Lending Fundamentals: Essentials for Every Lender

Melissa Martorella, Esq.:

Thank you all for joining on this wonderful Wednesday morning or afternoon for our webinar today. Today we'll be talking about lending fun fundamentals, essentials for every lender. So it'll definitely be like a back to the basics sort of thing. But I've got two wonderful people here with me today to go over it. So to introduce ourselves I think many of you know me. My name's Melissa. I'm one of the partners here at Fortra Law and I manage our banking and finance group. And we primarily, you know, we do many things, but one of the primary things we do is close loans and make sure our lenders are compliant. And I have two attorneys on my team with me today. Laney, would you like to introduce yourself first?

Laine Prescott, Esq.:

Absolutely. my name is Laine Prescott. As Melissa just mentioned, I'm one of the attorneys here on the banking and finance team. I spend most of my day structuring loans and, and loan documents, and also working on non-judicial foreclosures. And yeah, very excited to be here today. Thanks.

Melissa Martorella, Esq.:

Awesome. And Casey, go ahead.

Casey Busch, Esq.:

Hi, everyone. Casey Busch. I am also an associate attorney on the banking and finance team. Just like Lainey, I help with structure loans and help with loan closings. Make sure you're compliant when the loan closes. Make sure all your loan documents are are ready to go.

Melissa Martorella, Esq.:

Awesome. and then a few little housekeeping things here before we get started. First, yes, this webinar is getting recorded. As soon as it uploads and all of that, they will be linked to our website. So if you wanna rewatch it or if you wanna send it to somebody in your office that didn't get a chance to review it today live feel free to send it to them so that information will be there. Separately. there's a couple of different options here for talking to us during this. There is a chat box. We will not be looking at the chat box, so if you have questions and you wanna talk about them it, there should be a q and a tab. If you put any question or comment that you have in the q and a after we finish the webinar if we have time, we'll go through as many of those questions as we can.

So feel free to put any questions that you have in the q and a section, not the chat box. But yeah, so with that, we will get started. Really looking forward to having Laney and Casey take this one. I'll kick us off, but they are the experts and they're going to lead most of this webinar. I'm just here to facilitate with their second webinar ever. So here we go. First objectives of this webinar. Hopefully we will cover some of the fundamentals of licensing and lending compliance with you all, specifically for business purpose loans secured by real estate. That's what we're gonna be talking about today. If you have questions about consumer loans, if you have questions about loans that are not secured by real estate, we can handle some of that. But otherwise that's not what we'll be talking about today.

So business purpose loans secured by real estate anywhere in the country. So if you have questions about those, feel free to drop those in the q and a. We'll also go through how you should approach loan structure and documentation. You know, depending on the structure of your deals it might require different documentation. You know, big thing that Casey Laney and many of the other attorneys on my team do is get on kickoff calls with our clients to talk to them about what are you trying to do? What are your goals? Because sometimes in an email you're like, yeah, I just need to, I just need a loan set of loan docs. But what's in that set of loan documents is what's important. So really how navigating how to approach approach loan structure is very important. And then finally, another objective. How to address common issues that arise especially relating to entity for, you know, or entity structuring issues with relation to borrower or guarantor, any entities, sometimes that can be quite complicated. And then also title issues and closing concerns. Between the three of us, we have closed thousands of loans. And so along that way we have encountered very interesting problems. We'll share some of that experience with you today.

Quick agenda. So first, an overview of essential compliance requirements. We'll talk about best practices for loan documentation. We will discuss how you should review entity documents and how to resolve any discrepancies. We will go over obtaining title insurance and common endorsements, and then we'll finally talk about completing the closing process itself. And so with that, take it away.

Laine Prescott, Esq.:

Thank you Melissa. And thank you again everybody for being here. We are very excited to be here today with you. We are gonna start with a little mini series on essential compliance requirements, and we'll go ahead and kick off with licensing. This is one of the very first things that we look at when we're looking at a potential loan and determining what might be required for this. So very important to address this upfront, early. It can be a little bit timely if you do end up needing a license. Yeah, but on a federal level, for business purpose loans, there is no licensing requirements. So instead, what we're looking at here is the requirements for the property state. Some states like California, Arizona, and Nevada require a license for lenders just kind of across the board. Other states don't require licensing at all for business purpose loans.

And then there's lots of variations in between, depending on kind of whatever factors each state decides is important to them. You can see a few on here, like property type, borrower type, loan amount, those kinds of things. So you definitely wanna make sure you're looking at the property state that you're working in and determining what may or may not be required for you as a lender. And also noting, I know this is focused more on lenders, but brokers frequently also do need licenses. So you wanna make sure if you're working with a broker just make sure they're aware of it or, or bring it up to them, make sure they have the right licensing. That could be very important to you for an exemption as you can kind of see on the bottom. But we'll get into that in just a second.

So yeah, you wanna just definitely make sure you're looking at the property state, have a discussion with your counsel, make sure that you are in compliance for this. But noting that even if you are required to have a license, there are many exemptions that can exist. A very, very common one is an unlicensed lender using a licensed broker to arrange their loan. California is a great example of this. They do require both lender and broker licensing, kind of just as a good general rule of thumb. There are other exemptions that could exist, but this big, big exemption for lenders is getting a DRE license broker to arrange the loan for them. So this is something you definitely wanna look at and just make sure you're aware of, one, what is actually required, and two, if there are any exemptions or other options available. If you're not licensed to still be able to make that loan, it's definitely worth a conversation with your counsel and making sure that you're in compliance here. Can we go to the next slide, please?

And here's a little graphic for you guys. Generally the blue states aren't listed, but generally for business purpose loans in the blue states, you don't need a license. But the red states, as you can see, there's six of them. You do generally need a lender's license, regardless of like your collateral type or your borrower type or anything like that. Especially like Nevada, for example, is incredibly strict on this. So you wanna make sure you're addressing any licensing requirements that you might have in these states. The yellow states are five states where you're gonna need a license if you are lending on a one to four unit property, like a residential type property. The green states are that, but also it takes one step further where you will need a license if it's an owner occupied one to four family property.

So typically this is a primary residence. Some people think that you can't make business purpose loans on primary residences, and you actually can, if it's well documented, what the business purpose is. But you will sometimes need a license as you can see for those states. So you wanna keep that in mind for sure. And the white states are a little bit unique. We'll focus a little bit on North Carolina because I personally think they're kind of the oddest out there. North Carolina doesn't have a typical licensing requirement. They have a filing and bond requirement, and it doesn't look at the property type or the entity type or borrower type, nothing like that. It actually looks at the prior calendar year and your lending activity to North Carolina in the prior calendar year to determine whether you have to comply with these filing and bond requirements.

So definitely North Carolina's a little bit unique in that sense. It's not like a one and done license that you can renew. It's a, it's a little bit different. So again, worth a conversation with your council if you're looking at North Carolina. Otherwise as I mentioned for the blue states, there's really no license to lend for business purpose loans. There could still be broker or servicing licensing requirements, and there could be other things at play as well here. So, California, for example you know, there are a lot of exemptions for lender licensing. And, and say you fall under one of those and you can proceed without a license. Well, a, a lender license or a broker license also provides you a user exemption. And we'll get into USY on the next slide. So you might still wanna go get a licensed party to help with this loan. So licensing compliance is very important, but it's also really important to understand how that licensing can impact other areas when you're structuring your loans as well. Next slide, please.

As I just mentioned, we're gonna get right into usy. And USY is another really big compliance topic. Fundamentally, USY is just the maximum amount of interest that you are legally allowed to charge to a borrower for a loan. And it's determined generally based on the governing law state. So if you work with us, sometimes you'll get an email from us, Hey, what governing law state do you wanna use? And a lot of times we are asking for this reason. We're trying to figure out what's the most favorable for USY for you, or there could be other considerations as well. But this is a big reason why you wanna pick a good governing law state. You do have to have a nexus with the governing law state. So as a good rule of thumb, lender state or property state are good, two good states to go with.

