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62  3 Ways to Transform Your Sales Operations

Alex Buriak, Jet Lending

68  Working Your Book of Business

Gary

44 DOCUMENTATION

 Exorcising Hobgoblins: Removing Antiquated Clauses from Loan Documents Steve Ernest , Geraci LLP

50 LENDER LIMELIGHT

Anthony Geraci, Esq., Stratus Financial

72  Stop Being Just a Lender

Erica LaCentra, RCN Capital

76 OPERATIONS

76  Hyperlocal Due Diligence: A Look at Atlanta, GA

Rodney Mollen, RicherValues

82  A First-Hand Account of Our New Fraud Reality

Alesondra Mora, FlipCo Financial

86  Create Your ‘Gold Standard’

Evan Brody, Rehab Financial Group, LP

96 VENDOR GUIDE

98 LAST CALL

98  The Key to Scaling a Mortgage Fund: Building the Right Team

Brock VandenBerg, TaliMar Financial

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DAVID RODRIGUEZ DESIGN

CONTRIBUTORS

Gary Bechtel

Daren Blomquist

Tim Boord

Evan Brody

Alex Buriak

Nema Daghbandan, Esq.

Steve Ernest

Charles Farnsworth

Michael Fogliano

Anthony Geraci, Esq.

Matthew Gunter

Erica LaCentra

Rodney Mollen

Alesondra Mora

Sean Morgan

Brock VandenBerg

Shaye Wali

Scott Ward

COVER PHOTOGRAPHY

Nicco Salazar

Private Lender is published quarterly by the American Association of Private Lenders (AAPL). AAPL is not responsible for opinions or information presented as fact by authors or advertisers.

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Enough of Fraud!

AAPL has formed a member-led fraud steering committee and launched additional initiates to combat fraud in the private lending industry.

Because technology has made it easier than ever to perpetuate all kinds of fraud, lenders must defend themselves on multiple fronts.

Borrower fraud is one area where our industry stands to lose the most. Whether through the many presentations of asset and income fraud, identity theft, appraisal fraud, straw buyer schemes, occupancy fraud, same-day-close flipping scams, title fraud, and air loans—the list goes on—the list can seem overwhelming and endless—and all with the lender in a losing position. Read a firsthand account of one such fraud event on page 82.

During recent panel discussions at Geraci’s April Innovate Conference, lenders discussed a growing need to combat rampant borrower fraud, highlighting this fraud class as one of their largest concerns both within their own operations and for the private lending industry.

What’s more, the panelists—all executives at their own private lending companies— called for action from AAPL, citing our standing in the industry as their preference to spearhead a solution.

We answered this call, beginning immediately following the event. We are now in the planning stages to structure a member-led borrower fraud steering committee. Although the committee itself will have a finite number of appointments, we’ll host public open comment periods at aaplonline.com/committees/comments to gather insights on various topics and needs the committee identifies.

To stay up to date on this and other developments, subscribe to our newsletter at aaplonline.com/friends-of-aapl.

The steering committee will not be our first foray into industry fraud defense. Fraud—both what it looks like and how to combat it—is a frequent topic of our webinars and at the annual conference, here in Private Lender, and in our online article archive. Additionally, in 2023, we launched the industry’s first business identity theft and credentialing scam prevention initiative to protect AAPL brand assets from use by bad actors and to monitor for cloning of member websites.

President, American Association of Private Lenders

Usury in California: The Moon Case, the Current Situation, and the Fight for the Future

AAPL’s Government Relations Committee will continue to monitor the situation and assist in developing a plan for future steps.

MATTHEW GUNTER, GERACI LLP

F or more than 40 years, the law of usury in California has been a bit of a joke—that its exceptions are larger than the rule itself. Generally speaking, California caps the interest rate for all loans at 10%, though

licensed lenders and licensed brokers enjoy complete immunity from this limitation, or at least we thought so.

