Private Money Loan Documents and Related Disclosures by Dan Harkey

·????? What are loan documents?

Loan documents are not just paperwork but the backbone of a loan transaction. These comprehensive written agreements memorialize the borrower's commitment to repay the borrowed funds and the consequences if the borrower defaults on their obligations. The principal documents integral to this process are a promissory note, a loan agreement, and a deed of trust or mortgage instrument. In less sophisticated transactions, the loan agreement will be merged into a deed of trust and eliminated. ?In addition to these foundational documents, submitting personal and business financial statements is often part of the lender's criteria for loan approval. Understanding these documents is crucial for all parties, empowering them to make informed decisions.

Loan documents may be off-the-shelf standardized forms written by an industry lawyer or software support vendor. Often, these documents are a collection of clauses obtained by attorneys from an online legal research platform. ?

Some deed of trust forms are written and approved by the Federal National Mortgage Association (FNMA), commonly known as FannieMae. Fannie Mae is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. It plays a significant role in the mortgage industry by setting standards for mortgage lending and approving standardized deed of trust forms, known as uniform instruments, with various form numbers.

Lawyer specialists play a crucial role in the private money lending business. They construct other, more sophisticated, customized loan documents for specific purposes, ensuring that all legal aspects are covered and both parties are protected. This expertise provides reassurance in the complex world of private money lending. ?

The private money lending business generally uses off-the-shelf forms for most transactions. However, attorneys, independent or in-house lender employees, may draft customized documents for more sophisticated transactions.

Supplemental agreements, authorizations, disclosures, and notifications may be required to comply with statutory mandates and the lender's regulatory framework. These additional documents may also be necessary to ensure federal and state regulations compliance.

When an actual property sale transaction occurs, the seller's signature on a grant deed is notarized and subsequently recorded at the county recorder's office. This recorded deed serves as constructive notice to the public, indicating that the chain of title has been changed to reflect new ownership. A deed of trust is usually recorded concurrently, evidencing a lender's security interest.

We all grew up with the rule of law for as long as we can remember. The validity of contracts was assumed. Legal contracts, agreements between parties that created mutual understanding and obligations, were enforceable. The enforceable agreements between two or more parties were for lawful purposes, mutual agreement, consideration, competent parties, delivery, and engagement freely without force.

What happens when the government cancels contract enforcement for politically expedient purposes, as they did during the COVID-19 fiasco? Agreements between landlords and tenants become unenforceable. For instance, many landlords could not evict non-paying tenants due to government-imposed moratoriums, leading to financial strain. Later, there came the breakdown of law and order, where the contract with the public to maintain civil order was systematically and purposefully destroyed. Pass laws to encourage criminals to commit continuous thefts until all retailers close their doors. There are dozens of examples.

Trust in government has been destroyed for a good reason.? People begin making decisions with a lack of confidence as a significant factor.

Some assets are held outside government control, maintaining autonomy from government oversight and against pilferage and unwanted government intrusions. It is crucial to note that in cases such as real property, the government asserts control over this subset of assets; it usually demands proof of ownership through a government-mandated ownership certificate. Taxation and control are the principal drivers behind this requirement.

In most cases, the government exercises comprehensive control over individual absolute property ownership rights while granting temporary privileges and conditional licenses to own and occupy. When the government becomes aware of your new real estate ownership, it will enforce superior rights and encroachments and may levy additional fees and taxes.

Government authorities consistently monitor all physical possessions and conditional privileges through a web of regulations, liabilities, and taxation, with the constant specter of asset expropriation. Therefore, individual property owners are allowed a subordinate interest in ownership. Artificial intelligence (AI) has taken monitoring to a new level.

Examples of assets subject to conditional ownership include issuing a government-issued pink slip for an automobile or a real estate ownership certificate, commonly called a recorded grant deed. Conditional ownership means the government grants temporary privileges and conditional licenses to own and occupy certain assets. If a property owner fails to comply with government mandates related to licensing, regulations, taxation, and ideological differences, non-submission or non-compliance may lead to prosecution or, in extreme cases, asset seizure. Understanding these conditions is crucial for all property owners.