But you might look at those and go, Hey, you know, this one has a really strict user limit. Like Tennessee is usually around 11, 12%. We wanna charge 15%, but you know, we're lending in Arizona and they don't have a USY limit, so we're gonna use Arizona governing law for this. So you definitely wanna work through those issues. Make sure you're aware of those and pick a governing law state that works for you. There are a few states though, where governing law is not the determining factor. They don't allow for choice of law. States like North Carolina and Washington are really good examples of this. And I actually love having properties in those states because there is no USY limit. But they're gonna apply their, their USY laws if you have a property in one of those states. So it makes it really easy.

They're gonna apply their laws, there's no USY limit. You're good to go on this front. It's very easy. Montana though, is another example of this where they do not allow a choice of loss. So if you do have a Montana property and you wanna pick, you know, Arizona or someplace, again that doesn't have a user limit, Montana's gonna go. You can't do that. You are still subject to our USY laws. And Montana is very strict. They have a very, very specific formula that they use to determine their usy limit. It can be very complicated. So if you're considering lending in Montana, that is 100% worth reaching out to your counsel to have a discussion, maybe get an opinion letter, figure out you know, kind of what works for you in that case. A big conception or misconception about usy is regarding what's actually included when this is being analyzed.

So a lot of lenders come to us and they go, oh, you know, the USY limit's 10%, I'll just charge 9% on the note and I'll make up for, for, with fees and points. And we will, you know, end up getting the rest of what we need. That way. In most states, that's not going to work. Usury is not just looking at what your note rate is, it also factors in some other things depending on the state. So this is another state by state analysis. California, for example, does factor in fees and points. So if you're charging origination fees, lender fees, those things for purposes of usury, they're gonna look at that, they're gonna include that in their calculation to figure out what the rate is for usy purposes. The default rate or default interest sometimes is included. Usually what I see is that the default rate is subject to the USY limit.

Not a lot of states have guidance as to whether it's actually going to be included or not. It's not very specific. But there are states like California that say, you know, for usy purposes, default interest is not interest. And they actually don't include that as part of their calculation. So in addition to knowing what the usy limit is, it's also very important to look at your state and look at how are they actually determining what is considered interest for the purposes of usy and not just looking at your note rate and thinking you're good to go.

And and lastly here is the penalties for USY violations. This is, again, another state by state thing where it's usually a combination of civil and criminal penalties. Either one or the other, or both. And it can be kind of bad for you to have this. So civilly frequently what I see is the states will require you to return all of the interest that's been paid, not just the usurious part, but all of it. Some states require like three times the interest that it's been paid to be paid back to the borrower. So it can be very costly to have a user violation. And on the criminal front it kind of ranges, but it could be a misdemeanor, it could be a felony in certain states. Don't want to go to jail or prison just for this. So you wanna be very careful in making sure that you're not committing a USY violation, not unintentionally committing a USY violation because you, you know, you didn't do the factors correctly, you didn't formulate this correctly. So reach out to your counsel. If you have any doubts or any questions or you're not sure, make sure you discuss with them so that you're all good to go here. Next slide, please.

And lastly here in this essential compliance requirement, little section is penalties and fees. So we'll start with prepayment penalties. This is a very common way for lenders to maintain their return. So also sometimes it's referred to as like guaranteed interest, where, you know, if the borrower prepays the loan early, they, the lender can still collect the interest that would've been paid through however long their prepayment penalty is set up for. It's a really good way for lenders to, again, maintain their return. They rely on that interest as their income. You know, they expect a certain amount back on a loan before they go make another loan. But this is very lender friendly and not very borrower friendly. So it is commonly restricted by the states, and you wanna go look at your state and what's going on. Usually this is gonna be governed or determined based on the governing law state.

So you wanna look at that and, and see what's applicable there. There has been recently a really big issue in New Jersey. We've gotten a lot of questions about this. You in New Jersey, they don't allow for prepayment penalties. And the language of the statute is something along the lines of, except for corporations. And for a very long time that term corporations was actually interpreted as entities. So that included LLCs. But recently, sometime in the middle of last year, new Jersey's Department of Insurance released this unpublished opinion that we cannot get our hands on. And it seems like a lot of people are having a really hard time getting a copy of it. That says that the term corporations in that statute actually literally means corporations, and it does not include LLCs. So there was this really big shakeup in the private lending world where everybody was like unsure of what to do, whether they can do this, nobody could get a copy of the opinion.

It's just kind of something that's been going around and we've been hearing about. So you wanna be really careful because sometimes that does happen where there's a statute and you read it and you go, okay, here's how it's been interpreted. But then sometimes there are these things floating around, you wanna make sure you discuss with your counsel. You're not accidentally violating, you know, any laws there. But yeah, New Jersey has been kind of a pain the last few months, and we are still working on trying to get a copy of that. So if you have questions on that, let us know. Happy to help. There's also late fees and default interest that you can include in your loans. And this is another big misconception that these are the same thing and they actually are not the same thing. You can kind of think about them very similarly, but they are two separate parts of your loan documentation and your loan structure.

Late fees are generally for like nonpayment or late payment on a loan, whereas default interest is a little more broad. It can be for a default. That's not for nonpayment, it could be for other things. Late fees are also a one-time charge, whereas default interest can be charged monthly, just like any other interest that you charge. But both of them have to be reasonably related to the harm suffered by you, the lender. They can't be, you know, unconscionable or anything like that. You can't have them too high. And there are a lot of statutory and common law restrictions here. Late fees to me are a little more restrictive, but good rule of thumbs, like 10% after 10 days, that's what we usually see. Some states don't actually allow that much or they require you to wait a little bit longer. It just depends on what's going on.

And default interest, I talked a little bit about during usury, but it's very similar here where, you know, there might be a, a, the usury limit might be applicable to default interest might be like California, where it's not, they just say, you know, you're good for USY purposes, but even though it's not subject to usy, it still has to be reasonably related. You can't be charging too much if a court were to look at it they could deem it unconscionable if you go too high. So I'm gonna be a little careful with these, be a little more on the conservative side, but you do definitely still wanna include them so that you can protect yourself as much as possible. Next slide, please.

Casey Busch, Esq.:

So let's talk about best practices for, for documenting your loan. The primary thing you want, you're gonna want to do here as a mortgage lender is to secure your collateral. And how do we perfect our, our security interest in collateral? Well, there's, there's two primary ways of doing this. And the, and the first one that you're gonna need for, for real property is a security instrument. So a lot of the time when we get new lenders who are just entering into the, into this industry, and they'll ask, you know, can I just get a note? Can I just get a UCC? Well, to really perfect your security in interest in a real property, you're gonna need a mortgage or a deed of trust. The states vary on which one is required. California, for example, is a deed of trust state.

But Florida's a mortgage state. So really the, the name of the document doesn't matter too much. Your document set should have a mortgage or a deed of trust, and that mortgage or deed of trust is gonna be recorded on the real property so that other creditors will see that you have a security interest in that property. And you know, if they're interested in, in also recording a mortgage or deed of trust, they're gonna know that you have priority on that property and they're gonna have to negotiate with you if they want to get to your interest. And it also gives you priority in foreclosure. If you were to foreclose on a property and you're in first position because you recorded your, your deed of trust or mortgage then you're gonna have essentially the right of way. All the, all the mortgages and deeds of trust below you they would be wiped out by your foreclosure.

So it is important to get that security instrument make sure your, your documents set has that. But there's a, the question we get asked a lot, and, and that's, can I just record a file or record a UCC on the property? And that's, that's not usually gonna be enough for the real property. So A UCC when we talk about that in, in this context, it's a UCC one form. And that's a form that's created under the Uniform Commercial Code thus UCC. And that form allows you to perfect interests in personal property. So not necessarily real property. You're, you're the real estate that you wanna record that, that mortgage or deed of trust on. You're not always gonna need a UCC. Now a UCC one is, is gonna be used for, like, say you have a restaurant that you're, you're gonna perfect a lien against.

