Your trust deed investment will either be secured by a “whole” (only one lender or note holder) or a “fractionalized” (more than one lender or note holder) deed of trust. “Fractionalized” promissory notes and deeds of trust, when negotiated by an Mortgage Loan Broker (MLB), are subject to regulation by the DRE, which enforces the Real Estate Law, and the DOC, which enforces the Securities Law.
The Real Estate Law includes what is known as the “multi-lender law.” This law imposes certain restrictions including: (a) no more than 10 lenders or note holders (you and your spouse would count as one lender or note holder on a single investment); (b) a licensed servicing agent must service your loan and have a written agreement (loan servicing agreement) (c) defined loan-to-value ratios, based on the type of property being used as collateral, are generally not to be exceeded; (d) you may not invest more than 10% of your net worth or your annual income; (e) your loan must be directly secured by the Property and may not be indirectly secured through another promissory note and deed of trust (collateralization); (f) the MLB may not “self-deal” except in limited circumstances; (g) the deed of trust may not include a provision for subordination to a subsequent deed of trust; (h) with certain exceptions, the promissory note may not be one of a series of notes secured by liens on separate parcels of real property in one subdivision or contiguous subdivisions; and (i) your interest and the interests of other lenders or note holders must be recorded and identical in their underlying terms so that each note holder receives his or her proportionate share of the principal and interest. (There may, however, be different selling prices for interests in an existing note if the differences are reasonably related to changes in the market value of the loan which occur between sales of the interests.) The documents and instruments will be substantially the same whether your investment is in a whole or fractionalized promissory note and deed of trust. When funding a loan or purchasing a promissory note you should receive: the promissory note; the deed of trust; the assignment of deed of trust and assignment or endorsement of promissory note (if applicable); the preliminary report; the appraisal report; the loan application and related documents previously described; and the policy of title insurance describing the coverage you selected. The law also provides for a questionnaire to be completed by all participating lenders to ensure they understand the nature of the investment.
In addition, if the loan is negotiated by an MLB you should receive a lender/purchaser disclosure statement (LPDS) prepared in accordance with California law. A properly completed LPDS will identify: the MLB and his or her representative; the amount and terms of the loan to be funded or purchased; whether the loan terms include a balloon payment; any servicing arrangements; and information about the borrower, including employment, income, credit history, and credit references. The LPDS will also disclose to you the status of all existing encumbrances or liens against the Property, including whether any payments are delinquent, whether any notices of default (NOD) or notices of trustee’s sale (NOS) have been recorded, and whether there are any bankruptcy proceedings or active lawsuits involving the borrower or the Property.
You will also receive, as a part of the LPDS, information about the Property, including its address and/or assessor’s parcel number and legal description (if available); the age, size, and type of construction of any building improvements; an appraisal or, if you (the lender or note purchaser) have waived the appraisal, the MLB’s written estimate of market value. When the Property’s income is the primary source of payment of the debt service, you will receive income and expense information. Further, the LPDS will list the encumbrances and liens which are to remain against the Property and those encumbrances and liens which are expected or anticipated after your loan has been funded or the promissory note has been purchased. The loan-to-value ratio should be calculated for you so that you may determine the borrower’s equity and the protective equity in the Property (remember, they are different). Finally, the LPDS will identify the MLB’s capacity in the transaction: whether he or she is acting merely as an agent in arranging the loan or the sale of the promissory note; or whether the MLB or some related entity is the owner and/or seller of an existing promissory note or the borrower of the loan funds.
If the loan is fractionalized, the LPDS will include:
- The name and address of the escrow holder.
- The anticipated closing date.
Descriptions and estimated amounts of the costs payable by the lender (or purchaser) and borrower (or seller).
- For the sale of an existing note: the aggregate sale price; the percent of the premium over, or discount from, the principal balance plus accrued/unpaid interest; and the effective rate of return if the note is paid according to its terms.
- The estimated closing date of a loan origination.
- The MLB’s explanation if certain statutory loan-to-value limitations are exceeded. [Business and Professions Code Section 10229(g)]
- The MLB’s (or his/her affiliate’s) interest as a principal in the transaction, as limited by statute. [Business and Professions Code Section 10229(d)]
Any other information known to the MLB and necessary to clarify information in the LPDS.
Just as you (the lender) are entitled to receive a lender/purchaser disclosure statement, an MLB must give a borrower a statement known as the Mortgage Loan Disclosure Statement (MLDS). The MLDS explains the fees, costs, expenses and loan origination fees or commissions which the borrower will pay to the MLB or to others in connection with the loan. There could be an exception to receipt of the MLDS if the loan is a federally related loan and the borrower receives the appropriate Truth-in-Lending disclosures and a Good Faith Estimate conformed to California disclosure requirements.
Another disclosure statement that may appear with your loan documents is a federal Truth-in-Lending disclosure statement, which is required when applicable, pursuant to the federal Truth-in-Lending Act and Regulation Z. An MLB acting only as an arranger of credit is not generally subject to the disclosure requirements of Regulation Z which are imposed upon creditors (lenders and note holders). However, many MLBs act as both lenders and arrangers or hold themselves out to be lenders and, therefore, may qualify as creditors under this federal law.
Even private parties may qualify as creditors under Regulation Z after a certain volume of loans have been funded or promissory notes have been purchased. While you may not be a creditor by definition, either the MLB or another lender or note holder on a fractionalized deed of trust may be. If so, the borrower should receive a federal disclosure statement and a notice of the right to cancel the transaction within a specified period of time if the Property is the residence of the borrower.
The Truth-in-Lending Act (TILA) was amended in 1994 with respect to loans, other than purchase money loans, secured by the borrower’s principal dwelling. The amendment places some restrictions on creditors, requires them to make additional disclosures, and permits consumers to cancel certain transactions. A creditor is defined for purposes of this amendment as someone who originates, in any 12-month period, more than one loan subject to this amendment or any such loan(s) negotiated through a mortgage broker. Rules to implement the amendment were effective October 1, 1995 and affect all described mortgage transactions having rates or fees above a certain percentage or amount. These mortgage transactions are referred to as “high rate/high fee” or “Section 32” loans. A loan is considered to be a “high rate” loan if the APR exceeds by 10 points the yield on Treasury Securities having a similar maturity. A “high fee” loan is one for which the total points and fees exceed the greater of 8% of the loan amount or, as of 1-1-00, $451.00. (Note that this dollar figure is adjusted annually on January 1 by the annual percentage change in the Consumer Price Index as measured on the preceding June 1.) The TILA regulations are enforced by the Federal Trade Commission (FTC). Persons having any questions regarding “high rate/high fee” loans or Regulation Z should contact the FTC.