Recognizing that temporary ownership privileges are not immune from termination or misappropriation is imperative. In contemporary America, politicized, weaponized, and militarized police have emerged as the absolute enforcement of government overlords, where the concept of unencumbered individual ownership, which refers to the right to own property without any legal claims or restrictions, has largely faded. This concept is particularly relevant in private money lending, as it underscores the importance of understanding and protecting one's property rights when entering into loan agreements.

Are loan documents personal or real property?

Real estate is considered real property attached or affixed to the earth. ?Loan documents secured by an interest in real estate are considered personal property. Promissory notes and deeds of trust are evidence of indebtedness. Personal property instruments are securities under the Securities Act of 1933 and the Securities Exchange Act of 1934. They represent evidence of the debt and ownership of the property but are not directly attached to physical real estate.

Other personal property instruments include Investments such as stocks, bonds, mutual funds, U.S. treasuries, bank savings accounts, pension plan accounts (ERISA), IRA accounts, and many other forms of securities. The U.S. Securities and Exchange Commission (SEC) was established on June 6, 1934, in the aftermath of the 1929 Wall Street Crash as a government agency to oversee all securities transactions to prevent fraud and intentional misrepresentation. Its primary goal was safeguarding against fraud and deliberate misrepresentation. The SEC achieves this by requiring public companies to disclose meaningful financial and other information to the public, which gives a clear view of the company's economic situation and allows investors to make informed decisions.

The Promissory note:

A promissory note is a written, legally binding debt instrument that reflects an agreement between the lender/payee and the obligor/borrower. In writing, the obligor/borrower commits to pay the lender/payee within this document, thereby acknowledging the formality of the obligation.

A promissory note can either be "secured" or "unsecured." When the note is considered "secured," it is linked to a specifically described collateral property. Conversely, an "unsecured" promissory note imposes a payment obligation without physical collateral, relying solely on the issuer's commitment. The underpinning of such a promise can range from financial statements, personal integrity, background search, and credit history, as evidenced in a credit report. Other assurances may include a personal guarantee by a separate person or entity or a state or federal government guarantee.

A promissory note includes a promise to pay, the principal amount, interest rate, date and place of issuance, maturity date, payment schedule, and the issuer's signature. Additionally, various conditions relevant to repayment may be outlined, including provisions related to prepayment penalties, default interest rates, and restrictions on early payments. Conditions such as a variable interest rate addendum may be attached to the promissory note.

Conditions within a promissory note that prohibit refusal to sell or lend based on race or color or impose restrictions on the lawful use of property are deemed void or voidable as a matter of law. On occasion, instances of prohibitive conditions have been encountered. For example, I once reviewed a grant deed on record that prohibited the sale of the property to individuals of Chinese descent and another that banned the manufacture, sale, purchase, or consumption of alcohol on the property. Fortunately, both instances were found void or voidable under legal scrutiny, marking a significant and positive legal outcome.

Recourse vs. non-recourse obligations:

In a recourse loan, the lender possesses the primary legal right to initiate a foreclosure procedure on the pledged collateral if the borrower fails to meet their obligations. If the collateral's value falls short of covering the outstanding debt, plus accrued default and expenses, the lender retains the right to pursue the borrower's other assets. The avenue to pursue a deficiency judgment is to file a lawsuit for the deficiency.

A non-recourse loan is defined by specific language within the promissory note or an appendix that imposes constraints on the lender's recourse actions in the event of default. In such cases, the lender's sole legal recourse is limited to the foreclosure of the pledged collateral, and it cannot pursue the borrower for any deficiency beyond this collateral.

Non-recourse agreements are typically documented through a rider attached to the promissory note as an explicit limitation of liability other than collateral property.

