The Old Way of Transferring Payments:
Over the last several years, transfers were arranged by intermediary brokers and when an investor committed to buy, the broker produced some sort of purchase agreement between broker and investor. Usually the broker supplied the investor’s titling information to the originator factoring company and put an investor’s name directly in the court proceedings.
The investor rarely had any contract with the actual seller of payments or the originator, and thus there existed no real contractual relationship or performance obligation between these parties.
The investor’s relationship and contract with the broker was built on trust as the broker had no firm control of the asset, yet often exercised some level of control over the investor’s cash and the legal review of the transfer.
Whether third party legal review or in house, the Investor had few opportunities to review documents and often was not involved in the steps of the process. Likewise, the Broker had little control of the documentation until near the end of the transaction, and gradually there developed a distressing precedent of funding transactions before all documentation was complete, specifically post- court acknowledgement letters.
Issues With The Old Way Of Transferring
While this old process works, it requires quite a few leaps of faith and is fraught with potential issues.
Questions of the legal reviewer’s fiduciary duty come up, as do questions of funds control. This process also exposes the investor to a long time delay waiting for court, which may or may not be approved, and further it effectively commits the investor to signing documents that may come up- such as stipulations, affidavits, and originator’s purchase and sale agreements, and undisclosed servicing arrangements- without the Investor ever knowing about or seeing such documents beforehand.
Issues of confidentiality also arise- many investors would prefer anonymity over their personal name and address directly in a court order and openly viewable as a public record.
Finally, as the broker had no ‘chain of title’ connection to the asset, what was the buyers ‘purchase contract’ with the broker really stating?
At heart, an agreement from an investor to buy a payment stream needs to state that if the payment stream with the series of steps and documents summarized below is completed and reviewed properly and made available to the Investor, then the Investor will exchange money for the payments. Rarely could a broker control the proceedings sufficiently to ensure all of these elements and thus ensure the investor’s safety.
SUMMARIZED STEPS IN A TRANSFER
NO EXTERNAL CLAIMS
Confirmation that no other parties have any interest in the cash flow, such as bankruptcy, lien, taxes, or spousal claims
STATE STATUTE COMPLIANT
Verification and review that the transfer occurs in accordance with all applicable state procedures
Verification and confirmation that the proper parties are noticed, and done so in the proper manner and timelines.
Proof that a court of competent jurisdiction approves that the transfer is in the best interests of the Payee/Seller.
Confirmation that the issuer/carrier acknowledges and confirms the transfer.
Absent the items above, an investor should never be committed as the cash flow is not perfected or properly assigned.
Yet in most broker-arranged transactions where the broker is not a principal to the transaction, the brokers routinely used client funds to purchase payments prior to the final and critical step, carrier acknowledgement. While this rarely (but not never!) resulted in issues with the transfer, it is a distressing practice that we can no longer abide by and do not engage in. Large sellers of SMAs still use this deceptive, risky transfer method and it’s only a matter of time before something very bad happens. Thankfully, it will NOT be one of our clients who gets burned!
Unfortunately, a broker middling a simultaneous reassignment with his client directly in the court order has no control over the transaction and thus has little ability to ensure any of the items above. His purchase agreement with the Investor is of no use as the Investor is really at the mercy of the originator, yet the Investor has no contract with or even knowledge of the originator.
In every business, the Golden Rule applies- The One With the Gold Makes the Rules. However in the SMA business, the “Gold” is the future payments, and thus in a direct-to-court-order transfer process, true control lies with the Seller and Originator, and NOT with the end investor.
In short, committing to buy a case directly via court ordered re-assignment through a broker who does not properly control a transaction is fraught with investor exposure. And buying a case directly from an originator is likewise fraught with potential issues.
Enter a new way of doing business…
Wouldn’t it be nice to enter into a purchase agreement with a counter-party who actually controlled a payment stream? To buy from someone who had their own cash on the line, and who had already completed all the steps and completed the transfer?
Wouldn’t it be nice to buy an existing in force payment stream directly from the party receiving those payments, and close in a matter of days or hours, not weeks or months?
Wouldn’t it be nice if the One With the Gold was the Investor- and they were buying something known, proven, and reviewable, openly and with transparency, and could take it or leave it as they saw fit? With no stringing along or vague steps and procedures?
In short, wouldn’t it be nice to buy with confidence?
That’s what we do.