TILA and RESPA 101: Understanding Federal Law for Lenders

Steven E. Ernest, Esq.:

Alright, good morning or afternoon depending on where you find yourselves today. I sure appreciate you joining us. My name's Steve Ernest. I am the director of litigation and bankruptcy at the for Fortra Law firm. I'm also one of the partners here. I also have a YouTube channel called Western Lawman and if you're not presently a liker or a subscriber of that, I sure would appreciate you liking and subscribing. It will help me in ways that I don't remotely understand, but I'm led to believe it will help me nonetheless. We are here to today to talk with you about federal law for lenders. We're hopeful that we can help you understand some of those things. My role here is very limited. Mostly it is to introduce the big brains who are going to help you understand these things, who understand them intimately and very well. And the two people who are going to do that I know are already on the call because I can see them.

The first is one of my associates named Jacoby Perez. He's one of the lawyers here. He's been coincidentally at this law firm for longer than I have, and so he's here to talk to you about some of the things. And the other is a person named Anthony Diehl, who is also a famous lawyer in the real estate space and an associate here at Fortra, and he's going to explain some of that stuff to you as well. For those of you who are joining us today, who also joined me for the webinar that I did at this very time yesterday, we have a special prize for you because you've spent two of your lunch hours with me in a row, but I'm not going to believe you if you just tell me. So you have to put in the chat without Googling it. No cheating what yesterday's topic was. And we will go over that later. But without further ado, and to avoid the obviously and already pernicious effects I'm having on this webinar, I'm going to share my screen, which has the slides, and I am going to turn this over to, like I said, the big brain Jacoby. What do you have to tell us about all of these things?

Jacoby Perez, Esq.:

Well, good day everyone. I'm Jacoby Perez with the litigation team. We are going to be, as Steve mentioned, talking about federal law, particularly TILA and RESPA. Steve, if you could go just to the next slide here. I wanted to start out giving everyone kind of an overview of why we're doing this and it's because specifically this subject and it's because this is one that we keep seeing come up a lot and when it comes up, a lot of times we see these lenders reach out to us with temerity saying, what is this lawsuit? There's no merit to it. We did everything that we were supposed to. Litigation team handled this. And oftentimes they're surprised when they learn about the exposure and the liability or even just maybe the length of the case that they might be facing is a little bit more than they anticipated when the claims fall into this area.

I want to start by framing why that is what the issue is. As all the lenders here know, hard money and consumer lending are different beasts, right? The hard money space subject to different regulation, licensing, underwriting, and a lot of those differences are why hard money can be attractive in certain situations. I mean, it's a different product that serves a different need than what consumer does specifically. Often it allows more flexibility, requires less of the underwriting criteria. People that often can't qualify for a conventional loan can go to a hard money loan or when they need it to happen quickly, far more quickly than a consumer loan. So it serves a different space than the consumer loans do. And as we know, what comes along with that is kind of a different set of rules and it's a little bit axiomatic, but the hard money space is not subject to as stringent regulations as the consumer space.

But with that said, it's a mistake to think that just because we're in the hard money space, we don't need to know at least a little bit about what happens in the other space and what it requires. And the reason is that when it gets into the courtroom, it's not always clear cut, whether this was a business purpose loan or a consumer purpose loan. And that's kind of where the root of this assumption comes from. When we're dealing in the hard money space, a lot of US lenders only do business purpose loans, and so we assume that that's the only criteria that's going to apply and we function accordingly. I mean, the vast amount of private lenders are not even set up to do what? To meet the disclosure requirements and just the licensing and everything else that comes along with the consumer type loans.

And that's by design that gives the private money space the flexibility that it needs to be the product that it is. That said, borrowers, when they bring a lawsuit, they can say whatever they want, and early on we have this legal system that's adversarial. And then there's this idea that everyone should be allowed to have their day in court. And there's a huge kind of preference for allowing the evidence to kind of play out. Proving something is a frivolous claim is a little bit of a high bar in most situations. So it's not uncommon for borrowers to say, oh, well yeah, that's what they said. It was a business purpose loan, but in reality it was X, Y, Z that was my primary residence or that wasn't an investment property or that went to go pay off consumer debt regardless of what was in the papers.

And that can be because I didn't fill out the papers, the lender filled them out beforehand or some other third party did it either with or without my authorization. A million different things that they can claim. But the reality is that the litigation then puts it issue whether this loan actually was a business purpose or not. And if you kind of logically follow what the fallout would be from a finding that it's not a business purpose, you can see just how problematic it can be for a private lender that's not set up to meet those disclosure requirements. Because why would you assumed it was a business purpose loan and you did everything that you're supposed to for a business purpose. If all of a sudden a court says, actually that's consumer and all these other disclosure requirements and TILA and RESPA now are going to attach, well of course you didn't do anything that those would've required because that wasn't the type of loan that you thought was being made.

So one of the main things that we want to do here is set out some sort of best practices because a lot of times once you guys come to us in litigation, it's a little bit too late as far as preventing the problem. We'll do everything we can to mitigate a lot of times, yeah, we still can win this case, but it can take a little bit of money to go through the litigation process and either win on demur or summary judgment or even if it has to go to trial. But that takes time, that takes money and a lot of these cases, if you can get out ahead of it by having an understanding of how the law operates, why it operates that way and build that understanding into your best practices, into your underwriting system, you can avoid a lot of these headaches and when they do come along, be better situated to handle them.