The determination of whether an obligation is recourse or non-recourse often arises from negotiations between the borrower and the lender. In this negotiation process, borrowers should anticipate higher interest rates or a reduced loan-to-value ratio when opting for a non-recourse note. These adjustments compensate the lender for assuming the added risk associated with non-recourse lending arrangements.

The Deed of Trust:

A deed of trust involves three integral parties:

Borrower (trustor)

·????? ??????Borrower (Trustor): The individual or entity seeking a loan and providing security through real property.

·????? ??????Lender (Beneficiary): The entity providing the loan, holding a security interest in the secured property.

·?????????????? Trustee (Natural Third Party): ?An impartial third party entrusted with specific duties to protect the beneficiaries.

A Deed of Trust is a comprehensive written agreement that solidifies the parties' mutual understanding of the loan terms and conditions. This instrument requires that the trustor transfer the legal title of the real property to a neutral third party, known as the trustee. Typically, third-party trustees are entities such as title insurance companies.

The recorded deed of trust is a security instrument linked to a promissory note, which defines the loan terms and specifies the amount owed and loan terms. Statutes, such as the California Code of Civil Procedures, section 2936, determine the requirements.

A deed of trust includes the following information:

·?????? Identifications of the borrower, lender, and trustee, encompassing full legal names.

·?????? A comprehensive property description.

·?????? Terms and conditions of the loan, which may or may not include specifics such as the principal amount, monthly payments, and interest rates.

·?????? Provisions outlining late fees and penalties in the event of payment defaults.

·?????? A crucial power of sale clause granting the trustee the authority to sell the property in case of default.

Trust deeds are commonly employed in specific states, including Alaska, Arizona, California, Colorado, Idaho, Illinois, Mississippi, Missouri, Montana, North Carolina, Tennessee, Texas, Virginia, and West Virginia.

Conversely, certain states mandate mortgage deeds, such as Connecticut, Delaware, Florida, Indiana, Iowa, Kansas, Louisiana, New Jersey, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Vermont, and Wisconsin.

Several states, including Alabama, Arizona, Arkansas, Illinois, Kentucky, Maryland, Michigan, Montana, and South Dakota, allow lenders to choose between trust deeds and mortgages.

Trust deeds allow lenders to elect a non-judicial foreclosure procedure, allowing for a faster process for the lender to acquire title to the property in the event of default. In some cases, if proceeds from the foreclosure sale fall short of satisfying the obligation, the lender may initiate a state court action to secure a deficiency judgment. ?In cases where a lender selects the judicial route, as allowed by California law and many other states, the lender must file a lawsuit to proceed with the foreclosure process.?? Be aware that the borrower may possess rights of redemption post-foreclosure, which necessitates the involvement of a competent attorney to navigate the complexities.

A deed of trust must be written, include a property description for loan security, and be signed by the borrower (trustor). While a written agreement is not mandatory for validity, recording the deed is highly recommended to safeguard against potential conflicts arising from subsequently recorded instruments that could impact property title. Failure to get a written and recorded agreement could cause massively high blood pressure, stress, and the potential of losing everything.

Lenders often incorporate an "assignment of rents" provision, particularly for income-generating properties. This provision allows the lender to collect all rents and profits accrued after a borrower defaults. An important caveat is to handle rent collections diligently by gathering and placing the rents in a trust account until the loan is current or the property undergoes full foreclosure. Avoid the temptation to use the collected rent money for expenses. It's advisable to consult with legal counsel regarding the potential application of what is known as a "one-action rule."

Who are the parties responsible for the deed of trust?

Consider that a borrower agrees to sign a deed of trust or someone purchases the trust deed as an investment secured by real property. The language in the actual deed of trust differs from that of a family trust regarding the three parties involved.

·?????????????? ?Trustor—the person (borrower) or entity that owns the property. The trustor is also the grantor. The owner/trustor/grantor may decide to borrow money and agree to convey equitable title to the property as collateral for a loan.

