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Conduit borrowers act as intermediaries between entities in need of loans and lenders. They assume debt and provide securities loans to customers who cannot meet credit requirements, earning a profit in exchange for securing the loan. However, they bear full responsibility for repayment of the loan and should only be used after exploring all other legitimate means of obtaining a loan.
Conduit borrowers are essentially natural or legal persons who assume debts to guarantee a loan to a third party. Essentially, the conduit borrower functions as a lender to the third party, typically earning a profit for the effort. By assuming the debt and providing a securities loan to customers who do not meet the credit requirements of the originating lender, the conduit borrower assumes full responsibility for repayment of the original loan.
The concept of a conduit borrower can be illustrated by viewing the process as an intermediary between an entity in need of a loan and a lender in the business of making loans. When factors make it impossible for the borrower to obtain the loan directly, the conduit borrower may step in to serve as the conduit or conduit between the two parties. In exchange for securing the loan, the conduit borrower will negotiate with its client terms and conditions that are acceptable to both the conduit borrower and the loan recipient. This usually means that the conduit borrower’s client will pay a higher interest rate. However, if the client lacks the credentials to secure a loan without the use of a conduit borrower, this may be seen as the most efficient means of obtaining the loan.
It should be noted that the conduit borrower bears full responsibility to the original lender for repayment of the loan. Even if the conduit borrower’s client defaults, the borrower is still responsible for making the original loan payments in accordance with the terms and conditions. Of course, the conduit borrower may choose to use legal means to recover all or part of the balance owed. However, payments to the originating lender must continue during this collection process.
Although the use of a conduit borrower is common, the option should not be used until all other legitimate means of obtaining a loan have been investigated. While the interest rate charged by a conduit borrower may be competitive with rates obtained from subprime loan companies, this is not always the case. Any individual or entity wishing to borrow funds should investigate all options thoroughly before making a final request to a conduit borrower.
Smart Asset.
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