During this time, a loan made by a CFL (California Finance Law) lender or one made or arranged

through a DRE (Department of Real Estate) broker was exempt from the usury law, including loans that were subsequently modified or extended. It is this last point regarding modification and extension, on a loan arranged by a

DRE broker, that was the subject of the case known as In re Moon. This case, recently decided by the 9th Circuit Court of Appeals, has drastically changed the landscape of brokered loans in California.

Let’s take a deeper look into that case, what that means for the present, and what AAPL is doing for the future.

CALIFORNIA USURY LAW

California’s usury law is fairly unique in that it stems from the state constitution rather than a statute. Article XV provides for the limitation on interest, but then it goes on to say that certain classes of businesses typically engaged in lending are exempt, plus any further classes of persons or groups the legislature chooses to exempt. The legislature codified exemptions for licensed DRE brokers and licensed CFL lenders.

There are a few other exemptions as well, including loans made by a seller of property (known as the credit-sale or time-price doctrine), which under California law does not count as a loan, at least for usury purposes. There is also an exemption for default interest, which under California law, oddly does not count as interest, at least for usury purposes. Please note that before relying upon any usury exemption, you should consult with an attorney to discuss the specific scenario.

THE MOON CASE

In 1979, California voters passed Proposition 2, which updated the interest limitation to 10% and added the exception for loans made or arranged by a licensed broker. In 1983, the legislature codified this provision and clarified what they meant by “made or arranged.” This is known as Civil Code Section 1916.1.

In a 1984 case that reached the 9th Circuit Court of Appeals (In re Lara), the 1916.1 statute was interpreted. The court said that when a loan is arranged by a broker, the broker must have been compensated or expected to be compensated for their work for the exception to be valid.

In response to the In re Lara case and to clarify what it means to be “compensated,” the legislature in 1985 adopted an update to 1916.1, which remains the same to this day.

For nearly 40 years, the understanding of 1916.1 has been that a loan, once made, continued to be exempt from the usury law, even if the loan was modified or extended This understanding changed abruptly when lower-level bankruptcy courts and, ultimately, the 9th Circuit in the Moon case decided that any “forbearance” (meaning any extension of the loan term or period for a borrower to pay) will result in a “loss of the exception unless the broker

who arranged the purchase transaction related to the original financing transaction also arranges the new forbearance.”

In the Moon case, the 9th Circuit Court made an interpretation we do not feel is in keeping with the spirit of the law and its interpretation during the prior 40-plus years. Namely, that the language of 1916.1 is not limiting at all, but merely explains the methods by which a broker may be compensated to perform certain tasks that qualify as “arranging” a loan or forbearance. Nevertheless, the Moon case is over, and we must deal with these consequences.

OPERATING IN THE CURRENT ENVIRONMENT

Exceptions to the usury limit still exist. Loans made by a licensed DRE broker remain exempt, even when the loan is extended. Loans made by a licensed CFL lender remain exempt, even when the loan is extended. The major change is for loans arranged by a licensed DRE broker to a lender who is not otherwise licensed. These broker-arranged loans are still exempt from the usury law at the time they are made, but only for the original term of the loan. An extension of the time to pay, which includes formal modification agreements, forbearance agreements, or even less formal agreements to defer payment or to delay a foreclosure date, may all qualify as a “forbearance,” which will cause the loss of the exemption. Although a sale of a usury-exempt loan will not in and of itself cause the loss of the exemption, if that loan is sold to an unlicensed investor, or the loan becomes modified at a later date, there could be issues. This is not to say

that the Moon case applies to these situations, but given the broad nature of the exemption by the courts, a similar argument may arise in a future case limiting these transactions further.

As stated previously, it is strongly recommended that an attorney be consulted about any scenario dealing with usury in California. This article is not long enough to get into every detail or caveat—and there are several. There are potential workarounds to the result of the Moon case, but these should be discussed with an attorney who can apply these methods to the specific loan scenario.