A deed of trust is a security instrument. ?The deed of trust is drawn, signed, notarized, and recorded against the property at the county recorder’s office. ?Public records will then reflect constructive notice of that lien.

·?????????????? Beneficiaries - Are the lenders or the trust deed investors who exchange their invested capital for an investment, a recorded deed of trust or mortgage instrument, and a promissory note signed by the borrower/trustor as collateral.

·?????????????? Trustee—A deed of trust is a third-party entity, generally a title company, that holds bare legal title on behalf of the beneficiaries or investors in the loan transaction.

?The trustee has only three powers.

·????? To foreclose,

·????? To re-convey,

·????? To modify the trust deed per mutual agreement.

A trustee paid a fee to hold bare equitable title cannot benefit from property ownership but is hired only as an ownership placeholder in trust deed states. The trustee is an intermediary with a fiduciary responsibility to the stated beneficiaries. In the event of default, the trustee’s job is to protect the beneficiary’s rights and act in their best interest.

When a borrower/trustor pays off the loan, the trustee instructs the title company to record a satisfaction of mortgage document or reconveyance, referred to as a deed of reconveyance. This removes the lien from public records and returns and transfers full ownership back to the borrower/trustor. The document is prepared, notarized, and recorded in the county or municipality where the property is situated. Subsequent title searches will confirm the removal of the lien.

Some states use satisfaction of mortgage instruments rather than a deed of reconveyance. ?

Different states govern who may serve as trustees in a deed of trust. ?Generally, a trustee may be a lawyer, title insurance company, trust company, bank, credit union, or other company authorized explicitly by the state to serve as trustee.

Short Form Deed of Trust and Assignment of Rents:

A concise one-or-two-page document is the instrument for securing a promissory note with real estate as collateral. This brief "short-form deed" is officially recorded and establishes a lien against the property. Typically, an escrow officer prepares this preprinted form.

Long Form Deed of Trust and Assignment of Rents:

?A long-form deed of trust includes essential clauses and provisions such as:

·?????? Identify parties involved, including the borrower (trustor), trustee, and lender (beneficiary).

·?????? The premises clause, or the granting clause, names the parties and employs terms like grant, bargain, sell, transfer, assign, convey, and warrant in conveying property to the trustee.

·?????? Confirm the borrower's legal ownership of the property, complete with its address, Assessor's Parcel Number (APN), and legal description.

·?????? A statement encompassing all rights, titles, and interests held by the trustor, serving to define the collateral.

·?????? Provisions detailing the conditions of the deed of trust, encompassing various aspects of the loan, including performance, general representations, covenants, warranties, compliance with laws, permits, and notice.

·?????? Clauses addressing taxes, insurance, late charges, proof of payments, condemnation, property care, demolition, alteration, due-on-transfer and encumbrance, further assurances, Uniform Commercial Code security agreement and fixture filing, borrower information, trustor information, secured party details (beneficiary), lease covenants, after-acquired property, expenses, financial statements, books, and records.

·?????? Provisions outlining events of default, cross-defaults, acceleration of maturity, beneficiary's rights to enter and possess the property, receivership, trustee's sale, attorney's fees, suits to protect the property, and numerous other topics too extensive to enumerate.

Seeking legal counsel is advisable to ensure the drafting of a comprehensive and legally sound document.

Mortgage:

In a mortgage, two primary parties are involved, which excludes a third-party trustee:

·????? Borrower (Trustor):? The individual or entity seeking financial assistance through the mortgage agreement.

·????? Lender (Beneficiary): The entity providing the loan and holding an interest in the mortgaged property.

The concept underlying mortgages is rooted in the "lien" theory. According to this theory, when a borrower enters a mortgage agreement, they convey a lien interest in the real property to secure the debt. The borrower retains full ownership and title to the property, while the mortgage is a lien (money charge) that affects the property's title.

