Digital automation of background of borrowers for private money loans

In theory, private or hard money loans are just equity-based loans without credit, asset, or background checks, so borrowers think they can pull off a scheme. They know that banks and institutional lenders will discover the missing pieces and be able to make a more informed decision.

BlueCheck offers automatic API and manually assisted background checks for private and hard money loans, especially when working with a new borrower. When something doesn’t seem right in the conversation with a potential borrower, and you can't figure out why but know something is off, background checks help to vet out red flags or fill in the information gaps.

Here are some examples of what background checks have revealed and how they have affected underwriting decisions.

Borrower's LLC faces $1 million in business tax liens

A commercial Realtor in Los Angeles a few years ago provided private money bridge financing to his buyer. Three companies turned the buyer down for institutional financing, raising a red flag. During the conversation, the borrower claimed he did not know why he was being turned down for financing. 

This mystery was solved by running a background check during the call.

Is this $1,000,000+ tax liens between the IRS and Franchise Tax Board against some LLC?

I don't owe that tax lien. It's my company's.

"Until the tax liens are released, no family offices or trust deed investors will offer this loan."

So that's why institutional lenders were not interested in the loan. One million dollars in state and federal tax liens with no intention of paying them are not something we wanted to do.

Trying to refinance a property they don't own with cash-out

The lender received a call from someone claiming to own a free and clear apartment building valued at $4,000,000 and requesting a $1,200,000 private money bridge loan.

The potential borrower was new, finding them through a Google search, so we needed a history. That's not a red flag in itself. There was a sense that something wasn't quite right in the combination of the new person and the sense that something wasn't quite right.

Check the borrower's background when in doubt.

It was a mug shot from a conviction for a similar scam for $100,000 2-3 years ago that matched the driver's license the borrower sent in with their loan application, phony rent roll, insurance, and property management agreement.

The LLC that owned the apartment building had a different owner who lived out of state, according to a second background check.

Purchasing a portfolio of commercial buildings for $1,500,000 with cash back

Something was off from the first call with the borrower, but I couldn't pinpoint what. When the borrower provided the requested financial statements, including Rent Rolls, Operating Statements, Personal Financial Statements, Bank Statements, Entity Documents, Property Management Agreements, etc., did I want to start due diligence?

We weren't having a normal conversation with a commercial property owner where they mentioned their NOI (Net Operating Income) for their properties. Instead of discussing actual numbers as an investor might with a banker, these conversations were marketing pitches with words like "tremendous" and "strength."

Why did the borrower want private financing at 10-12% rates when they said they were financially strong and the building had great cashflows? No strong investor with significant cash flow takes 10-12% loans if they can get 4-6% from their local or regional bank. That makes no sense.

Borrowers presented the transaction as a cash-out refinance with over $1,500,000 in net proceeds.

As the background check revealed, they didn't own any buildings and were trying to purchase them with no money down while receiving $1,500,000 cash back.

Financial crime convictions

Borrowers with previous convictions for financial crimes may still be able to obtain private money loans.

After running a background check on a new borrower, the lender-placed the loan with a family office that was comfortable funding a blanket loan on a few rental properties even though the borrower had a prior financial crime conviction. The 12-month bridge loan was refinanced by a non-QM lender with a secondary market investor who accepted the prior conviction when it matured.

However, it is essential to note that not all private money lenders and NonQM lenders, or their secondary market investors, are okay with previous convictions for financial crimes.

Charges & Convictions - Non-Financial Crimes

Background checks have occasionally revealed criminal convictions or current criminal charges.

The go-to institutional private money lender always ordered background checks for us five years earlier before we ordered them on all new borrowers.

A real estate investor called the lender asking for $35-45K to remodel their rental property after the tenants move out in the next month.

It turned out the tenants had another ten months on their lease and that the money was being used for personal legal bills and to repay a friend who had provided the bail bond money. As a business purpose bridge loan became a consumer bridge loan, we needed to follow a whole new set of regulations.

The background check would have revealed the active criminal charges, and we would have better understood what the funds were used for (consumer purposes) and wouldn't have approved the loan.