FIGHT FOR THE FUTURE

Despite the end of the Moon case, the fight goes on. We have switched our focus to a legislative fix. We have already met with California legislators and their staff on a campaign to amend the statute to simplify the language of 1916.1 to clarify its original intent. In the coming weeks and months, we will be following up with them. To add weight to our effort, we’ll also be collaborating with colleagues in other trade associations affected by these court rulings. Geraci LLP, as the general counsel for AAPL, has led the charge against the court’s interpretation of 1916.1 and will continue to provide the resources and expertise necessary to push an amendment through the legislature.

At some point, we may ask AAPL members to join us in a grassroots campaign (i.e., letters and phone calls) to support a future bill that would change the language of 1916.1 to clarify the extent of the exception. In the meantime, please be mindful of the current state of the law when

considering an extension of a loan arranged by a broker in California. Again, we recommend that you speak with an attorney before weighing your options.

AAPL will remain focused on this issue as it unfolds. Should you have any questions regarding the case or Geraci’s involvement on behalf of AAPL, please contact Matt Gunter, a senior attorney with Geraci at m.gunter@geracillp.com. Note that Matt also represents Geraci as the ex-officio member of our Government Relations Committee, which will continue to monitor the situation and assist in developing a plan for future steps.

MATTHEW GUNTER

Gunter is a senior attorney on the Lightning Docs team at Geraci LLP. His work focuses on building the business-purpose mortgage loan documents that form the backbone of the Lightning Docs system as well as maintaining the system for nationwide legal compliance and specific client requests. Lightning Docs are the official loan documents of the American Association of Private Lenders (AAPL).

Gunter also serves as the ex-officio member of AAPL’s Government Relations Committee. In that role, he serves the business-purpose mortgage lending community to bolster relationships with regulatory jurisdictions and to help ensure regulations over the industry are limited and reasonable.

Matthew

NAR Settlement Could Cut Both Ways for Real Estate Investors

Investors will likely gain a bigger advantage in acquiring properties on the retail market but may see more competition from retail buyers on alternative purchase platforms and chilling demand for resales.

DAREN BLOMQUIST, AUCTION.COM

Alandmark court settlement roiling the real estate industry this year will likely give real estate investors an even bigger advantage when acquiring properties in the traditional retail market. It could also result in more competition from retail buyers on the alternative, often commission-free real estate platforms investors typically favor.

“I think the only ones winning here are the sellers and investors, to be honest,”

said James Perez, a real estate broker who runs Own it Now Realty with his brother Eric in Southern California. The Perez brothers list all types of properties on the traditional retail market, from high-end luxury near the coast to distressed, bankowned (REO) properties that are often more affordable for lower-income buyers.

“A lot of these buyers are entry-level or firsttime buyers with limited funds,” said Perez, referring to the buyers of the more affordable properties in his market. “They may just have enough to make the down payment.”

Some of those lower-income, often firsttime, homebuyers who are stretching just to make a down payment could be left out in the cold by the settlement, which was agreed to by the National Association of Realtors (NAR) and is scheduled to take

effect August 17. The settlement prohibits listing agents from advertising on the Multiple Listing Service (MLS)—which most agents have historically used to list properties—that the seller will pay a commission to the buyer’s real estate agent.

RETAIL ACQUISITION ADVANTAGE

Designed to deter collusive behavior between listing agents and buyers’ agents, the prohibition could result in more buyers paying their agent’s commission out of their own pocket. That extra cost could knock some marginal prospective buyers out of the running to buy a home in the traditional retail market.

“If buyers begin paying their agent, the funds will have to come directly from the buyer, which means the buyer is now responsible for their down payment, closing costs, and now agent commission,” said Jermain Morgan, a real estate agent and investor who owns Divine Investment in Columbus, Georgia.

“Down payment assistance programs are in place to help buyers of modest income,” continued Morgan, who often sells renovated properties originally purchased at foreclosure auction at

affordable prices to lower-income buyers. “In Georgia, the buyer is only expected to (put down) $1,000 in a Georgia Dream transaction. These buyers don’t have funds to complete a normal purchase. How can they now be expected to come up with thousands more to pay their agent?”

In the short term, this possible scenario the settlement has created could give real estate investors like Morgan an even bigger advantage in the retail market. That’s because investors are typically either agents who can represent themselves on the buy side or are experienced enough to be comfortable writing offers on their own without the help of a buyer’s agent.