If a borrower defaults on the loan, the lender has the legal authority to initiate foreclosure proceedings, ultimately leading to a foreclosure sale of the property.

Loan agreements:

A loan agreement, typically in the context of complex commercial loans, represents a legally binding contract that meticulously delineates the terms and conditions governing a loan transaction. In addition to these terms and conditions, the agreement includes representations and warranties made by the borrower to the lender concerning the impending loan transaction. These representations and warranties may contain the lawful utilization of the property, the presentation of financial documentation by a certified public accountant, the absence of immediate contemplation of bankruptcy following funding, and affirmations of the ability to meet installment payments. Loan agreements may be standardized, off-the-shelf documents in plain language or custom-crafted by law firms representing banks or other lending institutions.

In many less sophisticated transactions, the provisions of a loan agreement are placed in the deed of trust, eliminating the document.?

Example:

Loan Agreement and Promissory Note:

This Loan Agreement and Promissory Note (the "Note") is executed on this (date) by and between (named lender) (from now on referred to as "Lender") and (full name of the borrower or borrower entity) (from now on referred to as "Borrower"). Collectively, the borrower and lender shall be called "the Parties." The entire document should be thoroughly reviewed and comprehended to ascertain the rights and obligations of the parties under this Loan Agreement.

Loan Agreement:

In consideration of the value received, the borrower then commits to repay, to the lender's order, the sum of XXXX dollars, alongside interest accruing at a rate of XXXX per annum.

Additional loan terms:

The borrower and lender, through this Loan Agreement and Promissory Note, outline their respective rights and responsibilities and consent to be legally bound as follows:

·????? Principal loan amount

·????? Loan repayment terms

·????? Collateral

·????? Method of loan repayments and payment location

·????? Default provisions

·????? Borrower's failure to fulfill any principal or interest payment when due under this loan agreement

·????? Borrower's initiation of bankruptcy proceedings under federal bankruptcy laws

·????? The imposition of a federal tax lien on the borrower's assets

·????? The use of the property for unlawful purposes, as defined by state and federal statutes

·????? Additional provisions regarding default, like cure procedure

·????? Notice address

·????? The address at which the lender will send written notices to the borrower is as follows. Suppose the borrower provides written notice of a different address or relocates to a new location. In that case, the lender shall use that address to send notifications of default (or any other notices) to the borrower.

·????? Penalties for late payments

·????? Identification of attorney’s fees and out-of-pocket costs

·????? Parties that are entities, no individual

·????? Integration

·????? Severability

·????? Modification

·????? Exclusive jurisdiction for legal action in case of breach

·????? Governing state law

·????? Signature block

In sum, a loan agreement is a vital legal instrument that establishes the framework for a loan transaction and outlines the obligations and rights of both parties involved. It is advisable to have legal counsel draft a comprehensive and legally sound document.

Security Agreement:

A security agreement is a legally binding document that grants a lender a vested interest in a specified collateral asset. It is a comprehensive contract covering tangible and intangible assets associated with a loan transaction. These assets include trust accounts for rental security deposits, funds designated for tax and insurance payments, product inventory, furnishings, accounts receivable, and personal property closely tied to the property, such as tenant improvements, furniture, fixtures, and equipment.

The primary application of a security agreement pertains to business personal property.

https://www.legalnature.com/guides/everything-you-need-to-know-about-security-agreements#article-9-of-the-ucc-governing-security-agreements

UCC-1 Financing Statement:

The UCC-1 Financing Statement is a crucial legal document designed to provide public notice of a secured interest in a debtor's personal property and serve as a claim against that property. It is signed by the debtor and filed with the Secretary of State's office.