That restaurant has personal property, so not just like the, the stoves and the grills, but tables, chairs if there's like a cash register system nowadays, they have those scanners for your credit cards. That's what we're talking about. Usually when we, when we say you need a u CCC one now there is a UCC one fixture filing, and you're gonna see that a lot, most loan document sets in the mortgage or deed of trust. You're gonna see a clause in there that says, this deed of trust or mortgage complies with UCC requirements for fixture filing. When you see that in there, you don't generally need a UCC fixture filing. You know, there's a box on the UCC one form that you, you check off for fixture filing. If you have that language in your mortgage, a deed of trust, you don't need to check that box on A UCC.

So if there's no property, personal property that you're, you're trying to secure, you don't generally need a UCC one so long as you have that language in your mortgage or, or deed of trust, deed of trust UCC ones can be used for a lot of things, though. So, like I said, personal property, like a restaurant, you want to get those tables and chairs, cash registers, whatever. But also if your borrower has interest in a entity that they're trying to pledge for the loan you can use a UCC one and a separate agreement called a ownership pledge or an equity pledge, whatever you, you know, it's called in your document set. But you can use that UCC one to secure that interest too. And what you're gonna do is the, the UCC one is filed with the Secretary of State for whatever state that personal property is located in. And then that way, moving forward, other creditors know, Hey, this UCC one is filed on this entity, or UCC one is filed on, on the, the personal, the personal property for this, this property. So they'll know that, you know, there's other UCCS ahead of them if they were to go file or record a UCC on the property.

Moving on to disclosures. There are many disclosures you know, like Laney was hinting at, there's, each state has its own requirements, so there's gonna be a lot of state disclosures but there's two federal disclosures that you generally want to see in your document set. One of 'em technically a declaration, but the first one we're gonna talk about is the COA disclosure. It's the Equal Credit Opportunity Act. And what that one's gonna do is it's gonna let the borrower know that they have a right to the appraisals. That whatever appraisals that you get for that property they do have a right to receive that appraisal for one to four family dwellings. Generally, it's best practice to, you know, for the e COA disclosures to, to give them the appraisals even for commercial properties, but not necessarily, not necessary under, under federal law.

The other federal disclosure that you're gonna want to get, and it's, this is the one that's technically a declaration from the borrower but it's under federal law, and that's the anti-money laundering declaration. And, and what you're going to try to get from that is you want the borrower to declare that they aren't using this, these funds for any money laundering or you know, violating federal statutes. And there's three federal statutes that you're gonna wanna make sure are included in that money laundering de declaration. And if, if you're looking for that, if that's not in your loan document set, you're gonna want to consult with an attorney to make sure that's in there and that those statutes are accurately cited. And then state disclosures, like I said earlier, there's so many state disclosures that will change from year to year.

State disclosures, disclosures generally change a lot more often than federal. So for example, a couple years ago, Florida enacted the law where certain entities or individuals from foreign countries can't own property in Florida. Well, there's two or three disclosures that we had to add for, for those laws specifically. So state disclosures change quite often. Just last year in California, there's a foreclosure statute that passed, and it, now there's, there should be a foreclosure dec disclosure at the very top of your loan document set, and it has to be signed before any other loan documents. So, so those things are very important to look out for it and keep up to date. You know, if you have any way of checking on your you know, getting updates on, on this industry make sure you're subscribing to newsletters and stuff. So, because those state disclosures change, you know, every, every year, maybe even every six months. Next slide, please.

Okay, next part of no loan documentation is knowing your borrower. This is a very important part of the entire thing, because you're gonna giving your money to this person, right? So you don't want them to be somebody that you're not familiar with, or an entity maybe that they've hijacked or something. You want to know everything about them, everything that you can about them. So first, are they an individual? If they're an individual, run your credit score checks on them make sure you're doing your underwriting. But most importantly, check to see if they're vested on the property, how they're gonna vest on the property. Do they have co borrowers that are also individuals? Maybe they're, they're entities that they're co borrowing with. And that brings me to entities. If your borrower is an entity, what kind of entity is it?

There's quite a few different entities across all the states. Most common you're gonna see is an LLC but you'll also see corporations and sometimes limited partnerships. There's a lot of different entities out there. If you're not sure, if you, it's an entity that you've never heard of before, you probably wanna run that one by an attorney to make sure that's an entity that actually exists in that state. Some states have limited liability, limited partnerships and LLPs. So, you know, you, you really want to check with attorneys to make sure that entity is a valid entity type. Then you're gonna wanna look at who owns the collateral. For a purchase, this might not be that big of an issue. Your borrower is purchasing the property. The property's gonna invest in their name, so who owns the collateral? Your, your borrower will own the co collateral, but for a refinance there's a possibility that maybe your borrower is getting permission from a third party to put a lien on their property.

So your borrower doesn't own the collateral, but this third party does. And in that case, you're gonna want to get a couple things. First off, if that third party is a entity, you're gonna wanna get all those entity documents. Second, you're gonna want to get what's called a third party security instrument. And that essentially is just a security instrument, like a mortgage or deed of trust, where the third party is pledging that collateral for the loan, and the borrower may not even need to sign that third party instrument. But that third party who actually owns the collateral will need to sign the third party security instrument. And then finally here, we're gonna look at, can you get a personal guarantee? Personal guarantees are great because if you get to foreclosure you sell that property and you didn't have enough equity on the property, now you can go get a deficiency judgment against this guarantor, meaning the difference between what the property sold for and your loan amount, you can go look to the guarantor to try to recover that.

Those are so important that we don't even charge extra for them. Personal guarantees are included in our loan document fees because you know, we believe in them. If you can get as many personal guarantors as you can go for it they have to agree to it. But if you can get 'em, go do it. Now whether you can get them there are some restrictions on that. So say your borrower is an individual, well, if they're an individual, they've already signed the note, the deed of trust loan agreement they're already obligated to repay that loan just through those documents. So generally going to get a personal guarantee for an individual borrower is gonna be what's called a, a sham guarantee. And a court is gonna look at that and say, well, they're already obligated to repay the loan from the note and the security instrument and the loan agreement.

This personal guarantee is invalid. So you can't get a deficiency judgment against them. It gets a little bit more complex with trusts. Say your borrower is a trust. Well, if they're a trustee, maybe you can you're gonna wanna consult with an attorney for a trust. It gets very complex with that because they could be two or three different they could be a beneficiary, a trustor, a trustee in the trust. In that case, you, you probably won't be able to get a, a guarantee, but if there just maybe a trustor, you might be able to get a guarantee. So you, you want to have an attorney look at a trust for you, because those can become complex. But for an entity, it, it is fairly simple. So an entity, if you have an LLC as a borrower that same LLC can't be a guarantor similar to an individual if they're, they're already obligated to repay through the note and the deed of trust.

But the owners of that LLC can be personal guarantors since they're not, they're separate from the entity at that point. Mm-Hmm <affirmative>. So you, you can pursue personal guarantees there. It won't be considered a sham guarantee. But if you are, you know, in a sham guarantee situation it's definitely best to consult an attorney on that one. Especially for trust, like I said, that just can get very complex. And different states have different requirements for whether a, a trustee can be a sham guarantee or we guarantor on a loan. Next slide, please.

So here's some common borrower entity issues. So I'll start with LLCs. Which documents do you need? So to form an LLC in most states you're gonna need articles of organization. Some states will call that a certificate of formation. But you, it, it's an initial filing with the state that says, Hey, this entity is being created, I've created it. And you essentially kicks off your, your LLC you can't form an LLC without them. Next document that you're gonna need is an operating agreement. A lot of states do have laws that say you don't necessarily need an operating agreement to form an LLC. You should push your borrower to provide an ll an operating agreement if you can. It's, it's a very important document that will show you the management structure of that LLC.