“My expectation would be that there is minimal impact (from the settlement) to the real estate investment community on the acquisition side,” said Tony Tritt, a real estate broker and investor who owns Tritt Realty, operating in communities northwest of Atlanta, Georgia. “Our experience is that most investors don’t really feel as if they need an agent on the buy side; moreover, they’d rather get a couple of percentage points off the price versus having representation.”

Some investors press this advantage even further by allowing the listing agent to

represent them. That allows the listing agent to “double-end” the transaction; that is, they receive both the listing agent and the buyer’s agent commission.

“When I write offers, I always ask the listing agent if they would represent me,” said Josh Krom, a real estate broker and investor in Los Angeles, California, who owns Krom Brokerage.

“If they say no, then I just write it up myself. If I can sweeten the pot, I do.”

“With the new rules (under the settlement), perhaps I will offer to pay the listing agent’s commission,” Krom added.

CHILLING DEMAND FOR RESALES

Although the settlement could give real estate investors like Krom, Tritt, and Morgan an additional advantage in acquiring properties off the retail market in the short term, it could also chill demand for the renovated properties they sell back into the retail market in the longer term.

“I think the real estate market will eventually slow down a bit for investors and everyday sellers,” said Morgan, summarizing his belief that the settlement will suppress demand from many first-time buyers who purchase renovated homes from him and other investors.

Krom and Tritt both expressed concern about the ramifications of less quality representation for buyers, particularly newer buyers with less experience.

“If buyers are not represented by an agent, I don’t know how they will be able to submit an offer (for properties I list),” said Krom, noting that he does not double-end his listings due

“

SOME REAL ESTATE BROKERS AND INVESTORS WERE OPTIMISTIC THE DISRUPTION THE SETTLEMENT CAUSED COULD RESULT IN THE EMERGENCE OF MORE TRANSPARENT REAL

THAT WOULD

to potential liability issues down the road. “The ‘normal’ buyers will have less and less quality representation. For something as costly and complex as a home transaction, you cannot treat it like booking a vacation online.

“An experienced and intelligent broker is necessary to guide people through those challenges,” Krom continued. “People will then have to hire a lawyer to solve those problems, which may make the process more expensive in the end.”

Tritt took this train of thought in a similar direction, speculating that litigation from unrepresented buyers could end up creating a less efficient and more expensive process.

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“As we experience on the new construction side of the world, more paperwork, greater education, more people, etc. all equal greater expense to attempt to bring housing to market—making it increasingly difficult to create quality housing at an affordable price-point,” he said.

EMERGING MARKETPLACE ALTERNATIVES

Some real estate brokers and investors were optimistic the disruption the settlement caused could result in the emergence of more transparent real estate platforms that would benefit both investors and owner-occupant buyers.

“I have long been a proponent of a national MLS system or really preferably to list on Amazon.com and get rid of realtors altogether,” said

Paul Lizell, a Florida-based real estate investor who became a real estate agent to help better navigate what he saw as an inefficient system.

Lizell buys many of his properties via online auction on sites like Auction.com and trains other investors to purchase homes via auction through his REO Auction Academy.

“Buying from Auction.com, we don’t need a buyer’s agent,” he said.

TABLE 1. MORE RETAIL BUYERS PURCHASING AT AUCTION

Source: Auction.com

But investors like Lizell are facing more competition from first-time homebuyers and other owner-occupant buyers when buying on alternative platforms like Auction.com, and the settlement could accelerate that trend for bargain-hunting buyers who want to avoid paying a buyer’s agent commission.

One in five buyers (20%) who purchased REO properties at online auction in 2023 were owner-occupants, according to sales data from Auction.com. That was up from 15% in 2022 and 12% in 2021. In 2019 and 2020, the share of owner-occupant buyers was 11% (see Table 1).

