and non-owner-occupancy affidavits. Our guide to business-purpose vs. consumer loans covers the distinction.

Which financial statements do capital partners expect?

Expect requests for at least two years of financial statements, interim statements for the current year and evidence of liquidity. Audited statements carry the most weight, reviewed statements less, and internally prepared statements least, so say plainly which you have.

The OCC handbook's checklist for reviewing a third-party servicer is a useful guide to how institutions think: it includes background information, audited financial statements, a review of errors and omissions insurance and surety bond coverage, and performance measures such as delinquency, foreclosure and real estate owned rates. A capital partner reviewing you as an originator and servicer will ask similar questions.

How should you present your loan tape and performance history?

Present a loan-level tape of every loan you have originated over the period the partner asks about, with the same fields for every loan, and a short narrative for each loan that went wrong. Do not send only your best loans; a partner who sees no problems in a real track record assumes the tape is incomplete.

Useful fields include origination date, loan type, property type and location, loan amount, as-is LTV and LTC or ARV ratio, rate and points, term, extensions, current status, payoff date, and for problem loans the days delinquent, default date, resolution and any loss.

Then add a summary:

• Delinquencies and extensions: how many, why, and how they ended.
• Defaults: what happened, how you worked them out and how long it took.
• Losses: the amount, the cause and what you changed in your underwriting afterwards.

Be honest. Every real track record has problem loans, and how you describe them tells a partner more than any average. Our guide to the default and workout process can help you frame them.

What underwriting guidelines and policies do you need?

You need written underwriting guidelines that match how you actually lend, plus a written process for approving exceptions. A partner will compare your guidelines to your loan tape, and gaps between the two are a red flag.

Cover maximum leverage by loan type, appraisal requirements, borrower experience and credit standards, required equity, title and insurance requirements, and who approves what. For exceptions, follow the standard banks are held to: the Interagency Guidelines for Real Estate Lending, quoted in the OCC's Commercial Real Estate Lending handbook, say approval of a loan outside policy should be supported by a written justification that clearly sets forth all the relevant credit factors, kept as part of the permanent loan file. Show a sample loan file packaged the way you would send it; see how to build a loan file capital partners will fund.

How will a partner assess your servicing?

A partner will want to see how you collect payments, report, manage construction draws and handle delinquencies, whether you service in house or through a third party.

Prepare a servicing overview: systems, staff, payment processing, how funds are segregated, draw procedures, delinquency steps and sample reports. If you use a third-party servicer, include the agreement and its reporting. Our guides to loan servicing in private lending and the servicing and reporting capital partners expect go into detail.

What else goes in the data room?

Loan document templates. Your standard note, mortgage or deed of trust, guaranty, loan agreement and construction loan agreement, plus your assignment documents. Note that counsel prepared or reviewed them, and keep versions dated.

Title and escrow relationships. The title and escrow companies you use, how you confirm wiring instructions, and how lenders are named on title policies. See title insurance and title commitments for lenders and escrow and closing for privately funded loans.

Insurance. Certificates for errors and omissions coverage, fidelity or crime coverage and general liability, with limits and renewal dates. Requirements vary; ask early.

References and background checks. Contacts at title companies, other capital sources and repeat borrowers, with their permission. Expect background and credit checks on principals, and sign consents promptly.

What should a data room checklist include?

Folder	What to include
1. Corporate	Formation documents, good standings, ownership chart, signing authority, org chart
2. Licensing	License list by state, NMLS ID if any, counsel memo, business-purpose procedures
3. Financials	Two years of statements, interim statements, bank statements, liquidity
4. Loan tape	All loans, consistent fields, problem-loan narratives
5. Policies	Underwriting guidelines, exception process, appraisal and closing procedures
6. Servicing	Servicing overview, sample reports, draw procedures, servicer agreement
7. Documents	Loan and assignment templates, counsel review note
8. Closing partners	Title and escrow companies, wire procedures
9. Insurance	E&O, fidelity or crime, general liability certificates
10. People	Bios, references, background check consents, litigation disclosure

What does a 30-day prep plan look like?

Week	Focus	Done when
1	Corporate, licensing, insurance	Folders 1, 2, 9 complete; counsel engaged on licensing memo; insurance gaps identified
2	Loan tape and performance	Every loan on the tape, fields consistent, narratives written for problem loans
3	Policies, servicing, documents	Guidelines match practice; exception log in place; servicing overview and sample reports ready
4	Review and rehearse	Financials added; index checked; a colleague or advisor runs a mock diligence call

In week 4, reconcile the tape to your financials and guidelines; mismatched numbers cause most delays.

Frequently asked questions

What documents does a capital partner ask a private lender for?

Typically corporate and ownership documents, licenses, financial statements, a loan tape with performance history, written underwriting guidelines, servicing procedures and sample reports, loan document templates, insurance certificates, references and consent for background checks.

Do private lenders need an NMLS license?

It depends on the state, the loan type and the borrower. Some states require licenses managed through NMLS for certain lending, and business-purpose lending is treated differently from consumer lending. Consult counsel for your states.

Should I show defaults and losses in due diligence?

Yes. Include every delinquency, default and loss on the tape, with how it was resolved and what you changed. Partners expect a real track record to include problem loans.

How long does it take to prepare for capital partner due diligence?

If your records are in order, a focused 30 days is usually enough to build a data room. It takes longer if your loan history or policies were never written down.

How Lender Capital fits

Lender Capital offers direct capital placement for first-lien, business-purpose real estate loans: bridge, fix and flip, ground-up construction and DSCR rental. Lenders are reviewed for track record, underwriting and licensing before they can submit loans, so the preparation above is the same work that gets you approved. After that, you submit each loan with its full file, a capital partner sees the full file before committing and funds the whole loan at closing, and the loan is assigned to it at closing. You keep servicing and the borrower relationship, and you pay a placement fee from your origination points only when a loan funds. You keep your points and earn a yield spread: you set the borrower's note rate, the capital partner receives its agreed rate, and the difference is yours.

To compare placement with a credit line, see our warehouse line of credit alternative page, read how it works for lenders, or apply as a lender.

Sources

• Office of the Comptroller of the Currency, Comptroller's Handbook: Mortgage Banking
• Office of the Comptroller of the Currency, Comptroller's Handbook: Commercial Real Estate Lending (including the Interagency Guidelines for Real Estate Lending)
• Conference of State Bank Supervisors, NMLS
• Consumer Financial Protection Bureau, 12 CFR 1026.3, Exempt transactions