With that said, the relevant regulation as you see in this first slide here, it's codified. It's CFR 10 26 0.3 T lpa. The general idea is that they exempt an extension of credit primarily for business, commercial or agriculture purposes. That's that divide we're talking about. If it's business or commercial, it's not. So it's not going to have all the Tela requirements, HOPA requirements attaching to it. What is Tela and what is hopa? Well, it's a regulatory scheme that's put in place to protect consumers and it has disclosure requirements or certain underwriting requirements. There's all these things that lenders are required to do and servicers that are put in place to protect consumers that don't apply to the hard money space. Typically, we talked about why a lender, especially in California, typically wouldn't think it would apply and it actually even goes further than that and we'll delve into kind of the intersection between California law and this Tela. But the general idea is that we don't do consumer loans, so that's why it shouldn't apply. That said, it helps to know what the criteria are because you can employ best practices that kind of allow you to get ahead of it a little bit.

We can go to the next slide. So the implementing regulation that we're concerned with this space, it's called regulation Z. And you'll hear that kind of alternatively used with TILA or with the RESPA context or the Hoppa context. But all regulation Z really means it is this disclosure implementing aspect of the federal scheme. And we're not going to go into what all the specific disclosures are and things like that because again, if we're in the hard money space, those specifics aren't important because we're not set up to do that. There's a reason we're not set up to do that. But what is important is to understand when regulation Z says that this Tela scheme is going to apply, and that goes back to that business purpose. It only applies to business purpose rather than consumer purpose loans. So what is a business purpose loan? And the commentary on regulation Z, and we'll take a look at it in the next slide when we get there, kind of lays out five factors that it suggests that lenders should take into consideration at least when evaluating whether one of their loans is a business purpose for consumer purpose.

But kind of the general guiding principle here, what are the loans? What is the money being used for? If it's being used for a business purpose, oftentimes that means either an investment property or some other business venture as opposed to this person's primary residence, the main house that they live in or being used to pay off what's very specifically consumer debt. That's where the distinction generally speaking is going to lie. Now there's always going to be French cases and that's why these five factors come into it.

Maybe not oftentimes, but there are definitely times where there's mixed use for the funds and I know there's a guiding principle out there. Well, what is at least 50% of the use of the funds used for, which can be helpful, I would still say to evaluate the entire thing within the context of all of these criteria that we're going to look at. But the overall principle, what is the primary use of the funds? And that will determine largely whether it is business purpose or not. Now again, once you get to a courtroom, borrower can say whatever they want. The more proof that we have that they're being used for that actual purpose, the better off you're going to be. So the more documentation there is, and there's a little bit of conflict there, right? Again, there's a reason why the underwriting isn't as stringent for hard money loans, but the more that the borrower says in their own words that this is what I'm using the funds for, rather than just filling out a form one rather than it being a pre-filled out form two, rather than them just filling out a form just blatantly or just generally stating business purpose, the more specificity and the more frequently that they certify what it's being used for, the better off as a lender you're going to be when you get into court and say, look, I relied on what that borrower was representing to me and then the last weeks we talked about that reliance is a very important piece of this because we'll look at the California code, but what California says, unlike we have telo over here that says, look lender, you've got to consider these five factors when deciding whether it's a business purpose or consumer purpose.

Now, it doesn't say what the penalties are for getting it wrong or anything like that, and it isn't even implementing part of the law, just commentary on what they thought the legislature thought that lenders should be considering when making this determination. But over here at California law, you have a little bit stronger of a protection that is a coach that we love to cite. And we're dealing with these cases here, which is financial code 22 5 0 2, which says that the lender gets to rely on the written representations of the borrower for a determination of whether it's a consumer purpose versus a business purpose. And I know a lot of us have similar loan documents or similar things in loan documents for California, the certification of business purpose or of non-owner occupancy. And that's what those forms are designed to do is to paint the borrower into the corner of saying in their own words, in their written representations, this is what the funds are being used for. They're being used for a business purpose per California and federal law, and therefore lender, you're allowed to rely on the representation being made or the representation that I'm making when you decide whether to fund these loans or not.

So here are the five factors that the legislature, the federal legislature puts out there that says should be considered as far as when you're determining under Tela whether your loan fits or not, you can kind of see they're aimed at protecting the borrower. The closer you get to something that looks like a consumer use and the greater knowledge or the greater disparity of knowledge, let's say between the lender and the borrower, where the lender maybe should know better than the borrower or the borrower's vulnerable or could be taken advantage, the harsher it might be for the lender as far as this determination. So the first one, the relationship with the borrower's, primary occupation to the acquisition more closely related, more likely it is to be business purpose. Again, that goes to that sophistication issue. If you have the more vulnerable the borrower is, the less that they know about it, the more the lender maybe is going to be held responsible.

The second one, the degree to which the borrower personally managed the acquisition, the more personal involvement there is, the more likely it is to be business purpose. Again, kind of that same theme, the ratio of income from the acquisition to the total income of the borrower, higher the ratio, the more likely it is to be business purpose, size of the transaction, larger the transaction, the more likely it is to be business purpose. And then finally, the catch all, the borrower statement of purpose for the loan. So we talked about California law where that last piece is dispositive, arguably federal law says maybe there's a couple of other factors you might want to take into account. So there can be when you do actually get into these lawsuits, when you get in the courtroom, there's a little bit of tension between those because it's not necessarily clear all the time how they line up.