THINKING OUTSIDE THE BOX IN BIRMINGHAM

Karina Barone, a real estate agent and investor in Birmingham, Alabama, has been helping owner-occupants purchase properties on Auction.com for several years. Many of those are lower-income buyers who can’t afford prices on the retail market.

“I like the idea of people that do not have a house and cannot afford one, can buy one,” she said, recounting the story of one client who purchased an affordable property on Auction.com and has since added value through renovations. “You have to see what she did what did with that house … When she bought it, it was a $35,000 house. Now it’s worth about $180,000.”

Barone’s experience with that same client provides a prime example of why she’s willing to sacrifice her commission on the buy side in exchange for future commissions that stem from referrals from happy buyers.

“Out of this very sweet girl I have 10 other transactions,” said Barone, explaining that the client referred several family members to her.

“Everything was started because I didn’t mind not to make money in one of my first transactions with her.”

Daren Blomquist is vice president of market economics at Auction.com. In this role, Blomquist analyzes and forecasts complex macro and microeconomic data trends within the marketplace and greater industry to provide value to both buyers and sellers using the Auction.com platform.

Blomquist’s reports and analysis have been cited by thousands of media outlets nationwide, including all the major news networks and leading publications such as The Wall Street Journal, The New York Times, and USA TODAY. He has been quoted in hundreds of national and local publications and has appeared on many national network broadcasts, including CBS, ABC, CNN, CNBC, FOX Business, and Bloomberg.

DAREN BLOMQUIST

“Negative Remarks” and Foreclosures

Examining three states with the highest foreclosure rates will help you assess risk and strengthen your lending portfolio.

MICHAEL FOGLIANO AND SEAN MORGAN, FORECASA INTELLIGENCE

Tracking residential foreclosure data is vital for understanding both the health of the housing market and its impact on the broader U.S. economy. This is somewhat common knowledge to those in private lending. We’re all too familiar with the cascading effect of an increase in

foreclosures: potentially lowers property values in surrounding areas, reduces consumer spending power, and impacts the stability of financial institutions.

But, how can we break aggregated national statistics down into data that matters for the individual parties involved?

It’s great to know what the industry is doing across the country, but what activity is occurring in your backyard?

In this article, we take a deeper dive into foreclosure data to uncover valuable insights and offer suggestions on how you can apply this information

at a granular level to assess risk and strengthen your lending portfolio.

TRACKING NEGATIVE REMARK BORROWERS

According to ATTOM’s Year-End 2023 U.S. Foreclosure Market Report report, 2023 foreclosures were up 10% from 2022. This data is useful for describing the current state of the overall market, but is the same true for the private lending space? As a lender, can you protect against borrowers who are more likely to experience foreclosure? Or perhaps as a buyer, is this something you can monitor to find good value?

Forecasa spoke with several private lenders and learned that most do not file anything with the credit bureaus when deals go to foreclosure. Because of this, typical borrower background checks will not return any foreclosures/negative remarks from previous lenders. Additionally, as it relates to foreclosures, it’s difficult to judge a lender because so many loans are traded on the secondary market. When loans get traded, the note buyer is the entity that files the negative remark, not lenders. The originating entity may or may not ever

become aware of the non-performing loan. This is cause for concern for lenders because they may continue to fund deals to borrowers without knowing the risks.

To create more transparency and mitigate risk proactively, Forecasa has started tracking these borrowers so originators can identify risk both in their current portfolio and with future prospects. Forecasa has identified more than 1,500 companies within the private lending space as ”negative remark borrowers.” These entities include both companies and individuals who have a publicly recorded negative remark transaction. Every state has its own process and document types to record negative remarks, of which we include any of the following:

Lis pendens (A public filing of a pending lawsuit or claim attached to a property; since it is the first step of a foreclosure, it is a leading indicator of foreclosures to come.)

Foreclosure

Judgment

Notice of trustee sale

Notice of default Affidavit

To avoid “noisy” negative remark filings across a broad range of public records, Forecasa is only focused on negative remarks filed by private lenders or private loan buyers. As Forecasa identified these borrowers, our team noticed several instances where unique lenders or loan buyers had filed multiple negative remarks against the same borrower. In fact, 46% of borrowers with negative remarks have received at least two negative remarks in the last two years. Identifying and monitoring these negative remark borrowers is crucial to avoiding them.