By registering this statement, creditors establish their rights to the debtor's personal property, allowing them to take possession of these assets in case of loan default. The UCC-1 form covers the debtor's existing and future rights, title, and interest in a specific property, whether affixed to or located on it. It also encompasses improvements related to the property and any proceeds arising from these processes.

https://www.unitedcorporate.com/wp-content/uploads/2013/06/UCC1_5_02.pdf

https://www.usda.gov/sites/default/files/documents/form-ucc1-and-1ad.pdf

Personal Guaranty:

Borrowers are generally prohibited from guaranteeing their debt, especially if they sign a note and deed of trust as individuals. However, related parties or parties operating through a separate entity can guarantee the debt. In cases where a borrower secures a loan under their limited liability company or corporation, an individual can reciprocally guarantee the debt and vice versa.

Environmental Indemnity Agreement:

Lenders are concerned about potential environmental liabilities associated with properties, given their historical uses spanning a century or more. These properties may contain contaminants or hazardous waste materials, exposing the lender to potential liabilities and future cleanup costs that could exceed the recorded lien against the property.

To mitigate these risks, lenders may require borrowers to obtain or provide a phase I environmental site assessment as an initial investigation. Further investigations, such as phase II or III assessments, define the procedure, cost, and timing to mitigate the contamination.

In almost all cases, lenders require borrowers to sign an environmental indemnity agreement. Guarantors are also typically required to sign this Environmental Indemnity Agreement.

This agreement obligates the borrower to:

·????? Maintain compliance with federal and state environmental laws, including refraining from activities that introduce contaminants.

·????? Cover all costs associated with remediation as required by government agencies.

·????? ?Indemnify and hold the lender harmless from any remediation costs.

https://www.calrealestatelawyersblog.com/california-environmental-indemnity-provisions-cover-first-party-claims/

Judicial vs. Non-judicial Foreclosure States:

Different states in the United States employ varying legal mechanisms for property foreclosure. Some states use deeds of trust, while others use mortgages. Understanding these differences is crucial:

·?????? In states where mortgages are the norm, foreclosure proceedings follow a judicial lawsuit path involving the court system. This requires an attorney to initiate foreclosure by filing a petition in court. Legal procedures can be protracted, potentially taking years, and may be further extended due to ideological factors, such as socioeconomic disparities or diversity-related issues.

·?????? In trust deed states, a statutory foreclosure procedure streamlines the process, bypassing lengthy court litigation. Typically, a defaulted borrower is noticed, and a Notice of Default is recorded, followed by a Notice of Trustee's Sale after 90 days. A foreclosure trustee auctions the property within 21 days of the latter notice. The entire process can be completed in about 120 days. A trustee's deed is issued when the property is foreclosed on, and title insurance is employed to record the trustee’s deed. Some states, like Florida, use an accelerated foreclosure procedure even in cases involving the court system.

Additional Agreements and Certifications:

In addition to loan documents, borrowers or other parties may be required to provide various agreements and certifications. These documents serve purposes beyond the loan, such as meeting state regulatory requirements, satisfying investor disclosures, adhering to lender requirements, or addressing privacy and fairness concerns. Some of these documents include:

·?????? Original signatures on applications, bank statements, and financial statements

·?????? Fair lending notices

·?????? Notice of privacy practices

·?????? Disclosure of the borrower's right to obtain a copy of the appraisal

·?????? Mortgage loan disclosure statements

·?????? E-Sign consent to use electronic records and signatures

·?????? Property insurance disclosures

https://www.dre.ca.gov/files/pdf/forms/re882.pdf

https://blogs.claconnect.com/residentialmortgage/california-updates-mortgage-loan-disclosure-statement-requirements/

Other documents may be required depending on the loan’s purpose, the circumstance’s complexity, and the lender’s requirements. The overview above is a primer. Different states may have additional requirements. For more complex loan transactions, seeking counsel will be necessary.

?https://www.americanbar.org/groups/real_property_trust_estate/resources/real_estate_index/real_estate_commercial_faqs/

I hope that you find value in this somewhat technical article. If so, please forward it to your associates.

Dan Harkey

Educator and Private Money Lending Consultant

949 533 8315 [email protected]

Visit www.danharkey.com

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