Private lenders spend a significant amount of time evaluating collateral, loan terms, and borrower qualifications. Yet some of the most costly lending mistakes happen long before a loan defaults. They occur during due diligence when a lender fails to verify who has authority to borrow, who owns the property, or what claims already exist against the collateral.
Two of the most important components of private lending due diligence are entity review and title review. A thorough private lending due diligence process helps lenders verify authority, evaluate collateral, and reduce the risk of future enforcement challenges. While these processes are often treated separately, they are closely connected. A title report may identify who owns a property, but lenders still need to verify that the correct individual has authority to sign on behalf of the borrowing entity. Likewise, proper entity documentation is not enough if title issues affect the lender’s lien position or enforceability. Understanding how these reviews work together can help lenders reduce risk and avoid costly problems later.
Why Entity Review Matters
One of the most common mistakes lenders make is assuming that the individual negotiating the loan is automatically authorized to sign the loan documents.
That assumption can create serious issues if the loan later ends up in litigation.
Before closing, lenders should obtain and review the governing documents for the borrowing entity. The required documents vary depending on the entity type, but the objective remains the same: verify ownership, management structure, and signing authority. Lenders should also independently verify the entity’s status through the California Secretary of State’s business search database when applicable.
Limited Liability Companies (LLCs)
For LLC borrowers, lenders should review:
- Articles of Organization (or Certificate of Formation)
- Operating Agreement
- Any necessary Resolutions
The Articles of Organization establish the LLC with the Secretary of State and often identify whether the company is manager-managed or member-managed.
The Operating Agreement provides the details lenders need to determine who actually has authority to act on behalf of the company.
A common issue occurs when the Articles of Organization and Operating Agreement contain conflicting management structures. For example, the Articles may identify the LLC as manager-managed while the Operating Agreement states that members control the company. These inconsistencies should be resolved before closing.
Corporations
For corporate borrowers, lenders should obtain:
- Articles of Incorporation
- Corporate Bylaws
- Meeting Minutes or Unanimous Consents
The Bylaws typically establish who has authority to bind the corporation and whether multiple signatures are required for certain transactions. Another frequent issue is the failure to properly appoint officers. A corporation may exist legally, but if officers were never elected, questions may arise regarding whether the loan documents were properly executed.
Partnerships
For partnerships, lenders should review:
- Certificate of Partnership
- Partnership Agreement
The Partnership Agreement often identifies the general partner responsible for managing the partnership and executing documents on its behalf.
Because partnership agreements can contain unique approval requirements, lenders should review these documents carefully rather than relying on assumptions about who can sign.
Trusts
Trust-owned properties require a different review process.
Lenders should request either:
- The full Trust Agreement; or
- A Certificate of Trust
The goal is to confirm that the trustee has authority to borrow money and encumber trust property. Special attention should be given to irrevocable trusts, which often require additional analysis and documentation.
Common Entity Issues That Create Lending Risk
Across all entity types, the same issues tend to appear repeatedly:
- Missing governing documents
- Conflicting management structures
- Failure to appoint managers, officers, or trustees properly
- Unclear ownership information
- Missing authority to borrow or encumber property
When these issues are not addressed before closing, borrowers may later argue that the loan documents were not properly authorized.
Entity review helps lenders identify and resolve these concerns before they become enforcement problems.
Why Title Review Is Equally Important
Even when the correct party signs the loan documents, lenders still need assurance that their lien is attached to the right property and occupies the expected priority position.
This is where title insurance becomes essential.
Title insurance provides lenders with information about the property’s ownership, recorded liens, taxes, easements, restrictions, and other matters that may affect value or enforceability.
Just as importantly, title insurance may provide coverage if a title defect later impacts the lender’s security interest.
What Lenders Should Request
As a starting point, lenders should request a 2021 ALTA Extended Loan Policy (or equivalent state-specific coverage) whenever available.
For additional protection, lenders should also request coverage equal to 125% of the principal loan amount.
This additional coverage can be particularly important for interest-only loans or situations where lenders may incur protective advances for items such as taxes, insurance, or other property-related expenses.
Understanding the Preliminary Title Report
Before closing, title companies typically issue a preliminary title report.
Lenders should pay particular attention to two sections:
Schedule A
Schedule A provides important information such as:
- Current vesting
- Property address
- Property identification numbers
- Effective date of the title search
The vesting information is especially important because it confirms who owns the property and should match the borrower structure reflected in the loan documents.
Schedule B
Schedule B contains:
- Exceptions to coverage
- Requirements that must be satisfied before issuance of the final policy
- Informational notes
Requirements should be cleared whenever possible. If left unresolved, they may become exceptions that limit title coverage.
Reviewing Exception Items
Exception items identify matters that title insurance will not cover.
Common exceptions include:
- Property taxes
- Easements
- Covenants, Conditions, and Restrictions (CC&Rs)
- Existing liens
- Water rights
- Mineral rights
- Solar-related filings
Not every exception can be removed. However, lenders should work with title companies to eliminate unnecessary exceptions whenever possible and understand the impact of those that remain.
Using Endorsements to Expand Coverage
While exceptions limit coverage, endorsements expand it.
Several endorsements are commonly requested for private lending transactions, including:
- ALTA 9
- ALTA 14
- ALTA 22
- ALTA 27
Additional endorsements may be appropriate depending on the property type, loan structure, or transaction details.
For example, construction loans, condominium projects, variable-rate loans, and assignments may all require specialized endorsements to address specific risks.
The Connection Between Entity Review and Title Review
Entity review and title review are often viewed as separate due diligence tasks, but they ultimately answer two critical questions:
Who has authority to sign the loan documents?
and
What exactly is the lender receiving as collateral?
A title report may confirm ownership of the property, but lenders still need entity documentation to verify signing authority. Likewise, proper authority does little good if title defects or undisclosed encumbrances affect the lender’s security interest.
The strongest due diligence process combines both reviews before closing.
Final Thoughts
Private lending transactions move quickly, but effective private lending due diligence should never be sacrificed for speed.
Entity review helps confirm that the correct parties are authorized to borrow and pledge collateral. Title review helps confirm ownership, lien priority, and available insurance coverage.
When used together, these reviews provide lenders with a stronger foundation for closing loans confidently and reducing risk.
Taking the time to address entity and title issues before closing is often far less expensive than trying to resolve them after a dispute arises.
Whether you are evaluating a new lending opportunity, reviewing a borrower entity, or assessing title risks before closing, the attorneys at Fortra Law help private lenders navigate due diligence issues and structure transactions with confidence. Contact Fortra Law to learn how we can assist with your next transaction.