STATES WITH HIGHEST INCIDENCE OF NEGATIVE REMARK FILINGS

So where do we see this happening? In its “Q1 2024 U.S. Foreclosure Market Report,” ATTOM highlighted the following three states as having three of the four highest foreclosure rates in first quarter 2024: New Jersey, Florida, and Illinois.

Table 1 provides a breakdown of each state filtered exclusively to private lending. Generally speaking, private lending and non-private lending move

TABLE 1. STATES WITH THE HIGHEST FORECLOSURE RATES, ENTIRE MARKET VS. PRIVATE LENDING, Q1 2024

“46% OF BORROWERS WITH NEGATIVE REMARKS HAVE RECEIVED AT LEAST TWO NEGATIVE REMARKS IN THE LAST TWO YEARS. IDENTIFYING AND MONITORING THESE NEGATIVE REMARK BORROWERS IS CRUCIAL TO AVOIDING THEM."

in the same direction, but often at different magnitudes. Across these three states, you can see the private lending markets experienced the same direction, but a larger magnitude change than their state’s overall market change.

The private lending numbers shown represent lis pendens transactions where the plaintiff was a private lender or private loan buyer . As classified by Forecasa, a private lender is a mortgage originator offering short-term

TABLE 2. FLORIDA LIS PENDENS, Q1 2022-Q1 2024

(Private lenders and private loan buyers impacted: 626)

fix-to-flip/bridge loans, 30-year DSCR loans (30-year rental loans), groundup construction, and/or multifamily loans to residential investors. Although conventional lenders may offer these products, Forecasa reviews the underlying transactions to ensure the lenders being tagged as private lenders are truly private lenders. After identifying the private lenders, Forecasa can aggregate and analyze the data to create visibility into the private lending market.

Tables 2, 3, and 4 show a breakdown of private lending for each of the three states with the highest foreclosure rates.

USING NEGATIVE REMARKS FOR RISK MANAGEMENT

So now what? The ability to track and monitor negative remark transactions is

TABLE 3. ILLINOIS LIS PENDENS, Q1 2022-Q1 2024

(Private lenders and private loan buyers impacted: 268)

TABLE 4. NEW JERSEY LIS PENDENS, Q1 2022-Q1 2024

(Private lenders and private loan buyers impacted: 310)

not merely a regulatory or procedural requirement. It’s a critical component of risk management and underwriting processes in the private lending space. When interviewed in an episode of the

Lender Lounge podcast, Ryan Craft, CEO of Saluda Grade, said, “… the greatest risk in fix-and-flip lending is not the loan that you do, it’s the loan that you do not know about.” Using these negative remark

indicators allows lenders to proactively monitor their blind spots and identify risks before they manifest into financial losses. Here are some key points for how lenders can effectively use these indicators on their own:

Integration into underwriting processes. Lenders should incorporate negative remark checks into their standard underwriting procedures. By doing so, lenders can gain a comprehensive view of a borrower’s history that might not be visible through traditional credit reports.

Regional analysis. Given the variation in foreclosure activities across different states, as evidenced by the data from New Jersey, Florida, and Illinois, lenders should adjust their underwriting strategies based on regional risk profiles. This means not only looking at national trends but also drilling down

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into state-specific or even MSA-level data to tailor their risk assessment and mitigation strategies accordingly.

Continuous monitoring. The underwriting process should not be seen as a one-off activity at the point of loan origination.

Continuous monitoring of borrowers’ financial behaviors and any new negative remark filings is essential.

This ongoing vigilance helps lenders quickly respond to changes in the risk status of loans in their portfolio.

By adopting these practices, lenders can safeguard their assets and contribute to the overall health of the private lending market. Understanding and reacting to the implications of negative remark transactions ensures that lenders remain resilient in the face of potential downturns in the market, thus maintaining their financial stability and supporting sustainable growth.