And a lot of times it depends on what the actual fact pattern is. A lot of those other criteria that we talked about often aren't relevant. The borrower's involvement in the acquisition and whether they actually are going to be running the project and things like that, a lot of times it doesn't even matter, but if it does, it becomes a consideration. Here's the financial code that I was about, and so you'll have the language when we distribute the slides, but this is a very important if you're doing in California, a very important piece of the law that I think really is where that confidence of hard money lenders here comes from as far as, look, I wasn't required to do anything further. And the California case law says a lender doesn't owe any special duty of care to a borrower. It's an arm's length transaction.

Unless you step outside of that relationship as a typical lender, you're not required to do diligence above and beyond what a standard lender in the field would do. You don't owe any special duty of care. Now, that said, that's not always a catchall protection too because sometimes there can be red flags and we'll talk about that when we talk about the best practices, but here you have what lays out pretty clearly, much more clearly than I would say that the Tela and federal law says that a lender gets to rely on the written representations of the borrower. Very, very strong piece of law in favor of lenders. And the more that you get the borrower to affirm these things in writing and the more specificity that you get, the better off you're going to be.

And here we have kind of in conjunction with that financial code 49 70 D defines what a consumer loan is. And again, you'll have this definition in the slides. It ties the definition of a consumer loan to whether it's either going to be used for consumer credit or whether it's going to be a owner occupied property. And so we get to the best practices with respect to this issue. I've touched a couple of times now on the underwriting process because again, there are a lot of factors that were not required by law to consider when deciding whether to do hard money loans. That said, the more that you can get the borrower to certify what they plan to do with the loan, the nature of the actual property that's being secured, the better off you're going to be. And if there's any red flags, and this is really where you start to get into the problematic area.

If there is anything off about the loan, I would just implo don't turn a blind eye to that issue. Make sure you talk to the title company, make sure you verify with the Esther company. Make sure if there's a broker, you double check with the broker and all of those communications that you are documenting that you did that a lot of times the lenders, do you get additional of intent at different times in the loan depending on how long it takes to get, but additional letters of intent just certifying that what the purpose is at specific stages as the transaction is developing. I've seen lenders do additional interviews with the borrower. That's not that common. But if there is a reason to be suspect about what's being said in there, that additional interview might help save the day because you get to go to the court and say, look, court we did above and beyond the diligence that were required.

And I mean I had a case this year at trial where the borrower literally goes to court says, look, judge, yeah, I lied about what was in the application, but you know what? They still should have known that it was not a business purpose that I was buying the property. I said it was an investment, but actually I was going to live there. And one of the things that the judge hung his hat on in determining against them was that we held that extra interview to talk to her that proved of course she was lying. She has the text messages where she's saying, oh yeah, I'm practicing a script that I have to do in order to convince them. And that evidence the judge looked at and said, okay, I mean they would not have done this loan, but for her lying to them about what was in there, she wanted to argue, Hey, it doesn't matter whether I lied or not, they still had to meet these requirements.

Well, we did everything we were supposed to do in that interview, which is not a requirement for people to do, was a huge reason that that allowed the judge to dispose of her case. So anytime there are red flags, it can't urge enough not to ignore them because what looks like might be a little problem, even if you are going to win at the end of the day, it might be $200,000 later when you have to win at trial. And even if that's the case, yeah, the loan documents say you get your attorney's fees, but does this borrower even have the money to pay anybody back at this point? And there's all these other problems that if you get out ahead of it by understanding how the law operates, what's at play, you can save yourself a lot of time and money. So with that, I believe Steve will be introducing Anthony next.

Steven E. Ernest, Esq.:

Yeah, thanks and great stuff. Jacoby. One other item that I should have mentioned at the beginning that I didn't, if you have questions along the way, we are all experienced litigators and we're accustomed to people interrupting us, but in this circumstance, you sitting at home shouting at your computer will have no effect because each of you has been muted. So we will not hear you unless you happen to be very close to our office in Irvine. A much more effective strategy for you if you have a question is going to be including it in the chat. So please put it there. We will address those questions at the end and no extra charge for those. Secondarily, Barbara is our big winner and for the contest that we had this morning, Barbara, if you will let me know the size of a sweatshirt you wear, I have something that will be coming your way and thank you for spending your lunch with us two days in a row.

Next up, well, on the subject of what Jacoby was saying earlier, I have through my career I should trademark this because I am really the one who has made this up and some of my colleagues have copied it for me. I call these lawsuits wrongful infliction of money. You as a lender, what you've done is given a loan to someone who came to you asking for money. That's the extent of your wrongdoing in these circumstances. Sadly, your borrowers are still on occasion going to out of the good graces of their characteristics, still sue you for having given to them that money. And it's abundantly frustrating and we share your pain. We really do think these cases are absolutely as ridiculous as you do and these best practices that are on your screen hopefully will help you avoid as many of those wrongful infliction of money cases as you can.

But as Jacoby alluded, what the borrowers are going to say is, well, we signed all these documents, but I didn't read any of 'em. And the notary who was there didn't give me a chance to read them even if I wanted to because we were in a Starbucks and I only had five seconds to sign 136 pages, and so I didn't read it. Now there's California statutes that say, and there is in most of the other states, if you're not here in California like we are that say it doesn't matter if you didn't read it. If you didn't read it, that's your own problem. You're still charged with the information that's in it. And then there's the parts of the documents where sometimes in the borrower's own handwriting, they write, this is a business purpose loan and this is the business purpose that I'm going to put these funds to.