And in those operating agreements, there should be a provision that says who should, who can sign documents? And because of that, that's obviously a very important document that you want to, you want to push for. Now who should sign for an LLC? There's two management structures that you'll see in most cases. Some states it varies on, on the terminology but generally either the owners are gonna manage the LLC or the owners are gonna point managers to manage the LLC. Whoever's managing the LC is who should sign for the LLC. And some common issues that we see with LLCs is the, the articles that are on file with the Secretary of State often have a different management structure than what's provided in the operating agreement. This is a major issue that you want to get fixed, because if you go based off the operating agreement, well, the borrower can say, well, based on the articles, this is who should assign.

If you go based on the articles, they'll say, based on the operating agreement. So you want to get them to amend either or. It's usually simpler to amend the operating agreement. But if you want to get them to amend either one to so that they match across all boards. So if it's manager manage in the articles, you wanna see manager managed in the operating agreement. Moving on to corporations there's a few more documents you'll need for a corporation. So a corporation is gonna, similarly to an LLC, you're gonna have articles; these are gonna be called articles of incorporation rather than organization. Now the articles, again, it's gonna have the name of the entity, so you're want to make sure that's correct, but it's also gonna have it, it's also just the document that initiates the corporation, right? So this is once you file it, the corporation exists.

But corporations have by laws. Most states require by laws in order for the corporation to actually go conduct business. They file their articles, but, and not until they've approved their bylaws, can they go actually sign documents and you know, enter contracts essentially. So who should sign for corporations? This can actually vary by state to state, but generally, you're gonna want the president and secretary to sign for a corporation. So the president and secretary are officers of the corporation the president. You can kind of tell by the title alone. They're the one in charge. They're the one who's making decisions for the, the corporation. On a day-to-day basis you're gonna want them to sign. But the secretary kind of has this relationship with the, the board of directors and they are also responsible for record keeping for the corporation.

So it's good practice to try to get the secretary to sign as well. Most often you're gonna see that the president and secretary are the same person, so you can just add and secretary to the president's title and you're good to go. But when you're looking at who should sign, you're gonna want those two officers in 90% of cases. The rest, maybe they have a secretary who's unavailable to sign and only the president can sign. That's fine. But we generally recommend looking at the bylaws in those situations to make sure that's acceptable. You know, common issues with corporations most often we see that the corporation hasn't actually appointed any officers. So a corporation has shareholders, and then the shareholders will appoint directors, and the directors will appoint officers. So most often we see that the directors and officers haven't been appointed.

Maybe only the directors have been appointed. And to fix this issue, you're gonna want the minutes from their most recent meeting where they've appointed officers and directors. So, you know, they can do it all in the same meeting. They can do it through resolutions but they need to appoint directors and officers in order for the corporation to actually sign documents. Generally, shareholders aren't authorized signers just by being a shareholder alone. They can appoint themselves as director and officer. But the, the actual authorized signers for corporations are, are officers. And you should be looking for documents that, that provide those appointments. Now trusts we're gonna keep this relatively simple with just living trusts because there are some other trusts out there that can get a little bit more complex. So which documents do you need for a trust?

Generally ask the borrower right away for the trust documents. If they provide you the full trust documents, that's great. You can go through that. A lot of states in their probate code, California specifically all the borrower needs to provide by law is called a certificate of trust. And if that's all you get, that's absolutely fine, but you need to check for a few things. First off, you need to see, make sure a trustee has been appointed. The trustee should sign the certificate of trust, so that's generally not an issue. But you want to make sure that the trustee in the certificate of trust has been given the power to borrow and pledge assets. Generally you want them to be able to sign mortgages for on behalf of the, the trust. Those are some things to look out for in the certificate of trust.

And if those are missing you can go back to your borrower and ask for an updated one. Maybe they'll give you the entire trust document, and that's fine too. But those are the provisions that you're looking for, is that the trust the trustee has been given the power to sign documents on behalf of the trust and then who should sign for the trust? That's gonna be the trustee. So with a trust person has given property to a, a trustee, and they're trusting the trustee, thus the, the term trust to manage that property. And so the trustee is the one managing and signing so long as they have that power in the trust documents. Common issues with trusts, well, if the trust door is deceased there could be some issues with how property has been distributed through the trust. At that point, you really want to bring in an attorney to review this trust because there are a, a lot of ways that properties can be distributed once a, a trust door is deceased, and you need to really thoroughly vet that trust to make sure the property is actually owned by whoever is signing your documents. Next slide, please.

Okay, moving on to title insurance. So why is title insurance important? Well, first off, you, if you're looking at making a loan without title insurance you need to ask, are you okay making that loan without that collateral? Because it's a very real possibility that down the road without title insurance, you find out that your borrower just doesn't have title to that property, or maybe you actually have like a fifth position lien. You need to ask yourself that question. If you're looking at making a loan without title insurance because it's that important, title insurance is going to give you a fallback in case the borrower ends up not having title of that property or your lien position's incorrect. The title company's gonna reimburse you and and give you coverage. So on a title policy you are going to look at what type of policy you're gonna get.

There's now only a, the, the most common one is a 2021 all to extended policy. Used to be a 2006 policy, but most of the title companies are now going with 2021. And or equivalent here is very important because some states don't necessarily use the ALTA system. So like Texas, for example, has the TLTA where it's, it's, you know, Texas properties only, and that's the only sort of title policies that they'll issue. Florida uses alta, but they have their own endorsements. But you want to ask for a 2021 alta or equivalent. Now generally for your policy amount, you're gonna wanna look for 125% coverage that's recommended. Now the reason for this is because you're not just loaning your loan amount, you're loaning your loan amount, right? But you're also expecting interest back. You might also later need to extend funds for taxes or to, to protect your lien or something.

So you're gonna want title to cover those, those interest expectations those additional advancements. And that's why we request 125% on our loan documents. If you're comfortable going with a 100%, this isn't a requirement, but that's generally what we recommend going for is 1 25. Now going to the preliminary title reports. When you open up a a title case with your title company, you're going to get what's called a preliminary title report or a preliminary commitment. And this is a report before they close the loan that shows all of the possible liens, encumbrances you know, if there's easements, covenants it's basically your CCNRs. If you ever closed like a, a, a consumer loan that's kind of the terminology they'll use. So you're gonna get these exception items, and if they show up on your policy, then title is not going to give you coverage for issues with that exception item.

So your goal is before closing, ask your title company to remove as many of these as possible. Some of them, you know, if it's a recorded covenant, it's, it's not gonna come off. In that case, it's what we call it, running with the land. Those are just exception items that are recorded on the property. They're not gonna come off, generally, you'll get a endorsement later to try to cover that. But covenants, easements, stuff like that might not come off. But if you have a question on that, you know, if you see something that you're not familiar with our team is more than happy to take a look at it for you. Requirements and notes. Again, the goal is to clear all requirements and notes on a, on a preliminary title report. Those are basically things that titles gonna have to do before you close.

So most often a requirement is, say it's a refinance, and the first lien's coming off, and your lien is replacing it. A requirement will be that they have to file a or record a, a reconveyance prior to closing to make sure there's no lie that lien is removed. And you wanna make sure that is removed through ti through closing. But the, again, the goal is to clear all, and those should be removed. If your, your title company doesn't remove requirements you, you wanna hold up closing and make sure that they do it later. Next slide please.

And continuing with title insurance. So policy endorsements to a title policy very similar to like, if you were to get a auto policy for your car or a home policy for your home you're gonna get endorsements that extend your coverage beyond just your 2021 extended policy. So the, the standard recommendation recommendations that we get the ALTA nine, this is gonna be for restrictions, encroachments minerals. So those covenants and easements that I was talking about on the last slide, the ALTA nine is gonna cover as much as they can of those types of restrictions and encroachments and minerals those, those recordings on title the ALTA 14 you might've seen this in the past couple years more frequently. The 2006 policy provided some coverage for future advances. So the ALTA 14 was, it used to be primarily for construction loans but now 2021, they've removed, removed the future advance from the extended policy.

