Velocity Commercial Capital is returning to the securitization market, having tightened underwriting of small balance commercial loans following the disclosure that one of its borrowers misrepresented the use of proceeds.

The latest deal, Velocity Commercial Capital 2016-1, is backed by $348 million of loans secured by both single-family homes and retail/mixed use/industrial property loans, but a majority are for “mom-and-pop” landlords; the average balance is $325,114.  

Kroll Bond Rating Agency has issued preliminary ratings to eight of the 11 classes of notes in the transaction, including ‘AAA’ ratings to the Class A-FL notes totaling $184.9 million and the Class A-FX notes totaling $61.6 million.

Velocity’s first securitization, completed last year, included a loan that was used to purchase a primary residence, and not an investment property. The borrower misrepresented the use of proceeds. KBRA, which rated that deal as well, issued a statement saying that Velocity took steps to verify the loan documentation; but the original borrower checked a box indicating the proceeds of the $2.9 million loan were to be used to purchase an investment property.

In its resale report for the latest deal, KBRA notes that Velocity has since enhanced its origination practices to certify that a leased tenant is at a property when refinancing a loan. It also conducts pre-funding clearance and post-closing audit of legal and underwriting documentation. 

VCC will retain $17.9 million of the notes to be issue in order to comply with  European Union risk-retention standards, according to the presale report.

KBRA notes that 750 of the 1,103 investor-owner loans are associated with residential properties, while 353 are for property lessors to retail and industrial businesses. All of the adjustable-rate loans in the pool are secured by the underlying 1,104 properties as well as the property owners’ fee simple interest from tenant leases.

The residential properties are generally 1-4 family housing units, and the loans can be for a single-asset. The commercial properties include retail, industrial/warehouse and self-storage units. 

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