They write it in their own handwriting and then they'll say, well, I lied, like Jacoby just acknowledged each of those are good facts for us and bad facts for them. But sometimes it becomes a little bit more expensive to demonstrate those things than it does in other cases. So if you follow these best practices, it's going to help you hopefully get rid of or just avoid the cases entirely. Or if they are filed against you, you won't have to spend quite as much of your time and treasure in defending them because you will have followed these best practices and you can successfully defend yourself earlier in those lawsuits. So keep that in mind as we go through. And the next section we have is going to be with one of my associates and a brilliant young litigator in our group. Anthony Diehl. What do you have to tell us about Regulation X, which seems like it'd be a great band name or RESPA.

Anthony Diehl, Esq.:

Yeah, thank you Steve. My name's Anthony Diehl. RESPA - the Real Estate Settlement Procedures Act, also known as Regulation X is a consumer protection statute enacted in 1974, and it's interpreted and enforced by the Consumer Financial Protection Bureau. Like Jacoby mentioned, the private money lending has less restrictions and less duty to disclose, but with that lower duty comes a higher duty to investigate the purpose of the loan. I think it's important to take a look at the facts that are surrounding the loan and look at what the borrower actually says and does. For example, if a borrower is referred to you by a traditional lender, but that traditional lender denied the borrower because they couldn't afford the loan, that tends to indicate that they're probably trying to get a consumer loan, but they're at their last effort or their last option is to go for hard money.

So another example might be looking for borrowers that formed an entity right before calling you or even after calling you in order to say that it's a business that's lending or borrowing the money. You want to read the documents that the borrower states in their own words, make sure that on the owner occupancy certificate that they're not saying that they live there. And we've actually seen that where right there on the document it says, no, I do live here. Things like that. So use some common sense if your borrower is saying that they're going to use the money for advertising for their real estate company, but you are sending a check to cure the arrears on the first, probably have some issues coming down the road when the borrower is facing another default and you're moving to foreclose. And that's really what happens here is these borrowers are like a fish out of water when it comes to foreclosure and they will grasp at any straw that they can, especially these days with the access to AI and Google to look up how can I stop a foreclosure? So with that RESPA Regulation X Congress enacted it to help consumers become better shoppers and to try to eliminate referrals and kickback costs that unreasonably increase the cost of the loan to reduce the amounts that are placed in escrow and to try to maintain a modernization of the settlement process.

So in short, protect consumers from hidden fees, abusive servicing and undisclosed referral arrangements. It also gives a borrower the right to demand timely servicing disclosures and comes with some hefty consequences. RESPA allows for attorney's fees. It also has statutory damages for $2,000 per borrower when there's a proven pattern of practice. And then there's also treble damages that may be imposed not to mention in some cases when enforced by the C-F-P-V-A possible hefty fine and even a short stay in federal prison. So it's a good idea to try to avoid some of these things. One, the pitfall or one of the easiest ways for a borrower to impose respite duties is to merely state that the loan was lent on a one to four unit property, and that's generally the case. And so then the only option you have after that is to sufficiently prove that it was in fact a non-consumer loan with a business purpose.

So you can be pulled into RESPA. One way that all lenders are exposed to RESPA is if they promise a loan modification. So you want to be very careful and very clear about that when the borrower's asking for a loan modification or if you in fact do one, entertain a loan modification. There are very strict rules in the way that it's handled and these rules are ever changing, especially in California. But most importantly, if you are considering a loan notification, you need to stop the foreclosure process. That's kind of a give me in most real estate professionals such as real estate agents and what have you know about that. And like I said, you see these claims generally, you see them when the borrower's grasping at straws to stop a foreclosure, but they do arise organically as well when there's issues with servicing when a borrower is reviewing the documentation and see that there's a big kickback fee on the closing statement. So sometimes it's not just related to foreclosure, but that's generally what we see is a last ditch effort to stop a foreclosure.

It is good that you don't have to do certain disclosures, loan estimates and servicing disclosures, but you do need to make sure that you are using your good sense to identify if this is in fact a borrower who is in fact going to use the money for consumer purpose. And if that's the case, that's a huge red flag and you want to don't want to touch that loan with a 10 foot pole. The next slide. And so as we said, the borrowers will claim that there's a sham, it's a sham business loan. And so the best practices are to make sure that you read the documents that the borrower is providing, that you do some kind of investigation into what the borrower is asserting. And while the borrower may make misrepresentations about the purpose of the loan that you may rely on, and that tends to open the door for mortgage fraud, the mortgage fraud in the borrower's eyes is a slap on the wrists compared to the stopping of a foreclosure. So they're generally pretty brazen about admitting to essential mortgage fraud in order to stop a foreclosure. We see that commonly.

So the disclosures should match the reality of the loan. You should be careful about what the purpose is if you can control the way that the disbursement of the loan, it's a good idea. And then when specifically dealing with RESPA, you want to have a centralized and focused communication process. You should do this all the time because it's only later that they're going to raise RESPA and then you're then held to that standard for past acts. So you have to kind of in some way set yourself up to comply with certain RESPA requirements so that if they do raise RESPA, you can at least say, well, I complied with the one point of contact requirements or these as I'll get into in a moment. The QWR requirements. So generally you're looking at disclosures for forced placed insurance and avoiding dual tracking. And then you also need to be careful for the QWR, the qualified written response, which requires it's a preemptory requirement of one immediately acknowledging the request and then two, a significant investigation into the allegations leveled in the request essentially. And you have five days to respond or to acknowledge, and you have 30 days to provide an answer and you have to admit one or the other. Was there in fact an error in the servicing or the way that the loan was handled or was there not? And you're beholden to that admission.

