For investors and funders, effective portfolio oversight depends on reliable information. Loan-level data, supporting documentation and operational controls all contribute to understanding how assets are being originated, serviced and reported.
Agreed-upon procedures, commonly referred to as AUP Audits, can provide valuable additional visibility. But their effectiveness depends not simply on completing a set of checks. The scope needs to address the right areas, the evidence must be examined carefully and the findings reported clearly.
What is an AUP Audit?
An AUP Audit involves a practitioner performing specific procedures agreed with the engaging party and reporting the factual findings. Unlike an audit or assurance engagement, an AUP does not result in an audit opinion or assurance conclusion. Instead, the intended users assess the findings and draw their own conclusions.
Within lending and structured finance, procedures may examine whether specified elements of a portfolio have been originated, serviced and reported in accordance with agreed policies and contractual requirements. Areas considered can include data accuracy, credit quality, portfolio performance, covenant compliance, servicing processes and indicators of operational or fraud risk.
Why the scope matters
AUPs are most useful when the procedures are built around clearly defined objectives.
While many checks may be relatively standard, every portfolio and funding structure is different. One engagement might focus heavily on data integrity and origination policy, while another requires closer examination of servicing practices, asset documentation, cash flows or facility covenants.
The procedures therefore need to be sufficiently clear and specific to produce useful factual findings.
This is also why AUPs should not be approached simply as a tick-box exercise. The quality of the engagement depends on appropriate procedures, detailed examination of the evidence and clear reporting of any exceptions identified.
The value of specialist lending experience
Technical rigour is fundamental, but understanding the underlying lending environment also matters.
Lenvi has more than 35 years’ experience in financial markets and services approximately £45 billion of assets across multiple asset classes. Its teams work with lenders and investors across lending, servicing, risk management and portfolio oversight.
That experience provides important context when examining loan-level information and servicing activity. It enables AUP engagements to be approached as a specialist portfolio-oversight discipline rather than a generic review process.
It is also an area where specialist providers can stand alongside larger firms. Scale is only one consideration when selecting a practitioner. Relevant market knowledge, senior involvement, attention to detail and an understanding of the underlying assets can be equally important.
From findings to better oversight
A well-structured AUP report provides a clear account of the procedures performed and the factual findings identified.
Where exceptions arise, clarity is particularly important. The report should enable its intended users to understand what was tested and where the observed result differed from the agreed criteria. The investor or other intended users can then determine whether further investigation or action is appropriate.
AUP engagements can also provide continuity over time. Where reviews are repeated, previously identified areas can be revisited to establish whether issues remain. Lenvi undertakes AUPs at different frequencies, including annual, twice-yearly and quarterly reviews, depending on requirements.
Part of a wider approach to portfolio monitoring
AUPs provide a defined examination of agreed areas, but they can also form part of a broader portfolio-monitoring approach.
For example, ALVIN, Lenvi’s automated loan-verification system, integrates with a lender’s loan-management system through secure APIs. It monitors loan portfolios, tracks cash flows, verifies information from source systems and checks supporting asset documentation to help identify potential fraud, including double pledging.
The two approaches have distinct roles. Automated monitoring can help identify changes and anomalies on an ongoing basis, while an AUP provides factual findings against specifically agreed procedures. Together, they illustrate how portfolio oversight is evolving beyond periodic checks towards greater transparency and visibility.
What should investors look for in an AUP?
A useful starting point is to consider:
Purpose: What should the engagement help you understand?
Scope: Are the procedures focused on the areas that matter most?
Expertise: Does the practitioner understand the lending products and operational environment being examined?
Reporting: Will findings and exceptions be presented clearly enough to support informed decisions?
Frequency: Is an annual exercise sufficient, or would more frequent oversight be appropriate?
A well-designed AUP cannot remove portfolio risk. What it can provide is clearer factual information, giving investors and funders a stronger basis from which to assess that risk and determine their next steps.
Find out more about Lenvi’s approach to agreed-upon procedures and portfolio oversight.
Read more from our experts
Expert perspectives on regulation, innovation, risk and the trends impacting lenders across the market.