And the, the, the ALTA 14 is very helpful because it's, first off, it's not just for construction loans. You know, title companies often say that, but it's for future advances, meaning if you have to cover taxes in order to keep your lien in place, or again, if you have to pay a, a senior lien holder to keep your lien in place or something those future advances are gonna be covered by an ALT 14. So if you get a title company fighting back saying, well, this is just for construction loans it's, it's not the case you can rope us in if you want, and we'll give you some help because title companies really like to fight that one. ALTA 22 for the location this one's fairly straightforward. Just if you have a map that where your property's recorded that's, that's gonna give you coverage for any errors on that map.

And then usury the ALTA 27, this one like Laney was hinting at earlier. You have usury caps on your loans. The, the most interest that you can charge. Well, this will give you coverage for the, the actual deed of trust if the usury issued does arise. Now, you know, we're reviewing for a comp compliance with usury. So generally we'll let you know if your loan is gonna be usurious. That's not an issue going through us, but the title company will often push back and say, we need an attorney opinion that this is not usurious. Something like that in California, we're more than happy to jump in. We're licensed in California. If you're not out in California and you need that opinion, we can find somebody who can give you that opinion.

Other common endorsements. So the ALTA four is pretty common. And actually ALTA five two for HOAs. But ALTA four for condominiums. Very, very popular. Variable rate mortgages, again, if you're doing adjustable rates in your loan you wanna get an ALTA six environmental actually an ALTA eight. We get a lot of requests for ALTA eight. So if that's something that you're into for the environmental issues you can, you can get that with a standard policy if you'd like. This, there's really nothing holding you back on that. The ALTA 10 for assignments if you're looking to sell the loan, you're gonna want to get an ALTA 10 at origination. Just provides coverage for the assignment and transfers the policy essentially to whoever's buying the loan. A also 11 for a modification.

This one we really recommend every time you modify your loan but specifically when you're gonna provide an additional advancement through a modification. And al also, 11.2 is very helpful. But you should really be getting in al also 11, anytime you modify your loan just to make sure title's gonna continue to provide coverage for whatever you're modifying. And then the ALTA 32 and 33 again, if you have a construction loan, these are what you want to get obviously with the ALTA 14, but the 32 and 33 is gonna provide coverage for mechanics, liens at closing, and then the 33 for each draw. So you have a construction holdback after closing, each draw is gonna be covered by the 33. So the construction 32 and 33, if you have a holdback, you gotta get those together. That's very important because you're gonna get coverage against mechanics, liens. And next slide, please.

Laine Prescott, Esq.:

Okay, I'll hop back in here. So we've kind of talked about pre loan doc compliance, your actual loan documents, your entity title issues. Now you are at the closing table, ready to get your loan closed. Wonderful, fabulous. We love it. There are several other closing documents throughout this process that title and escrow generally provide or you wanna get from your borrower. So we're gonna walk through some of those through here. So next slide please. We'll start with the closing protection letter, also called A CPL. This is a contract that's going to be formed between the underwriter and you as the lender. And it's only going to be used when the underwriter is using a closing agent to issue the policy. So it's very important if there is a closing agent that you get this because the underwriter is agreeing to indemnify the lender for actual losses.

If the closing agent has certain misconduct like negligence or fraud or, or something like that in this case, the underwriter is not issuing the policy directly, they're using this agent instead. Usually you don't really get a lot of say in that. So you wanna make sure that you know, you have coverage. If they do something wrong and there's an issue down the line with, you know, title, whatever, that there's not gonna be a problem with you being able to recover for any losses that you incur. So sometimes we get a little bit of pushback on this where the underwriter comes back and they go, Hey, we're actually issuing this policy directly. There is no closing agent, and so we're not gonna do a CPO. That is completely fine. In that case, you wouldn't need it at all because your title policy is going to, you know, give you coverage for losses if the underwriter did anything wrong. So very simple, easy thing, but you definitely wanna make sure you get it if there's a closing agent, just in case we love to have everybody nice and protected. Next slide, please.

Another thing you're gonna see it relates back to kind of what Casey was just talking about with title is a proforma or a marked up preliminary title report. And this is basically the title report that Casey was talking about, and they're going to revise it based on all of your requests. So your exception items you wanna be have removed, the endorsements you're asking to have issued, all of that's going to be reflected on the proforma proforma or marked up title report, and to show exactly how that final policy is gonna look before it's actually issued. This is very important to review because Casey kinda mentioned this a few times. Title does sometimes push back, they don't wanna make changes, or you ask for something that they go, Hey, we can't do that. You know, whatever. And you can sometimes catch those things in, in the proforma.

So you wanna make sure you're reviewing all of your title requests are in there. If they are not in there correctly, you definitely wanna go back to your title agent and go, Hey, you know, can you fix this? Why is this not, you know, endorsement not being issued, or why can't this exception be removed? Sometimes it's, again, they're not able to, they're not allowed to. Sometimes they just don't want to. If their underwriter views it as too risky they don't wanna honor your requests. But a lot of times in that case, there is some sort of workaround for coverage. So, as Casey kind of mentioned with, you know, covenants and things, recorded covenants restrictions can't be removed, but you can get al to nine, you know, the endorsement issued. And that's very, very common. We request on every loan file, and that kind of gives you enough coverage. So if you get a lot of title pushback, just reach out to your legal counsel and see what a workaround might be. So you can still get the maximum amount of coverage as possible. But again, this is just important to review to make sure you are actually gonna get all the coverage that you expect to get before the final title policy is actually going to be issued to you. Next slide, please.

Next is the settlement statement. We usually call it settlement statements. Sometimes it's called the HUD or the dis closing disclosure or an estimate. It's all the same thing, so it doesn't matter what terminology is used, it's functionally the same thing, but it's an itemized list of fees and credits. So basically you're gonna have a few columns on this document. It's gonna have a list of the name of all, you know, the, the fees, credits, loan amount, all that stuff. And it's gonna have a borrower column and a lender column. And it's recording how all this money is going back and forth in this transaction. So you'll see the loan amount if it's a purchase, you'll see the purchase price on the borrower side. Then you'll have all the fees that each party's responsible for until you get these final numbers on the bottom of how much is going to each person.

And usually that gives you a good idea of the wire amount. I always recommend reaching out to your escrow agent and confirming that that actually is the wire amount, whether it's what you expect to wire in or if the borrower has to bring in funds. That does happen. Sometimes you wanna make sure they're wiring in the correct amount of funds. But this is really important to review because there's a lot of money flowing between parties in these transactions. You wanna make sure that every single one is being reflected to the right parties in the right amounts. Another really common issue that we see with this is the per diem interest is not always accurate. Sometimes closing gets pushed a day, so you need to go in and adjust this to take off a day of per diem interest. Or, you know, it's, it wasn't calculated quite right.

The, the number of days wasn't calculated quite right. So you wanna make sure per diem interest is accurate so that you're being paid and or conversely the borrower's not paying too much interest. That can be a big problem too as well. And as I already mentioned wire amounts should match on here. So everybody is bringing in the right amount of money. It is incredibly difficult after closing to go back to a party and get more money from them if you need to. So it's really important to just make sure it's all accurate here and you don't have to go fight it out later after closing to try to, to get any issues resolved. You wanna make sure it's all resolved upfront. Next slide, please.

Insurance. So this one comes from your borrower. You'll reach out to them and say, Hey, we need a copy of your insurance policies. Usually this is gonna be hazard and liability insurance. If you are requiring other insurance policies you would wanna make sure to review those as well. But typically what we see is just hazard and liability insurance. And you wanna confirm that your borrower has the correct types and the correct amounts, and you're gonna be reviewing to make sure that things like your borrower vesting is on there. If you have like an entity, for example, you don't just want it to be your entity name like A-B-C-L-L-C, you wanna make sure the full vesting's on there. So a, B, CL, LC, a California Limited Liability Company, you want the whole thing. If it's a third party deed of trust, like Casey referenced before where somebody else owns the property, you wanna make sure the property owner's on there properly.