So the best thing to do is to avoid loans that indicates borrower intent to use the money for personal needs and to, in a sense, preemptively anticipate a RESA violation or a RESPA claim anyhow, by centralizing your communications and having disclosures ready. Yeah, we can go to the next one there. So the remedies you're looking at, first of all, there's somewhat of a risk of rescission, but generally that's kind of tied to till, but there's a three-year statute of limitations for improper disclosures and a one-year statute of limitations from the date of violation on unlawful kickbacks, you can be required to pay the actual damages that the borrower endures, and there's a certain statutory amounts depending on the violation. And then probably the biggest one here is the attorney's fees. You're going to be responsible for the borrower's attorney's fees. We see attorneys take these matters on contingency often, and that's the most common way that they take them actually.

So if they're successful, you've essentially hired an attorney for your borrower at 600 to a thousand dollars an hour and excessive and duplicative billing rates and entries. So it can run away fast when it comes to attorney's fees. And so that's certainly the highest risk there. Here we mentioned hope, and I just want to comment on hope a little bit. A high risk or a high cost loan is based on a certain metric over the, it's the A-O-R-P-A, which is not the, I'm sorry, the A OPR, which is not the A PR, it's a government rate that changes periodically and there are government websites that you can refer to understand what that rate is. And depending on the type of loan, you are allowed to borrow up to a certain amount above that rate or lend at a rate that's above that rate. So it's a good idea to have your thumb on the pulse of that rate and make sure that you're not exceeding it because that'll pull you in.

Let's see here. Sometimes the CFPB, I mean certainly the borrowers will refer you to the CFPB. It's an ever-changing agency at this point. We're seeing that it's changing significantly under this administration, and so they're already inundated with a lot of complaints and we may find that they're unable to field most of 'em going forward, but of course that can change with the signing of a pen. But so generally the CFPD is going to look at wide scale violations, but that doesn't mean that you're not going to get a letter from an attorney general asking about a loan. So it can happen. We can go to the next one.

So as I mentioned, there's treble damages, which is a legal term for just triple the amount of damages for kickbacks, and we talked about attorney's fees and then of course the criminal penalties, $10,000 and up to a year in prison, which is we highly recommend you avoid that also under till you're looking at rescission and attorney's fees there as well. And that's where the borrower is weighing, well, yeah, I'll admit to mortgage fraud if I can rescind this loan and pay my attorney. So there's not much of a stick when it comes to mortgage fraud generally, and at any rate, that's you turning the tables and going after them. But really the idea is just to get out and to resolve as quickly as possible and avoid the risk of attorney's fees. Let's see here. So there's again, a number of disclosures that are required, and I think, yeah, you can get ahead of some of these issues by just complying with some of these things that are relatively simple.

Let the borrower know if you're changing the servicer, keep the borrower informed of any changes to the loan and make sure that you document the communications and if you get a QWR respond quickly without delay and make sure that your documents are in order and that it's easy for you to investigate A QWR. Now, some borrowers will inundate a servicer with demands in A QWR. It doesn't mean that all of them are appropriate, but there is a handful that the borrowers can raise that you do need to address. And again, I think it's important to note that it's not just a response that you're not obligated to, well, you have to sign under penalty of perjury. So if you're saying that the loan is fine, you better be really sure that the loan is fine. And if there's an issue, you have to just close it there.

Let's see, are we on the next one now? Yeah, so to mitigate some of these issues, you can conduct a self-audit and if you're a servicer, you can audit the lender, and if you're the lender, you can audit the servicer and just make sure that these standards are complied with in a general manner. Make sure that you are documenting everything and that you're reading the documents and applying logic to the documents that you see. Again, if a borrower's forming an LLC right before calling you, they're probably not an actual LLC, they're just trying to get a loan.

You want to make sure that you use the proper language to reinforce the commercial business purpose. And I don't think that there's any limit to how much you can try to document the purpose of the loan, but it's very important that you feel that you can determine that the way that the borrower is in fact going to use the funds is consistent with what they're saying. Otherwise you just have a borrower who's setting themselves up for default, and as soon as they get that notice of default, they're going to run to an attorney and tell 'em how you tricked them into a business loan when in fact it was a or a consumer loan. And be prepared and call us quickly. Don't waste any time. We need as much time as possible to prepare to respond to any borrower demands and certainly any lawsuits, these lawsuits usually start with a temporary restraining order and there's very little time to address those.

And so a quick response is necessary and a proactive response to mitigate these issues in these claims is absolutely recommended. Make sure that you're training your staff to make the proper notes, to review the documents completely and develop various checklists to ensure that you're complying with all of these things and make sure that the checklist is checked off, that nothing's skipped and all of it's there. And when you do things and when you can present these documents as evidence, it's very, very strong. And sometimes it can lead to a very quick conclusion to the case when this attorney who's been taken on a contingency realizes that you've got all the documents that you've done, everything you're supposed to do correctly, that this borrower has clearly come to you for a business purpose or has presented themselves in a meaningful way that borrower or that attorney on a contingency is going to say, okay, yeah, I I'm out because I'm going to lose. And so having that ready and being prepared for that can reduce these from drawn out litigation to a very quick with an attorney where we just say, Hey, look, I've got all this documents, we've got our checklist that we're prepared, we've got statements of compliance and this doesn't look good for your borrower, and that borrower's attorney is going to go to them and say, Hey, we should probably dismiss or find a way to resolve this another way, I think. Yeah, so any questions?

