A verification agent, also sometimes referred to as a verification trustee or review agent, plays an important role in debt facilities and securitizations. A verification agent is an independent third party that is appointed to review and verify information and reports related to the collateral within structured finance transactions.
In both debt facilities like warehouse lines of credit and term securitizations of assets like mortgages, auto loans, or credit card receivables, the verification agent serves as an independent check to ensure the accuracy and completeness of critical information.
Some of the key responsibilities of a verification agent may include:
Reviewing and Testing Collateral Information
- Reviewing periodic reports on the performance of the collateral pool, including details on delinquencies, losses, prepayments etc.
- Selecting random samples of loan files and performing diligence to verify information like borrower details, credit metrics, property values for mortgages etc. is accurate
- Testing and confirming calculations related to principal balances, interest amounts, fees etc. on individual loans
Checking Compliance with Transaction Requirements
- Reviewing reports from the sponsor/servicer for compliance with portfolio metrics like weighted average coupon, loan-to-value ratios, geographic distribution etc.
- Verifying compliance with triggers related to early amortization events, events of default, servicer termination events etc.
- Checking adherence to servicing standards and policies related to collections, loss mitigation, foreclosures etc.
Providing Attestation Reports to Parties
- Providing periodic reports detailing verification reviews, tests performed, and factual findings
- Issuing opinions and making statements as to accuracy, completeness, and compliance with deal criteria
- Reporting instances of material discrepancies, misrepresentations, control failures etc. if identified
Utilizing an independent verification agent is considered a credit positive element by the ratings agencies in structured finance transactions. It provides reassurance that information on collateral performance and compliance is being independently monitored and verified on an ongoing basis.
How Do Verification Agents Work?
The verification agent is appointed at the closing of a structured finance transaction, usually based on mutual agreement between the primary deal parties which include the sponsor, underwriter, trustee, servicer, and investor representative.
The verification agent has access to read-only copies of the servicer’s systems and loan/collateral files. They are provided with periodic reports prepared by the servicer covering details on transaction performance.
The verification review process involves both general procedures for each reporting period as well as more extensive procedures conducted less frequently, such as annually.
Some of the general procedures include:
- Recalculating – Verification agents will pick sample items, often using random number generators, and recalculate balances, payments, interest amounts, fees etc. based on deal documents and then compare their numbers to the servicer’s.
- Reconfirming – They will take samples of information from the servicer’s reports such as aggregate UPB, delinquency and loss amounts, loan counts by credit grade, etc. and reconfirm these back to source system data or documentation.
- Analytical Reviews – They analyze metrics, trends, and performance data and investigate any anomalies from expected performance ranges or prior periods.
Examples of less frequent, detailed procedure steps include:
- Retesting loan/collateral attributes on a comprehensive sample – property values, borrower credit scores, income levels etc.
- Reviewing loan files more extensively for adherence to policies and procedures, eligibility criteria etc.
- Examining account histories and servicing records on delinquent, defaulted, modified, foreclosed loans
Throughout verification reviews, agents catalog any identified discrepancies and track these to resolution by the servicer.
Costs and Fees for Verification Agents
Verification agents have upfront due diligence fees as well as ongoing monitoring and verification fees. These costs are born by the sponsor but may be spread across other parties.
Upfront Due Diligence Fees
Before deal closing, the verification agent conducts initial reviews of the sponsor’s origination, underwriting, and valuation processes as well as testing samples from the proposed collateral pool:
- Loan file diligence – physically re-underwriting loans including income, assets, appraisals etc. Fees can range from $75 to $350+ per file depending on loan type and diligence level.
- Valuation diligence – 3rd party property appraisal and BPO reviews from $50 to $150 per file.
- Compliance reviews – testing adherence to laws, regulations, consumer protection etc. up to $100,000+ for large pools.
- Legal document reviews – $5,000 – $15,000 per template to verify compliance, enforceability etc.
- Total upfront diligence fees often range from $200,000 to upwards of $1M+ depending on deal size and scope requirements.
Ongoing Monitoring and Verification Fees
Post-close the verification agent is paid periodic fees to cover their loan-level testing, recalculations, report reviews as well as more extensive procedures and examinations conducted annually/quarterly:
- Monthly fees – Scale based on size of the collateral pool but often in the range of 1-2 basis points (bps) per year.
- For example, $250K – $500K+ per year ($20K – $40K+ per month) for a $25B collateral pool.
- Plus certain variable usage fees billed monthly for activities like increased samples sizes for loan testing, onsite visits, deal party meetings etc.
- Annual fees in the $200K range depending on deal complexity to cover loan file review processes etc.
In total, investors view verification fees that annually equate to 3-5bps of a transaction’s balance as reasonable for the independent surveillance and reports received.
Reporting by Verification Agents
The core output of the verification agent is the attestation reports they prepare for transaction parties summarizing their review findings, diligence conducted, and statements on collateral accuracy and deal compliance.
1. Periodic Opinion Reports
Monthly or quarterly as applicable, the verification agent issues:
- Type 1 – Factual findings reports detailing verification procedures performed and any discrepancies identified
- Type 2 – Transaction compliance reports with opinons on whether the collateral and deal triggers are in compliance with established requirements
These provide timely updates between annual attestation periods.
2. Annual Independent Accountant’s Report
Annually, registered public accounting firms who serve as verification agents also issue a SOC1 Type 2 report which contains:
- Description of diligence procedures conducted across areas like recalculations, confirmations, file reviews etc.
- Detail on the scope, sample sizes covered by the diligence
- Factual findings resulting from their examination
- Opinion statements that the information and records tested are fairly stated or require certain qualifications
Essentially, these SOC1 reports describe the verification agent’s processes and detail findings that either clear identified discrepancies or highlight areas still requiring remediation by the servicer.
The reports give comfort to investors on processes being followed and provide transaction compliance opinions from a certified accounting firm.