You don't wanna have any issues with your property, your collateral later on down the line because they didn't have the right insurance. You also wanna make sure the lender that you are listed as the mortgagee or sometimes called like an additional insured with your full vesting. So make sure you have your full vesting as well. If you're an entity you wanna make sure that that's on there, that'll help. One, make sure that you're actually an additionally insured, but if something happens with insurance, like coverage lapses because borrower didn't pay, or, or the insurance company terminates the, the policy or something you being listed as going to trigger the insurance company to send you notices of these things so that you can kind of keep up with the insurance, helps ensure that borrower in compliance and that there are no defaults under your loan.

So, very important to be listed on this as well as the lender. We also wanna review for loan information like your loan number, you wanna make sure that's on there. And importantly, you wanna make sure the property address is correct. You wanna make sure that the insurance is actually for the property that you are securing as your collateral. And lastly, here is the effective date and the expiration date. These, sometimes you have to be a little flexible with usually on a purchase. This is not an issue. We recommend about 12 months out from closing and they get a new policy. They say, we need 12 months from now. The insurance company says, great, you're all good to go. But sometimes on refinances, if the borrower is like halfway through a 12 month period, the insurance company's gonna go, Hey, we're not renewing this through 12 months.

You can come back to us in six months when the policy expires and we'll renew then. A lot of times the borrower doesn't have any sort of say in this, they don't really have a choice. This is just the insurance company that they just have to deal with. Usually we'll reach out to you and go, Hey, is that okay with you? And most of the time it's not really a problem. You just have to kinda internally note that six months from now, you should probably follow up with the borrower, make sure that the insurance, you know, was actually renewed. Or if it's not, usually the insurance company will send you a notice letting you know that. Next slide, please.

Casey Busch, Esq.:

Okay reviewing your signed documents of maybe the most important part of the closing process. Review them in full. So we always recommend a wet signing and, you know, there's documents that need to be notarized, so that need to be done in person. But most importantly, re review them to make sure that they've been fully and properly executed. Commonly we'll see that initial lines throughout the documents are missed. Our loan documents specifically have places where the borrower has to initial for important disclosures or terms. And then every, every page of some of the documents have initial lines at the very bottom to make sure that they've reviewed the page. And then at the end, you have your signatures, of course, to make sure that they've signed. So make sure those are all filled in and initialed and signed properly.

Missing lines open you up to arguments later that the documents weren't properly executed. Handwritten requirements, many documents have handwritten portions that have to be done specifically for business purpose loans. There's a either a business purpose letter or in our case our documents have a business purpose certification where the borrower has to hand write the purpose of the loan and, you know, give it, make sure that they're giving proper detail to what the funds are being used for so that later on they can argue that it was a consumer purpose loan. The more detail the better and make sure the entire loan amount is being covered in the handwritten letter or certification, whatever's in your loan document package. That's a crucial element to, to business purpose lending. And next slide, please.

Okay, so to recap here we've got our compliance requirements. State and loan specific requirements for usury licensing penalties, fees everything that Laney was covering in those initial slides. Make sure that you or an attorney or somebody has reviewed your compliance to make sure you're compliant when your loan closes. Loan structure and documentation. Make sure that whatever collateral you're trying to get is being perfected properly with the proper documents and documentation. Review your documents to make sure fix your filing language is in your, your mortgage or deed of trust. And if you need a UCC, make sure you've consulted with an attorney to make sure you, your UCC is, is getting all the collateral that you want. Entity and title reviews. Very important that your borrower entity or, or trust is accurate and has a proper borrower signing on your loan documents. And then also your title policy. Make sure that your title policy is securing the right collateral. Make sure it's giving you coverage for all of the endorsements that you want and that exception items are being removed, that you want to be removed. And make sure at the closing that you've got your settlement statement, your insurance, your proforma from title, and make sure your loan documents have been properly executed so that the borrower cannot make any arguments later that nothing was executed properly.

Laine Prescott, Esq.:

That's all. We will open up to questions now. If you have other questions aside from what you put in the q and a box, you are always welcome to reach out to us. Our emails are all listed here. We love answering questions, so always happy to help. Okay. I think Melissa, you marked the first one to answer.

Melissa Martorella, Esq.:

Yeah. if you just wanna read the question out loud and then go ahead

Laine Prescott, Esq.:

And answer it. So the first question is, if seconds are serviced by a professional company, is the loan still vulnerable to AB one 30? I'll go ahead and take this 'cause I work in our non-judicial foreclosure world. The answer is yes. I won't get too into it because that's a very different topic than what's here. But you do still have some risk there. You wanna make sure that you are talking to your service company or servicing company and making sure whatever they need for their compliance so they can sign that declaration. If you go to foreclose, they have everything that they need. You are in a much better place if you have a professional company because this is what they do all day every day. But you do just wanna make sure that you're not accidentally not including something or, or they might need something. And it's always good to get them involved from the very beginning instead of trying to have them come in halfway. We have seen a few issues where they don't wanna sign that declaration later on if they're not there from the beginning. So, but it is still a risk, so just reach out to them and make sure you are all set for what they need.

Melissa Martorella, Esq.:

Awesome. And I'll just add on this as well. We have a ton of material on AB one 30 specifically on our website. We've done webinars, articles, that sort of thing. So head there and there's more resource. And as lady mentioned, we can definitely answer those questions. Next question.

Casey Busch, Esq.:

Yeah, I can take this one. How much would you charge to review loan docs created by a loan broker using DocMagic? So we don't generally review third party documents like this created by like third party companies but this seems to be something pretty specific. So if you want to give us a call or we can schedule reach out to you and schedule a call and we can discuss how we can help you you know, that would be great and we can give you a quote for that work.

Melissa Martorella, Esq.:

Absolutely. And I'll say too, what does generally happen with this sort of thing is it's probably more expensive for us to review a set of documents that has been prepared that are not our own versus us drafting ourselves. Just for, for the plug there. So if you want I'd probably recommend we use our do prep services. I'll jump in on the third one. I, I, I don't have to. They could do it themselves as you guys saw Laney, in case you're wonderful experts here. But I'll, I'll jump in. This question's from Ika. Good to hear from you. For usy purposes and the calculation of fees and points, do you need to calculate in third party fees selected by the lender or broker, like servicing company fees, processing fees, appraiser fees, et cetera? And I'll give you the most attorney answer ever.

And that's, it depends. Some states exempt late charges and, and points to third parties and those sorts of things from the newsy calculation. Other ones include all of that in even theoretical fees. Sometimes your holdback depending on the state. This is why, you know, I believe Laney was talking about Montana earlier. Montana is incredibly complex and you need that opinion letter because they do calculate in even potential future interest or default interest into this calculation. So it's something that's very complicated. It depends state by state, so depends on where you're looking. Hopefully if you have an exemption, then it won't matter anyways. But in some of those states, it can be something that it becomes quite complicated to address.

Laine Prescott, Esq.:

Okay, I'll hop back in for the next question. Can a late fee be charged on the principal amount if the loan has matured? Essentially, the loan is in default due to non-payment of principle by the maturity date. If you're referring to the balloon payment, the answer is generally no. Some states don't really have a lot of guidance on this, so, so we do see some clients who choose to include this language. Other states like California, it is a hard no on late charges on, you know, ma balloon payments and maturity. You can charge default interest on the loan at that point. But a late fee is, is separate. And gen, I would generally recommend not doing this.

Casey Busch, Esq.:

I can jump in for the licenses. What licenses are needed in California for business purpose loans for lenders, and for the person who brings the lender and borrower together? So, so California, there's, there's two routes you can take. I'll start with the DRE license. The DRE license is required for a broker, or you can use it as a lender. But that's the Department of Real Estate license. Generally if you're a lender, you want to go through A-A-D-R-E licensed broker for your loan. If you yourself are a lender with a DRE license, you can do that too. But that's, that's the first license is you're going on. Have a broker who has a DRE license. The second route is for CFL, that's the con Confu Consumer Finance license. And that's gonna be for lenders, generally, the lender's gonna have that license. You don't need a broker if you're using that license. As far as for the person who brings the lender and borrower together, again, the DRE broker is gonna be the most common one. The, the CFL it's a little bit deeper. The CFL can only broker to other CFLs. So that's not a very common route that, that we see. But if you have a DE broker, then you are, are set for compliance there.