Steven E. Ernest, Esq.:

Good stuff. Yeah, good stuff. Thanks, Anthony. I think that's really smart advice. When you have an attorney on the other side, which you almost always do, the borrowers aren't paying their lawyers if they're working on a contingency fee, which they generally are means they don't get paid until the case concludes and they win and they collect something from you. And what that means at a practical sense is that every time that lawyer touches his file, he's losing money and they know that. And so if we get involved early on and let them know that they're in for a fight and that we know what we're talking about and they're holding sort of a bad hand here, there's a much better chance that're going to go away. So I fully endorse the preparedness and the hitting them hard and like the Duke Lalu, you didn't expect to hear that name today from Buller.

You announced your presence with authority right away. I think that's really smart advice. Alright, well good stuff. Thank you guys both. We have a few questions here and I neglected to tell you this and so it is my fault, not yours. Questions are to go in the q and a. They are not to go in the chat, but since it's my fault and I didn't tell you that, I'm monitoring both the chat and the q and a and for the same low price of this webinar, we'll answer all of those questions. I'm going to do the chat ones first and then please don't put anything else in the chat.

Oh, and here's the disclaimer that I should have said at the beginning, but again, neglected to, we're not giving you legal advice today. We're telling you what's going on, we're telling you what our observations are in the marketplace, but to give you legal advice, we'd have to know specifically what's going on with your loan and your situation. And we don't, because like I said, your calls are muted and we can't hear what you're saying. So generally what we're saying, you can apply, but don't take sort of one kernel that you heard and then get yourself into trouble. And in six months say, well, Steve, but you said we need a more robust understanding of what's happening with you before we can give you legal advice to get legal advice, give your attorneys a call and let them know what specifically is going on with your loan and whomever the attorneys you have who are calling, really it should be us and is our contact information.

So that's great. Alright, first chat question is from James Paulina. I have just discovered that my borrower has completely lied on its application for business use. Yep, that'll happen. Jacoby talked about this. He lied about owning a trucking LLC and owning a big rig. His use of the money was for personal consumption. What should I, you mean what should I do? Jacoby talked about those a little bit. So lying on a credit application or anything involved in the loan is loan fraud. It's also a breach probably of one of the terms and conditions of representations, of warranties in your loan documents. So that's an event of default, same as it would be to miss a payment decision. James, a hundred percent yours. Do you want to enforce that event of default or do you want to see if he pays off your loan? Because a lot of times the money is the important part of a loan. It's up to you. It is an event of default. You can accelerate the loan and collect the entire balance probably, I don't know who wrote your loan documents, haven't looked at 'em, but in the 30 years of practice, I can tell you that this situation is almost always an event of default. Jacoby, you got anything to add to that?

Jacoby Perez, Esq.:

No, I think that's dead on. The only other thing would be maybe letting them know in writing that you've identified this just so it's documented. But other than that, yeah, I mean it's completely up to you. It's a breach of the contract event to default how you want to move forward's up to you.

Steven E. Ernest, Esq.:

Yeah, if you've got a performing loan, if they're paying you every month what they're supposed to, you might want to just sit as still as you can. Hope the money keeps coming in, but we're happy to look at it and talk to you about it with you. So there you go. Got the first one right, John DOAs. We see frequent seller carryback loans on single family residences without any resp a compliance. The CAR form implies that if you are an individual lender and do no more than three loans per year, the loan is amortized for at least five years without a balloon payment. Okay? So there are exceptions to all of these rules and the statutes are intricate and complicated and there are ways to weave your way around some of the requirements, especially if you have particularized licenses and we would need to have a look at your loan portfolio.

But seller carryback loans are frequently allowed, I'll tell you that. So John, you may have done it right. I hope that you have. I hope you had learned counsel helping you and you didn't write the loan documents yourself on the back of a napkin. But if you want us to at it and if you're having problems collecting, we're certainly happy to do that. Those are all the questions in the chat. So we will go to the q and a, which is where they're supposed to be, and those will be better Jacoby. Anthony, do you have anything to add to that last one or should we just move along?

Anthony Diehl, Esq.:

Nothing add,

Jacoby Perez, Esq.:

Yeah, nothing add. There's definitely an exception for certain carrybacks and yeah, Steve's exactly right. The factual scenario will dictate it. So we need to know the facts.

Steven E. Ernest, Esq.:

Alright, Richard Nemi, oh, this is a good one. What is dual use collateral? That is a house that has a day job and a night job, so it's an asset or a pool of assets that's serving as collateral for more than one obligation. You don't see those an awful lot, especially with SFRs, but it does happen a lot of times a pooled asset will serve as dual collateral. So collateral for more than one loan obligation. James Paulina. I just discovered that my borrower completely lied on his loan. Oh, we already did this one. This is the guy with the truck, so you want to hear it again? Nah, you've already heard it. That's enough of that one. James Paulina almost got his question answered twice. Lisa Eshelman, you are using private money loans as another name for business purpose loans. I think that's true. We use them somewhat interchangeably during this webinar.

That sounds confusing to those that don't know the difference. There are plenty of private money consumer loans out there. I think that means private money, consumer loans that are not business purpose loans. That's right. Private money lenders are allowed to issue consumer loans if they want to. We don't see it an awful lot, but sometimes it does. And Lisa makes a good point and thank you for pointing that out. This presentation was directed to private equity lenders who are making business purpose loans, consumer transactions, whole different prickly pair. There are lots of disclosures and obligations that are incumbent upon you and be careful if you do that. So thank you Lisa.