Fogliano is a product manager at Forecasa, responsible for product development and data analysis. After studying mathematics, Fogliano gained experience in several industries, always working with complex data.

Sean Morgan is the founder and CEO of Forecasa, where his primary focus is product and business development. With a background in oil and gas intelligence, Morgan and his team achieved a successful exit several years ago, before entering the lending analytics space. Before his tenure in the energy sector, Morgan began his career as a CPA for PwC, cultivating a strong foundation in data interpretation and strategic insights.

Michael

SEAN MORGAN

MICHAEL FOGLIANO

State of the Private Lending Industry: Volatility or Smooth Sailing?

Lightning Docs, the official loan document platform of the American Association of Private Lenders (AAPL), recently provided updated data on interest rates and loan volume for both short-term bridge loans and long-term rental loans for the first four months of 2024.

NEMA DAGHBANDAN, ESQ., GERACI LLP

During the last six years, Lightning Docs has collected data for more than 61,000 loans at an aggregate of $33 billion from lenders who have used its platform for loan documents (including 50% of the top 50 private lenders nationally). The updated figures Lightning Docs provided for interest rates and loan volume for short-term bridge loans and long-term rental loans from January to April show the private lending industry is doing significantly better than during this period last year.

TABLE

BRIDGE LOAN VOLUME UP

On a year-to-year basis, bridge loan monthly volumes are up from January and April, compared to the same period in 2023, based on a sample size of 125 users on our platform (see Table 1).

We are defining a “bridge loan” as an interest-only, short-term loan of 36 months or less that can be used for fix-and-flip projects, mild construction to ground up, or as a short-term financing mechanism with no construction (i.e., a true bridge).

BRIDGE LOAN VOLUMES BY SAME USERS

January 2023–January 2024

The most dramatic year-over-year spike was in February when loan volumes demonstrated a 46% jump up in production from the previous February Given the poor market conditions at the start of last year, this increase was not entirely surprising. What was surprising was the 38% rise in loan volume comparing April 2023 and April 2024. By April last year, loan volumes had mostly stabilized across Lightning Docs users. Should these trends continue, this is great news for the private lending industry.

BRIDGE LOAN INTEREST RATES HOLD

Interest rates for short-term loans nationally continue to hover around an average of a little over 11%, peaking at 11.5% in January and dipping to a low of 11.3% in February and April (see Table 2). The average loan amount has remained close to $460,000 for most

of the past four months, except March, when it climbed to $472,382. To exclude outliers, we limited our analysis to loans between $50,000 and $2 million.

When segmented by individual interest rates, in April 2024, 84% of loans fell within the 10%-12.99% range, based on a data set of 1,705 loans. There are exceptions at

TABLE 2. BRIDGE LOAN RATES AND AVERAGE LOAN AMOUNTS

both ends of the spectrum: 3% of loans came in under interest rates of 10% while 14% of them topped 13% (see Table 3).

BRIDGE LOAN ACTIVITY BY STATE AND COUNTY

In terms of activity, California, Florida, and Texas remained the top three

$474,000.00 $472,000.00 $470,000.00 $468,000.00 $466,000.00 $464,000.00 $462,000.00 $460,000.00 $458,000.00 $456,000.00 $454,000.00

states, in that order, between 2023 and 2024 so far. Illinois, Georgia, and North Carolina shifted slightly within the middle of the top 10, while New Jersey, Massachusetts, and Ohio held on to their places in the bottom half

of the list. (Pennsylvania dropped out of the top 10, while New York took its place as the ninth most active state.)

At the county level, Los Angeles is still the No. 1 county in terms of overall activity, and San Diego inched up to second

place and Cook County moved down to third. Dallas and Orange County each dropped one place from fifth and sixth place, respectively, in 2023 (see Table 5) Overall, three of the most active counties were in California; four were in Florida.

