Paperless loan process requires diligence

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A change in procedure has eliminated federal paperwork in the marine loan process, but has increased the likelihood of fraud and identity theft, members of the National Marine Bankers Association were told in November at their annual conference.

With new electronic filing regulations and faxing procedures enacted in 2007, the Coast Guard has gone paperless, and all documents for marine loans now are being scanned.

As a result, getting marine loans will become more complicated, says Kathi Krencik, president of the American Vessel Documentation Association. Loan originators, she says, will have to develop more clearly defined policies and procedures.

Krencik, a certified Microsoft Access programmer specializing in database programming for vessel documentation, says the AVDA recommends all original loan documents be sent to lenders, and that non-AVDA members should develop procedures for custody of original documents.

The changes were the subject of a Best Practices slide presentation at the NMBA conference in Palm Springs, Calif. The presentation by Don Parkhurst, senior vice president of SunTrust Bank; and Michael Bryant, a partner in Trident Funding Corp., offered some tips on dealing with the changes:

• New electronic procedures imply more red tape and pressure to close from dealers/brokers/customers. Lenders should not fund loans upon receipt of faxed documents if originals remain unsecured. Electronically filed documents increase the risk of fraud and identity theft because the Coast Guard currently has no encryption process.

• A paperless Coast Guard increases the chances for document rejection, with multiple faxed documents, scans and small font sizes raising the likelihood of illegibility. The lack of original signatures will encourage shrewd lenders to consult with legal counsel for guidelines to fund these transactions.

• Lenders should be on the lookout for straw purchases, in which the lender finances the boat purchase for one person, but the boat is in the care and custody of someone other than the person on the loan documents — possibly someone who did not qualify for the loan.

• Best management practices to avoid straw purchases should require that loan documents include a statement of ownership, documenting that the borrower will be the sole owner of the boat and it will remain in his or her care/custody at all times. A lender should closely review all title and insurance documents to confirm that no other party appears as owner or insured.

• Co-brokered loans are a new source of deception to both lender and consumer. In essence, Loan Broker 1 is submitting loan applications on behalf of Loan Broker 2, who is not approved by the lender. The lending company should always know with whom it is doing business.

• Boats delivered overseas that will be returning to the U.S. for permanent mooring are another problem for loan originators, especially in Florida. Best overseas delivery practices discourage financing boats to be delivered without a standby letter of credit or some form of collateral. When the boat is to be shipped, obtain proper documentation before funding. This includes: bill of lading; cargo insurance; foreign assemblers’ declaration; independent inspection of vessel; statement from borrower confirming shipping line, ship, date of sail, etc.

• Non-English speaking borrowers also present a higher risk of default and require interpreters to protect the bank’s interests. To avoid the Florida Document Stamp Tax, dealers/brokers are offering offshore deliveries. Florida requires offshore deliveries to be validated through photos documenting point of delivery through GPS coordinates.

This article originally appeared in the January 2009 issue.

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