Richard Nemi, you were late. I was late to the webinar. Could you have them define again? I don't know what you want us to define, but if you give us another question, I will define something again for you that you may have missed. So there you go. John Dous, the CAR Seller Financing addendum states an individual can provide seller financing. This is the seller holdback. Again, we answered that one. Oh, these are people who were in the chat that copy their questions to q and a. So there you go. No extra charge to answer it twice. The broker presents. This is from James Paulina. The broker presents all this false information to me. The lender, the broker usually doesn't want me to have direct communication before the loan closes. Who's more responsible? Well, I think in that circumstance, if the borrower wants to sue somebody, he's probably going to sue everybody.

So if you think the broker is misrepresenting things to you, you have a duty of inquiry to figure it out, especially before you fund the low because ultimately it's your money. You can ask whatever questions you want and demand whatever disclosures you want and have any requirements you want because it's your money. Nobody's going to make you loan your money until you're comfortable doing so. If you wait until the movie gets to its darkest scenes before you start asking those questions, you may find yourself in a bit of a pickle. And if it turns out that it was your broker who was lying to you and making misrepresentations, well you have some claims to your broker, but I wouldn't be so convinced that you're going to get 1,000,007 out of your broker whatever the amount of your defaulted loan was or you're going to. What you would do I think is tender your defense in the lawsuit to the broker. Are they going to take it? Does your broker have insurance? Those are a lot of good things to find out before you loan your money, especially if your broker has some trust issues with you. So be careful. Like I say, it's your money.

Mike Nas, CFPB due to be shut down January, 2026 per the director's press release. If I am not mistaken, well Mike, some of these, this is not a political program. We don't get picked up by M-S-N-B-C or by Fox News. I don't think we're endorsed by Elizabeth Warren or by Ted Cruz. So a lot of things happen in politics and a lot of things say they're going to happen in administrations as they come and go, like Anthony alluded, sometimes it happens, sometimes it doesn't. We'll have to see. All we kind of know is what best advice we can give to our clients today. Anthony, you were talking about C-F-P-B-A little bit in administrations. You got anything to add? Can you look into your crystal ball and tell us what's going to happen in January?

Anthony Diehl, Esq.:

Well, I can't tell you what's going to happen, but I know what's happened in the past. The CFPP has already done its work at interpreting the statutes. And so those rules are set. So even if there's no CFPB by way of example, the way that they interpret and enforce the rules still exists and the courts now, certainly after Chevron's overturn, will interpret those rules as they're propounded. So the CFRs are still relevant. The codified federal rules are still relevant even if there's no agency to go out, enforce it directly.

Steven E. Ernest, Esq.:

All right, John, do on a single family owner occupied property, I'm not sure what that means. It seems like it's fragment from a different question. So I'm sorry I can't add to anything. If you give me the full context of your question, we will still answer it for free, but I can't do it with what you said there, Richard. Another one. If a loan is secured by a principal residence where the business is being conducted, can a portion of the proceeds be used to bring property taxes current? That's a tough one. I kind of think, no. What do you think Jacoby?

Jacoby Perez, Esq.:

So if I understand the question correctly, there's a business being upgraded on the property, it's also a principal residence. My first question, what's the main portion of the funds being used for? Are they being used to fund the business? If that's the case, I guess the ratio of what's being used for the property taxes versus what's going towards the actual business, I think would weigh heavily there. The more that's going towards the business versus the taxes, I think the better argument you have.

Steven E. Ernest, Esq.:

Yeah, I think you're slicing it pretty thin on this one. If this is a business purpose loan, so the guy can build out his doctor's office in his garage with MRI machines and things like that, I think he might do okay as far as the machines and the build out go. If he's paying his property tax on his house though, that's a tough one. I would stay away from that one. The machines, the MRI. Great Property tax, I'm not so sure. Alright, anonymous attendee, someone who wants to remain stealth and is not wearing a name tag to today's webinar In a business purpose loan, what percentage of the loan amount can be used by the borrower for consumer purpose zero, I think it's business purpose loan. It's used for business purpose, not a consumer purpose. Question number two from same anonymous attendee is the percentage based on the gross amount of the loan or the net proceeds to the borrower. Thank you. I don't divide by zero. I think this one's zero. Anybody else?

No. Okay. Derek Moore, does your firm review existing loan files for legal exposure and when? Well, I can answer that one. Yes, we do. We do for sure. Audits of your portfolio, if you want to send us a specific loan to look at for potential problems, we can do that as well. Question number two from Derek Moore and when exposed offer read legal remedies and when exposed offer legal remedies. So yeah, if you've got a problem loan in your file, we can give you some advice on what should be the best way out of it and how you can solve your problems. Answer is yes to both of your questions. Contact information is right there on your screen.

Mike Tanenbaum. I issued a non-business purpose loan on an owner occupied property in 2017 when loans of that sort were legal. Well, consumer loans are still legal today, so you can still do that. I voluntarily allowed the loan to keep running beyond its maturity rate in 2022. So loan modification or forbearance. Good. I'D now like formally I'd like to formally extend the maturity date on the loan. Can I legally do that even though this loan is now considered a commercial loan? I'm not sure how it would be reconfigured as a commercial loan. If you had a consumer loan when it started. It's probably a consumer loan forever, but you can for sure extend your maturity date, whether it's a consumer loan or whether it's a commercial business purpose loan. There are forms for modification. We have a practice group here at this law firm that can help you with that.

