What Happens When Borrowers Fail To Disclose Material Facts? by Dan Harkey

The procuring mortgage broker states…

“My client needs a loan to pay various judgments, liens, and tax obligations.? He has a ton of equity in his real estate and is probably worth more than 10-20 million dollars.? Would he ever default?? I will obtain an application for your review.”

The prudent lender responded a couple of weeks later….

After the lender’s underwriting department has conducted due diligence, the broker/lender, responsible for facilitating the transaction and ensuring all necessary information is provided, responds to the borrower’s procuring mortgage broker. The broker/lender's role is crucial in such transactions as they are responsible for verifying the information provided by the borrower and ensuring that all potential risks are identified and addressed.

As potential lenders, we have meticulously conducted due diligence on every transaction. Our comprehensive background search on the borrower and the borrower’s operating company and our thorough check of court records revealed a more complex situation than initially presented. This rigorous process involved [specific steps of due diligence] and should reassure all concerned about our commitment to uncovering all potential transaction risks.

Our rigorous due diligence process is designed to reassure all parties involved about our unwavering commitment to uncovering and addressing all material facts and potential risks. What was initially represented as a few judgments, liens, and tax obligations has unexpectedly transformed into an immensely complex underwriting exercise. This unexpected turn of events should underscore the importance of being prepared for surprises in the lending process.

This transaction had three parties:

·????? The primary principal borrowers who own at least 15 pieces of real estate,

·????? An operating company owned and actively operated by the borrower and managed by a close relative

·????? A newly formed separate company started and operated by a close relative, which is not part of this loan request.

·????? The borrower has a business enterprise with many judgments and liens, separate from the borrower’s judgments as an individual.

·????? The borrower has a business enterprise with many judgments and liens, separate from the borrower's judgments as an individual. This borrower has many prime real estate pieces, some free and clear.? The equity to borrow against appears to be more than adequate.

·????? The borrower has a significant financial burden of about 2 million dollars of state and federal personal tax arrearages and judgments.

·????? The borrower had a Lis Pendens recorded (notice of pending legal action) on numerous properties by equipment lenders using his individual properties as a source of repayment.

·????? There are also multiple defaults on large leased business equipment he has personally guaranteed.

·????? No new loans or conveyance are possible unless these obligations are satisfied because they are all a matter of public record, and lien priority dictates that they come first over any newly recorded lien.

·????? The borrower operates as an individual investor and president of one or more corporations.? He and the entities are separate and distinct.

·????? The operating company, owned by the borrower separately from the individual, also has 2 million dollars of civil judgments and liens. The company has not paid California employment taxes for almost two years.

·????? The company has also defaulted on lease payments for multiple pieces of large equipment, which the borrower personally guaranteed.

·????? ??The defaults of some equipment leases had personal guarantees; therefore, the judgment becomes an individual obligation of an estimated $300,000.

·????? The borrower and the borrower’s lawyer argue that business debts cannot be attached to the individual or his unrelated real estate holdings.? Therefore, a title insurer must insure these new real estate loans.

·????? The borrower tends not to pay vendor service providers in his business, resulting in litigation.? There are multiple civil judgments against the company.

·????? A borrower-related party has started a new company in the same line of work.? The new company took over all active customer accounts.? The operational buildings and the equipment used in the latest industry are the same.? However, even the new company continues to default on equipment payments owed by the old company.? It appears, although not verified, that the borrower is attempting to take his defaulting company, with two million in debt, into insolvency without bankruptcy or paying creditors.

·????? The new company would take over the business accounts and operate a functioning enterprise with a projected profit.? The intent is that all tax obligations, judgments, liens, and tax obligations remain in the old insolvent company.

·????? All arrears in taxes, judgments, and liens of the old operating company would disappear in insolvency.

·????? While one may consider the underhanded maneuvers a brilliant estate planning scheme, the loan request was declined for apparent legal and ethical reasons. The borrower's actions, including the attempt to transfer liabilities to a new company and the history of defaults and litigation, raised serious concerns about the borrower's financial responsibility and the potential for future defaults.

·????? The broker/lender perceives that there will be future litigation since the new operating company defaults on equipment leases, all with personal guarantees leading back to the borrowers as individuals.

·????? This perception underscores the need for thorough risk assessment in such transactions, ensuring that we are always prepared and proactive, especially when potential future litigation is a concern.

In conclusion, this case is a stark reminder of the risks and complexities involved in loan transactions, especially when borrowers withhold material facts. It underscores the critical importance of thorough due diligence and the potential serious consequences of unethical or deceptive behavior in financial transactions. A lender would decline to take on a loan transaction fraught with continuous problems.

Thank You

Dan Harkey

Educator and Private Money Lending Consultant

949 533 8315??? [email protected]

Visit www.danharkey.com

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