Seller & lender beware

Marine lenders like to swap what they call “horror stories,” deals that look bulletproof but go horribly bad. Often these tales are cleverly embellished “greater lies,” but they serve to warn neophytes that boat transactions or loans that look pristine on the surface can be shark-infested underneath.

Here’s an example that could occur. A lender receives a loan application on a new boat with all the supporting paperwork in order. The buyer has a top credit score, squeaky-clean tax return and impressive financial statement. It’s an easy approval decision on a $250,000 loan with no money down; the money goes out and the deal is closed. A few weeks later, the new buyer calls and says he’s mailing the keys back to the lender noting the boat has no engines. It was shipped that way to allow the buyer several power choices, but the one he wants is not available now.

How could this happen? No one working directly for the lender or a lender’s agent ever physically inspected the actual boat to verify it was complete. A mistake of this nature will probably not result in a complete charge-off for the lender, but it will certainly cost staff time, remarketing and legal fees to correct and reduce the profitability of the overall marine loan operation. Keep in mind that “little deals” gone bad like this one are simply painful.

Taken as a whole, the boat loan market is exceptionally statistically safe. The latest National Marine Banker Association statistics show marine loan charge-offs (0.50 percent) are running about 40 percent below all installment loan charge-offs (0.80 percent). Boat buyers have strong credit ratings, much higher than buyers of other products that can be financed, such as cars. High credit ratings are the litmus test of borrowers’ ability to repay, which correlate to low risk for lenders. But that doesn’t mean sellers and lenders should let their guard down.

Transactions, new or pre-owned, accompanied by what appear to be clear titles or “documented” by the U.S. Coast Guard, don’t guarantee that everything is what it appears. An October 2006 study conducted by First American Transportation Title Insurance Company reported that more than 35 percent of recorded maritime vessel ownership records contain potential title issues. It evaluated more than 100 randomly selected commercial and recreational vessels listed on the Coast Guard’s National Vessel Documentation Center registry. The study found that nearly 8 percent of vessels examined had liens filed that were unsatisfied. More than 80 percent of vessels had delayed filings for important documents, namely bills of sale or preferred mortgages.

Smaller boat transactions, usually backed by a state title, aren’t immune to mistakes or delays either. There are no accurate records about the veracity of data entered by state workers, but human error is a known factor. In terms of timeliness, some state agencies charged with boat titling are known to run six to nine months late in data entry. Even if your state of business is right on top of the situation, it doesn’t mean a neighboring state is providing current title details. To complicate things, not all states have boat title programs, and every state does it a bit differently. Congress recognized the mess and authorized establishment of a National Vessel Identification System in the late 1980s to help remedy some of these challenges, but it never gained sufficient priority or funding to fly.

So what should careful sellers or lenders do? Use their eyes and instincts. Knowing the people involved in the transaction and gaining visual proof of the boat, new or used, in question (including flipping the engine hatches) is the best course. As noted in earlier columns, there are allies with a stake in the process to help: surveyors, documentation firms, insurance agents, admiralty attorneys and others.

Consider also one of the excellent boat transaction software programs available to boat sellers and lenders. They keep track of the deal details, when actions have been or need to be taken, connect the parties involved, often populate and produce the documents needed at closing and shepherd along a complex process to take place on the date planned.

No party to a “done deal” wants it to reappear because of a “hidden lien,” inaccurate equipment inventory, unfinished product or missing closing documents. There’s no circumventing due diligence in assuring the deal on paper accurately reflects the exchange of cash to fulfill a dream.

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