Melissa Martorella, Esq.:

Next question. What document can we use to take over the LLC borrower instead of foreclosing? So we get this question a lot. It would be an ownership pledge or a membership pledge of the entity of the, of the interest holding the entity. You can definitely include this in your documents. We do this all the time. But there are some caveats that I will tell people about this. The first one is I wouldn't just necessarily include this pledge automatically on every single loan without looking into the borrowing entity. You know, I'll see this sometimes where people will include it, and it's not a special purpose entity or specific purpose entity. You know, it, it's a general company. And it has more than just this property as an asset. If that's the case, if you were to enforce this and take over that entity, you wouldn't just be taking over the property and, and that ability, you'd also be taking on any debts and liabilities that that entity has.

So it's definitely something that you want to do more due diligence on and not just include it in, as a matter of fact, you're like, oh yeah, we gotta add the pledge of the ownership interest and the entity. It's not as simple as that. So I would definitely do a little bit more due diligence there. The other thing that I will say with regards to that is even for enforcement. So even if you have a special purpose entity and you've done all of that you have to do a UCC sale or a UCC foreclosure to take over that entity. And in theory, you know, it's very quick. You do take over the company itself. But in general, title companies don't like it when you circumvent, you know, the foreclosure process. And really that's what this is, is you are circumventing foreclosure and trying to get access to that property without foreclosing.

You know, every state has a foreclosure process outlined, whether it's judicial or nonjudicial, something like this by circumventing it. Usually what the title companies will want to do in order to give you clean title at the end of the day is to see some sort of foreclosure action as well to take over the property. So what I'll say on this is it's definitely something you can include and it's definitely something that I would use as like a hammer or a negotiating point with a borrower if they're in default to say, you know, I don't want to do this, but I'll take it off the table if you can get the bunk current or something like that. It's definitely a negotiating tactic, but I would not say that this is a first resort sort of thing to go for. It should definitely be something that you think about, you know, later on and should be done carefully if you do it at all.

Laine Prescott, Esq.:

Okay, next up is under what circumstances lenders or brokers are exempt from having a license in California? I'll start with brokers. There's really not a lot of options there. If you are brokering alone, you need a license. Also, I will say a common issue that we see is you have to charge a fee. Generally, you have to be paid for those services. So if you are a licensed broker and you're not charging a fee, you're gonna get a message from us If we're working with you going, Hey, you need a broker fee on here. And conversely, if you are charging a fee on here, you know, broker fee, that kind of thing, you also have to be licensed. So it kind of goes both ways. So if we see a broker fee on there and your broker's not licensed, we're gonna go, Hey, actually you need this license in place.

There's just not a lot of exemptions for that. For lenders. There are quite a few more options. Having a licensed broker is the most common one that we see. You get an exemption that way. You can be an unlicensed lender with a DRE arranged loan. Some other ones, there's like a certain kind of volume one, like I think it's like if you do less than five loans a year I can't remember the whole thing off the top of my head, but you know, there's certain like volume ones that you can do, I believe seller carrybacks, you don't have to be licensed for. There's kind of a, a, a whole list and not all of them are great options, but they are all out there. So if you're not licensed and you have a specific scenario, reach out to us, we're happy to help you look at it and see if you need a license or if there's an exemption that you could use.

Casey Busch, Esq.:

Okay, aside from the anti-money, anti-money laundering disclosure or private lenders generally required to have an anti-money laundering program per sen. Laney, I think you actually did, you just did a fence in article.

Laine Prescott, Esq.:

I did. I just did a little article on that New residential real estate rule which is not really a big issue, so go read that if you're interested. But the answer is yes. Our team does not really do this stuff. If you have questions on this, we can loop you in with our corporate in securities team. Or if you know Kevin, he's wonderful. His team takes care of this kind of stuff.

Laine Prescott, Esq.: Awesome.

Melissa Martorella, Esq.: Oh, go ahead. Casey

Casey Busch, Esq.:

Oh, if a, if a third party brings the lender and borrower together, what level of involvement does a broker need to have? Is it sufficient if the broker knows the detail of the loan and approves it? So in California specifically, there's a lot of disclosures that you'll need to provide as a broker. So it's not just knowledge of this loan or the terms. So if you have questions on that, we, we did a webinar on this actually last year about all the DRE compliance. And you can reach out to us directly if you have specific questions. We also sell a a DRE disclosure package that either we can fill it out for you per, on a per case basis or you can buy the entire template and there's instructions on how to fill it out. So if you're interested in that, please reach out to us on the, on the disclosures.

Melissa Martorella, Esq.:

Next up, do you need to be a CFO licensed lender to record a UCC to encumber personal property? If the G of trust and note was originated by a DRE broker lot going on in this question. So kind of as we go through on the licensing here, it, this is specific to California. In California, a lender needs to be licensed to make a business purpose loan secured by real estate. There's an exemption if a DRE broker arranges that loan, you could also have a loan that has both a California Finance lender and a DRE broker on the same loan. That's also totally fine. But I, what I'll say is, you know, I won't get too far into it. If you have questions about that structure, let me know. But big picture, you don't need a to have a license to record a UCC filing.

It, it would be part of the loan that was originated. So if you're an unlicensed lender and you used A-A-D-R-E broker to originate that loan so that you're exempt from licensing, they wouldn't have just originated or negotiated that deed of trust in the note. They, they originated the loan for you. And so whatever is in that, not just that deed of trust in note, but any loan agreement, any guarantee, if there was some sort of pledge of personal property or collateral like you would see with a UCC filing, they would've arranged all of that. So it's not that you need a separate license to do this thing, it would fall under what's being originated entirely. So I'm going to say no to answer this question, but it's a little bit more in depth. So if you have follow up questions, feel free to reach out.

Laine Prescott, Esq.:

Okay, the next thing here not really a question, but it is a good little tidbit. So might mention that you can't require a guarantee from a retirement plan, like a self-directed IRA or a self-directed 401k. That generally is the case. So you do wanna pay attention if your borrower is one of those, or if you know, you have like an LLC for example that is owned by a self-directed retirement plan you do wanna be careful with those, with the guarantee there as well. It does get kind of complicated. So in this scenario, I would suggest reaching out to an attorney and discussing and making sure that, that this is all structured correctly for those.

Casey Busch, Esq.:

And just to add on that so we didn't really cover 401k or retirement plan borrowers here, but there may also be tax implications with a 401k or a retirement plan borrower. So you might wanna reach out to a tax professional specifically. We don't do tax issues here but you, you wanna check that before you make that loan.

Melissa Martorella, Esq.:

That's a great point.

Laine Prescott, Esq.:

Yeah. I can continue into the next question if you want. Then. MLO and or an MLS required for business purpose loans, are these even licenses? An MLO is a license. They are generally only for consumer loans, so you don't really have to worry too much about those. NMLS isn't really a license. It's more of a, like a database for licenses. It's a really great resource. We use it quite frequently. If we're not sure if a party's license, we'll try to find them on the NMLS and it will give you the you know, a list of all their different state licenses and what they have in place. So it's a great place to start if you're not sure if somebody's license just to try and search and see what they have. But otherwise it's not really its own license for that, but it's, that's more like the consumer world. We don't really touch that at all.

Casey Busch, Esq.:

Take this one. For personal guarantees. Let's say h is the sole member of the borrower and LLC, I want a PG from his spouse. Someone said there's a court case that says it is unlawful to require a spouse to assign a pg absent an agreement. If this is the case, can't there be an agreement with the spouse that they agree to a personal guarantee because it is an inducement for the lender to make the loan? Quite the law school question here. I, this is not the case in California, but in other states, this, this might be an issue. There are states that require the spouse to, to sign onto the personal guarantee or approve it based on whether they're a community property state. This is seems to be a state specific issue. If you want to give us a call and we can look at it from that state's perspective. But in, in California that's generally not the case. The, you can get anybody to get a personal guarantee as long as they're not also the borrower.

