Velocity Commercial Capital took steps to verify the so-called liar loan included in VCC 2015-1, a small-balance commercial mortgage securitization, according to Kroll Bond Rating Agency, which rated the deal.

A report published by Bloomberg this month alleges that proceeds from one of the loans used as collateral was used to purchase a home for use as a primary residence, and not an investment property. The article alleges that the loan used to purchase a $2.95 million home in Manhattan Beach, Calif., was underwritten to low documentation (or no documentation) standard; such loans are commonly referred to as "liar loans."

Such loans are believed to have contributed the housing crisis because they allowed borrowers to misrepresent their income or assets, allowing them to qualify for homes that they ultimately could not afford.

In this case, according to Bloomberg, the borrower misrepresented, or at least failed to represent, the purpose of the loan.

In a report published Monday, Kroll said that it took several steps to verify that the loans underlying VCC 2015-1 were, in fact, commercial loans. These steps included reviewing the sponsor's credit policies, underwriting guidelines, sample loans documentation and representations in connection with the sale of the loans to the trusts. "Through the review, KBRA gained comfort that Velocity was originating commercial mortgage loans and not making any consumer loans to residential buyers," the report states.

Since Kroll rated the deal, and a previous transaction issued by the sponsor called VCC 2014-1, based on its CMBS ratings criteria, the loan's residential status would represent event of default. Velocity would have to either repurchase the loan or substitute a qualifying loan for the affected mortgage.

But Velocity told Kroll that it secured a hand-written note from the borrower stating that the loan was obtained for a business purpose; the note states in boldface type that "the proceeds of this note will not be used for personal, family or household purposes." Further, the borrower ticked the boxes on the application that the loan would be used for a commercial purpose, specifically the purchase of an investment property.

Using the proceeds for something other than its intended purpose would also constitute a borrower event of default, at which point Velocity can declare the full amount of the note to be immediately due and payable.

The loan was sourced by a mortgage broker that also participated in the origination of five other loans for Velocity, totaling approximately $3.9 million, in addition to the Manhattan Beach loan.

Velocity works with a network of mortgage brokers. The sponsor requires brokers to execute a broker agreement and a loan fraud zero tolerance acknowledgement.

The sponsor told Kroll that it has not yet contacted the borrower but plans to do so, although the ratings agency did not specify a time frame.

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