The answer is yes. Mike Tannenbaum. Oh, well here's another one from Mike. I meant a consumer loan, not a commercial loan. Yeah, I think that's the way I answered your question. I hope you got the answer you were looking for. Robert Novasky. That's a good one. Novasky. Good. What is your take on the use of arbitration? Oh God. Arbitration clauses in loan documents and how do you see them play out in litigation? I'm going to answer this one, but this is just one man's opinion and then I'm going to see what Anthony and Jacoby think. I hate arbitration. I hate arbitration provisions. I strike them in my own contracts that I write for my personal use. I advise my clients against them. I think arbitration is a terrible idea. You can do what you want. Here is the why behind that arbitrators do not have to apply the law.

There can be a statute that says lender wins in this circumstance 100% of the time, and the facts can perfectly match up with that statute. And we can convincingly present that statute to the arbitrator and the arbitrator can say, I literally don't care about that statute and I literally don't care about these facts. He can write that down in the arbitration order. I want the lender to lose and I want the borrower to win and here's my award. They can do that, absolutely. That brazenly, they are not required to follow the law. And what are your appellate remedies in that circumstance? They do not exist. There is no appeal from arbitration unless it's undisclosed bias. Like your arbitrator was the uncle of the borrower and he didn't tell you about that. Other than that, you just have to lick your wounds and take your loss and go away.

It used to be that arbitration was cheaper and faster than a regular lawsuit. I don't think that's true anymore. It's probably a little bit faster, but I don't know that it's any cheaper because the arbitrators themselves have to be paid something like three $5,000 an hour and they have 20 hour minimums and it's extraordinarily expensive. Arbitration is and advantage, I don't want to tell you that it's all bad things and that any lawyer who tells you otherwise is giving you bad advice because reasonable minds may differ. I'm certainly not the only attorney in California with a reasonable opinion. So attorneys who like arbitration among the primary reasons is the expense that I was just talking about because especially in a commercial or a business purpose loan transaction, each side is going to have to share equally in the arbitrator's fees. And if the arbitrator sends you a bill at the beginning for $30,000, the borrower has to fund 15 of those $30,000. And they're not used to, or a lot of times, willing to pay those amounts. All they want to do is make the lender pay everything. And so sometimes that'll help you. But that's what I think about arbitration and arbitration provisions. Jacoby and Anthony, you have any opinions as strong as mine on this subject? I

Anthony Diehl, Esq.:

Mean a differing opinion, but these are fact intensive questions and your ability to present evidence in arbitration is limited. And so the arbitrators are going to take the case at first glance generally, and you need that opportunity to show as much evidence as possible and to hang your defense on a statute. I tend to agree with Steve that arbitration is maybe not the best place for some of these claims. Certainly when you do them, they apply to both. So you can compel arbitration, but so can the borrower. So you need to be careful when you're offering arbitration in your loan documents.

Jacoby Perez, Esq.:

Yeah, and I'll just add very quickly, Steve highlighted the risks extensively. The whole idea, it's supposed to be cheaper and faster. There's no guarantee that's going to be the case. I have seen it work out for some lenders that choose it early on and get a quick disposition. But one thing when you're calculating, like Anthony mentioned, whether it's worth it or not, unfortunately, the reality is in the hard money space, a lot of times we're fighting against a negative impression of what we do. And in things like arbitration where they don't have to follow the law, and it can be a case of first impression, that can work against you and you might be left without recourse because of it. So that's my piece on it.

Steven E. Ernest, Esq.:

All right, cool. Mike Nas again, if the CFPB goes away, is there a California equivalent where we would hear from? Thank you. No, thank you. I don't know of a California equivalent to the CFPB. Anthony, do you?

Anthony Diehl, Esq.:

Yeah. There is a California Consumer Protection Board or agency, and they largely just adopt what the CFPB puts out there.

Steven E. Ernest, Esq.:

Good. That we asked Christian Payne, if a business purpose loan has a portion of the proceeds going toward paying off a personal tax lien, I feel like we've had this one. Can the loan still be considered business purpose if the tax lien must be cleared to complete the transactions? I think you're asking for trouble doing stuff like this. That's what I would say. I don't want to give firm opinions one way or other because I haven't seen the particularities of your transaction. But what you want in a business purpose loan is for your borrower to tell you that they're using the funds for a business purpose and to tell you what that business purpose is. And if they start telling you that some of it is going to be for a consumer purpose, I really just think you're asking for trouble, guys.

Anthony Diehl, Esq.:

Yeah. Use some common sense and watch out for the red flags like Jacoby says.

Jacoby Perez, Esq.:

Yeah, I mean, technically there are situations in which all the funds don't have to go towards it, but again, the closer you are to the 50%, the more that is going towards consumer purpose, the more facts that surround that, it looks like that's what's happening. The more you're inviting trouble. So ideally, it's all going towards business purpose. That's what you want.

Steven E. Ernest, Esq.:

All right. Well, that is a hundred percent of the questions and chats that we received. We here at fortria are sure appreciative of your interest in the things that we say, and we greatly appreciate those of you who are our clients. If there's anything we can do for any of you, whether clients or not in the future, we certainly would relish the opportunities to be of service. And we put on conferences twice a year, once in the springtime in Las Vegas, once in the late summer, early fall in beautiful Newport Beach where we would love to see you and add those. We offer free legal advice. That's not legal advice much like today's. You can find us in the hallways and their educational portions of those conferences as well. So we look forward to seeing you at our conferences and our future webinars, and with the contact information you have at present on your screen, you can get in touch with any or all of us at your convenience. So thank you all so much. Enjoy the rest of your Wednesday, enjoy your Thanksgiving, and we appreciate you all.