Conduit borrowers are essentially individuals or corporate entities that assume debt in order to secure a loan for a third party. Essentially, the conduit borrower is functioning as the lender to the third party, and normally makes a profit for the effort. By assuming debt and providing a securities loan to customers that don’t meet the credit requirements of the originating loan institution, the conduit borrower assumes full responsibility for the repayment of the original loan.
The concept of a conduit borrower can be illustrated by viewing the process as an intermediary between an entity that needs a loan, and a lender who is in the business of making loans. When factors make it impossible for the borrower to secure the loan directly, the conduit borrower may step in to function as the pipeline or conduit between the two parties. In exchange for securing the loan, the conduit borrower will negotiate terms and conditions with their client that are agreeable to both the conduit borrower and the recipient of the loan. This generally means that the client of the conduit borrower will pay a higher rate of interest. However, if the client lacks the credentials to secure a loan without the use of a conduit borrower, this may be viewed as the most efficient means of obtaining the loan.
It should be noted that the conduit borrower has full responsibility to the original lender for the repayment of the loan. Even if the client of the conduit borrower defaults, the borrower is still liable for making payments on the original loan according to the terms and conditions. Of course, the conduit borrower may choose to use legal means to recoup all or part of the remaining balance owed. However, payments to the originating lender must continue during this collections process.
While the utilization of a conduit borrower is common, the option should not be employed until all other legitimate means of obtaining a loan have been investigated. While the rate of interest charged by a conduit borrower may be competitive with the rates obtained from high-risk 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 application to a conduit borrower.