The Value of the Five-Part Due Diligence Search

When vetting a potential borrower, it’s important that you learn everything you can about their financial history. Public record searches provide critical information about an applicant’s existing liens and other financial obligations that could affect their ability to repay debts. Additionally, these searches help you determine if a priority position to collect could be obtained should you decide to fund the deal.

Any blind spots in this pre-funding due diligence process can cause big problems down the road.

The five-part due diligence search is a standardized, comprehensive group of public record searches that delivers insight into all existing claims and potential credit risks that are recorded in the public record. Leaving off any piece of the five-part search can put a lender at a risk for loss – because what you don’t know certainly can hurt you.

The five-part due diligence search consists of:

1.  A State-Level UCC and Lien Search

Does another creditor already have a UCC Financing Statement in place against the collateral? A state- level UCC search will disclose any notices in the state’s records that may indicate an existing claim against the collateral an applicant is pledging to secure the loan. In addition, the UCC index in many states includes other lien types such as certain tax liens and/or judgment liens (often those filed naming a business as debtor) which could have priority over a newly filed UCC Financing Statement.

2.  A County Search for Fixture Filings, Federal & State Tax Liens and Judgment Liens

A thorough pre-funding due diligence search effort would also include a search of the county real estate records for Fixture Filings to uncover any existing claims against personal property that are affixed to a piece of real property.

Although, as noted above, some states do house some tax lien and judgment lien records at the state filing office alongside UCC records, the majority of federal tax lien, state tax lien and judgment lien records are filed at a county-level filing office.

Searching for tax liens and judgment liens is uniquely critical in that these lien types are non-consensual – meaning there is no underlying agreement between the lienholder and the debtor. In fact, a tax lien or judgment can be filed without the debtor even knowing about it, so a lien search may be the only way for you to uncover the obligation.

3.  A Litigation Search at the State Court of General Jurisdiction

This piece of the five-part search will reveal if the applicant has been named as defendant in a lawsuit. If an open case is discovered, it could be a red flag of things to come. Should the case be decided in favor of the plaintiff, it could impact the defendant’s ability to repay debts and, in some cases, even affect lien position. For any closed cases, if the plaintiff did not elect to file a judgment lien to enforce the court’s final judgment, a litigation search may be the only way to learn of an outstanding judgment debt.

4.  A Litigation Search at the U.S. District Court

This search will show if your prospect has had any Federal suits brought against them which can include cases that cross state lines, cases filed by the U.S. government and those involving patent and copyright claims.

5.  A Bankruptcy Search at the U.S. Bankruptcy Court

Lastly, you will want to know if your applicant has ever filed for bankruptcy protection. If so, it could indicate a history of credit issues and financial instability that you would want to be aware of. The specific details of the case, such as how long ago the case was filed and the outcome for creditors will be an important part of your risk assessment process.

The five-part due diligence search is an easy-to-implement pre-funding search strategy that empowers you to quickly evaluate prospects and make funding decisions with confidence.

To learn more about the five-part due diligence search, or the CLAS Exclusive Lien and Litigation Search Package™ that combines all five components for one low rate anywhere in the nation – contact CLAS today at 800.952.5696 or connect@clasinfo.com – or fill out our simple contact form here!