What Types of Financial Documents Do Lending Businesses Process?

Although financial documents often notoriously difficult to automate, they’re tough to avoid. Lending businesses are required, for various reasons, to verify, review, and document the identity and financial information for each new client (or potential client). They can also choose to collect information about the creditworthiness of each borrower, including paystubs, income, tax documents, and more. 

While this results in a robust understanding of the client file, it can also mean a lot of paperwork. Here are some key pieces of documentation, as well as where and when you need them.

1. Identity documents and verification

Identity documents are used to verify a borrower’s identity and comply with Know Your Customer (KYC) regulations, as well as anti-money laundering (AML) laws. KYC and AML laws emerged in the Bank Secrecy Act of 1970 to formalize record keeping and keep tabs on drug trafficking, organized crime, tax evasion, and terrorist financing. 

Cash heavy criminal enterprises were moving large amounts of money with no accountability, so the government implemented new standards in order to monitor suspicious transactions. Banks now had to ask questions about who deposited large sums, keep records of cash purchases over $10,000, and file currency transaction reports (CTRs) with the US treasury, creating a paper trail for government officials to follow. 

The 2001 Patriot Act added stricter KYC and monitoring rules post 9/11. These included identity verification (name, date of birth, address, and ID such as an SSN or passport). This formalized some of the KYC rules we have now, and enhanced due diligence processes for foreign accounts, suspicious activity, and information sharing. 

Most importantly, the Patriot Act expanded the AML obligations beyond banks. Today, you are required to follow KYC/CIP regulations at credit unions, banks, broker dealers, mutual funds, insurance companies, trust companies, mortgage lenders, and more.  

2. Income & employment

Income and employment documents are some of the 80% of corporate documents that are unstructured. Idiosyncrasies like billable hours and payroll formats cause automated tools to struggle, often leading to errors that make automation unfeasible. This is the legacy of older AI tools like OCR; modern AI uses natural language programming (NLP) which can put some of these financial details into context and more reliably automate results. 

Documents to support income are required for lending businesses like banks, credit unions, mortgage brokers, and payday lenders. They typically include loan application forms, pay stubs, tax returns (T4s in Canada, W-2s in the United States), bank statements, employment letters, or financial statements from a business.

In the case of a business loan, the business will need to prove cash flow, either through tax documents, audited financials (or interim financials, depending on the size of the business and the period), or bank statements. Just like in KYC rules, business lenders have to verify the owner’s identity, but they also might want to verify income (ie. last 2-3 years of personal/business tax returns), notice of assessments for taxes, assets, profits, and adjust for any debts, car leases, or other loans. 

3. Ownership documents 

Property title, vehicle ownership, UCC filings, lien agreements, and insurance docs all make up the documentation for assets used as collateral. When real estate is bought, sold, or borrowed, or the ownership is transferred, ownership documents are legally required to prove the transfer under KYC and AML laws. 

UCC (Uniform Commercial Code) filings record the lender’s security interest in the vehicle, equipment, or other property. These filings make sure the lender is ‘first in line’ for the property over other creditors that the debtor might have. The Canadian equivalent to the UCC is the PPSA (Personal Property Security Act).

KYC and AML laws have made verification requirements more stringent, and lenders often have creditworthiness requirements of their own. The result is paperwork – and a greater demand for automatic connections (from parties like Plaid or Flinks). Automatic access is sometimes unpopular, though, which is where dedicated document upload solutions step in. Today, AI tools can process financial documents for lenders in a fraction of the time – without missing a thing!