Melissa Martorella, Esq.:

Next one. Is there a rule of thumb request to remove exceptions that a title company will see as reasonable? In other words, I don't think it's reasonable to simply say, remove all exceptions. What's a more reasonable agreed with you that probably would not fly if you were just like, title company, delete all of these. I don't wanna see them. They're not going to do that. It's hard to give you a clear answer here though, because if as soon as you start doing these, every single title prelim, preliminary title report that you see is going to be different there's usually some stuff with taxes and maybe supplemental taxes, but then there might be, you know other liens if you're in second position. Well, you need to figure out what deed of trust is staying on the property or what mortgage is staying on the property.

There could be you know, other, other liens secured by the property. You know, maybe they have outstanding taxes, personal taxes or, you know child support payments that might have attached to collateral because it, it's with the borrower and their debt. Lots of things that could be popping up. There could be easements, there could be conditional use permits, there could be all sorts of things that are showing up on title. So sometimes it's easy to go through and you can be like, oh yeah, you know, this one's standard. Delete this pay these, or, or whatnot. But other ones require some digging. You know, title companies will often give you hyperlinked prelims, and especially when you see an exception item on there that looks a little weird, you might wanna click on that link for that exception item and review the underlying document that was recorded.

That'll often tell you a lot of information, like, what is it, you know, is it an easement like Casey was talking about, that's going to run with the land forever? If that's the case, cool, that's gonna stay on title forever. Or is it something where, you know, is it an old conditional use permit that actually expired in 2012? And all we need to do is have a release done on that and we can clean up that from title. That might be something that you try to try to deal with. So just, it depends on what it is. You'll have to look at it to see. But it's definitely not something where we would ever be like, just delete all of this stuff. We go through and we review these title reports and we say, you know, delete this item, this one can stay, pay these, et cetera. And so it's a very specific request depending on the state of title for that property.

Laine Prescott, Esq.:

Okay. Next up, do you recommend an Ulta 11 endorsement for a maturity date modification only? As Casey mentioned, we recommend it for any modification, even maturity, date only modifications. One of the advantages of it is it will give you a date down of titles. So you know, if you made the loan 12 months ago and you wanna extend it you'll get this kind of updated title report that will show if there's any intervening liens, if the borrower's done anything weird in the meantime, if there's any tax issues you know, all those things. Title's gonna do a search for those. And you know, as part of this, all 1211, if there's anything that does come up like that, they might add exceptions, but you wanna make sure you're reviewing that, make sure you can, again, if there's anything that you don't want on there, you can request to have those items removed from the updated title policy before the L two 11 is issued. And you just wanna make sure that's, that's taken care of and title is still going to provide coverage for you through the new maturity date. So yes, we do recommend it.

Casey Busch, Esq.:

Okay. is the user endorsement necessary if the loan is DRE broker license loan, which qualifies for the exemption? Is it necessary? I wouldn't say it's wholly necessary, but it's really easy to get. When we draft loan documents and we, you know, prepare the closing instructions for you, title will often say, Hey, do you have an attorney who can tell us that this user this loan qualifies for an an exemption? And then all we do after that is say in an email, this loan qualifies for an exemption because it's brokered by a DRE licensed broker. And then they usually give it to you, is it necessary? It's highly recommended, but it's really easy to get especially if you're going through us.

Melissa Martorella, Esq.:

Next one is escrow, a closing agent. They can be so you know, in California it's a separate company and so it would be other states they can also be closing agents, so it just depends on who's doing what. Other states like New York or attorney closed states so that, that would be the closing agent. So it depends, but generally, yeah, escrow would be a closing agent.

Laine Prescott, Esq.:

That kind of goes into the next question. In California, we use escrow and title, do we need a CPL In that case if escrow is the closing agent, that is, you know titles using to issue the policy for some reason you would need one in that case. If you have escrow and your title underwriter is like, I'm still issuing this, you know, myself, then you wouldn't. So it really depends on kind of what's going on. I recommend just reaching out to your title agent and if you're not sure and just go, Hey, are you guys using a closing agent? Or is the title is or is the underwriter issuing my policy directly? And that will give you a clear answer of whether you need a CPO.

Casey Busch, Esq.:

So for private money, business purpose loans, how many days of interest can the lender collect prior to closing? This is also one that I think depends on state.

Melissa Martorella, Esq.:

Yeah, and what I'll say on this one too, for, for California for example, this is actually restricted charging per diem interest before the borrower's advance or before the money is advanced to the borrower. And it's only allowed in very strict circumstances. So it's definitely a state by state issue, but in generally should not be doing this in advance of the closing date unless you've talked to an attorney and you've reviewed that state specific laws. Sorry, I didn't mean to cut you off there, Katie.

Casey Busch, Esq.:

No, it's okay. I I knew it was restricted in California, but I didn't know about generally. So thank you.

Melissa Martorella, Esq.:

Of course. And this one also a very California specific one. Is it required to give a 90 day notice of loan maturity if it's a business purpose loan for California loans secured by residential property, and I believe potentially just owner occupied property, but I will double check that for you. Yes you do. This is why if you see in our loan documents, we provide a balloon per balloon payment disclosure it's meant to not only advise the borrower at closing, but then you can also resend that 90 days out from the maturity date so that you comply with this requirement. Also, if you're using a loan service error, they should be doing this for you as well.

Laine Prescott, Esq.:

Okay, next we have you referenced endorsements 32 and 33 for construction loans. Could you go a little deeper than that? I understand CLTA 1 22 0.1 A to be better than 32, but there's frequently pushback from title companies regarding issuing the 1 22 versus 32. Can you discuss this? I'm personally not very familiar with the 1 22 endorsement. We always request and recommend the ALTA versions. So I'm not sure how much I can go into this or if either of you have.

Melissa Martorella, Esq.:

Yeah no worries. I can jump in on that too. The, the other thing I'll say, I agree with Lane, we're always asking for. Also, the other thing, CLTA is a California specific property, or, or, I'm sorry, policy. So also if you're getting that, just know that that's not necessarily going to be something that you'll want if you're doing out of state lending. And also, so it also just depends on the title policy that you're, that you're getting. If you're getting a CLTA policy, which I wouldn't recommend because it's a, it's not as strong as an CLTA policy for a California loan, it makes sense that you would put the CLTA endorsements with that CLTA policy. However, we would recommend that you don't do CLTA policy and you actually do an alta. It's going to be, the base policy is much stronger.

And then you know, it correspondingly the endorsements tie to that one. So that might be why you're getting an issue on the 1 22, especially if the policy you're requesting is an CLTA policy. And then if you're asking for a CLTA endorsement, it just won't tie together. But if that doesn't answer your question, feel free to reach out to us and we're happy to help. And we'll do one more question because we only have until one I'll let take Casey answer this one, but if we didn't get to yours, feel free to email us. And then yeah, we're here for you. So, Casey, you wanna take this last one a plug for our purpose? Yeah.

Casey Busch, Esq.:

What do you charge for your business-purpose loan documents? So we, our loan documents start at $1,500. There are you know, requests and structures that, that will increase that fee, but that's our, our base fee. If you want to discuss your loan and if you know, we can help you out, we will give you an estimate on your, your loan documents, but usually $1,500 for just your standard set of loan documents. And we'll let you know if the fee is different based on your term sheet and your structure. If you want to give us a call and we can, you know, discuss your loan and, and how we can help you that'd be great and we can, we'd love to work with you.

Melissa Martorella, Esq.:

Awesome. Thank you everyone, and we hope you have a wonderful Wednesday and a great rest of your week. Again, if we didn't get to your question and, and you really need it answered, our, our contact information is here. We're happy to answer it for Thank you. Thank for your wonderful experience.