What is a verification agent?
A verification agent is a company that checks the accuracy of a debt capital borrower's origination data and reporting. Capital providers often require that borrowers appoint a verification agent prior to the execution of an asset-backed credit facility, as the verification agent's "stamp of approval" on borrower collateral reduces the riskiness of the credit facility and protects against excess advances in funding.
After a debt raise, when fintech borrowers request funds from an asset-based credit facility, capital providers often wait for a green light from the fintech's verification agent before moving forward.
Historically, the use of verification agents has been most common in securitizations, where the volume of credit events and the number of transaction participants makes it critical that all parties have a high degree of financial and legal certainty that the transaction's underlying assets are sound.
But verification agents are also increasingly common in private credit and fintech debt capital deals too, especially those transactions where capital providers want to know that the fintech's assets—think credit card receivables or single-family properties, for example—meet all the general and deal-specific validation requirements that the borrower and lender have agreed upon.
For example, for a debt deal backed by single-family houses, a verification agent's role might be to check that each individual house in a property tape has recently been appraised and that the purchase documents for the property are complete. For a debt deal backed by corporate charge card receivables, a verification agent would make sure that every business listed in a fintech's loan tape is legitimate and creditworthy, which might mean validating borrower data with an identity verification platform like Alloy.
As we explain below, verification agents usually produce a verification file, or timestamped verification file of borrower assets, each time a borrower makes a draw request.
Importantly, the scale and complexity of a verification agent's responsibility vary significantly by debt capital transaction and asset-level data availability. A question such as, "Is this a legitimate corporate borrower?" is easier to assess programmatically than, "Is this two-story house in Virginia in good condition?"
How do verification agents work with fintech borrowers?
The bulk of a verification agent's work happens as part of the borrower draw request process, or each time a borrower requests funds from a debt capital provider as part of an asset-backed credit facility.
In previous posts, we covered why draw requests are important and how Finley's software can automate routine draw request operations. Draw requests, or borrower requests for funds from a credit facility, have three main components: a loan tape (or equivalent), a report on borrowing base calculations, and a signed draw request document.
Verification agents help capital providers answer the question, "Is the asset-level information in the borrower's loan tape accurate?"
If a borrower has a $100 million in assets and wants to draw $80 million against those assets, it's critical that a capital provider have high confidence in the accuracy of the borrower's reporting before making the disbursal.
That's why capital providers tend to require a verification agent to review and prepare a timestamped report on a borrower's data tape each time that borrower makes a draw request. (Practically speaking, borrowers will often send the same data tape, a set of associated borrowing base calculations, and a signed draw request document at the time of request as well, so the capital provider can review those files concurrently.)
If there are issues with the data tape, the verification agent can ask the borrower to update or refresh the data. If the data tape looks good, the verification agent produces a timestamped verification file and sends it to the capital provider and borrower. This file is essentially the green light for the disbursal of funds, assuming the borrower meets all other draw request requirements.
Want to learn more?
Capital providers often require fintechs to select a verification agent prior to the execution of a debt capital raise. While selecting and partnering with a verification agent tends to be straightforward, fintechs are often surprised by the cost and complexity of having to interface with a number of vendors in order to raise and manage debt capital.
In many cases, the task of managing disparate capital markets data pipelines, reporting timelines, and compliance requirements ends up requiring more headcount than business leaders anticipate.
If you're interested in learning more about software that can work alongside your verification agent and help you scale your capital markets function, just schedule a demo or take a self-guided product tour here. We'd love to chat!