Massachusetts

Los Angeles, CA

Cook, IL

Los Angeles, CA

San Diego, CA

San Diego, CA Cook, IL

Miami-Dade, FL

Orange, CA Fulton, GA

Dallas, TX Orange, CA

Riverside, CA Dallas, TX

Lee, FL Broward, FL

Philadelphia, PA

Maricopa, AZ

Hillsborough, FL

Pinellas, FL

TABLE 4. TOP BRIDGE STATES BY LOAN VOLUME

TABLE 5. TOP BRIDGE COUNTIES BY LOAN VOLUME

GAUGING INTEREST RATE VOLATILITY BY COUNTY AND MONTH

Lenders who provide bridge loans need to be aware of the market environment to correctly price loans and avoid leaving money on the table or being overpriced. With that need in mind, our industry report, for the first time, includes a look at the volatility of interest rates by month for the most active counties (see Table 6). Los Angeles holds to a fairly consistent interest rate, starting with 11.52% in January and coming out to 11.29% in April. Three of the top 10 most active counties, however, showed some wild swings in rates. Orange County went from 12.17% in January to 10.74% in April—a difference of almost 1.5%. Orange County stands out for a highly unusual confluence of both high loan amounts and high interest rates.

Another high-volatility market is MiamiDade, which moved 79 basis points between February and March this year. A further dramatic change was found in Pinellas County, Florida, where the rate plummeted by nearly 80 basis points, from 11.75% in January to 10.97% in April. The remaining active counties showed much less rate volatility.

RENTAL LOANS PERFORMING BETTER

Rental loans have also performed better in the first four months of 2024 than the same period last year, when they faced a fairly shocking interestrate environment (see Table 7).

For our purposes, ”rental loans” are defined 30-year loans secured by rental property. They are also known as Debt Service Coverage Ratio, or DSCR loans. Loan volumes showed the greatest yearto-year improvements in January and February, reaching 50% percent or more

TABLE 6. TOP BRIDGE RATE VOLATILITY COUNTIES

TABLE 7. MONTHLY RENTAL LOAN VOLUME BY SAME USERS

than each of those months in 2023 (based on a sample size of 34 users). Similar to bridge loans, Lightning Docs users experienced significant unexpected growth comparing April 2023 to April 2024, with 43% growth year over year.

RENTAL LOAN INTEREST RATES REMAIN AROUND 8%

Rental loan interest rates started at 8.3% in January and steadily decreased from there to a flat 8% in April (see Table 8). Average loan amounts have been sticky—at $264,000 or close to it. Unlike bridge loans, rental loans tend to follow the same flow as other major related indices, such as the 10-year Treasury yield and the consumer mortgage interest rate. All three of those metrics— for rental loans, consumer mortgages, and Treasury bonds—reached a peak in October or November of last year and have generally tapered off since then. The interest rate for bridge loans, on the other hand, does not seem to be mirroring the pattern of any of the underlying indexes, staying relatively flat—at or around 11% over the 14 months from January 2023 to April 2024. However, that stability could change as rated securitizations for private loans bring more liquidity into the market.

Looking at April 2024, when segmented out by interest rates, rental loans have less rate diversity compared to bridge loans (see Table 9). Most are at the 8% rate, with 21% of the loans less than that and slightly more above 9% (using a sample size of 1,385 loans).

PENNSYLVANIA DOMINATES IN DSCR LOAN ACTIVITY

From January to April of this year, Pennsylvania has kept its spot as the

TABLE 8. RENTAL LOAN RATES AND AVERAGE LOAN AMOUNTS

$268,000.00 $267,000.00 $266,000.00 $265,000.00 $264,000.00 $263,000.00 $262,000.00 $261,000.00 $260,000.00

TABLE 9. APRIL 2024 RENTAL LOAN INTREST RATES

TABLE 10. TOP RENTAL STATES BY LOAN VOLUME

TABLE 11. TOP RENTAL COUNTIES BY LOAN VOLUME

Philadelphia, PA

Essex, NJ

Baltimore, MD

Franklin, OH

Harris, TX

Cuyahoga, OH

Duval, FL

Dallas, TX

Cook, IL

Cuyahoga, OH

Essex, NJ

York, PA

Harris, TX

St. Louis, MO

Baltimore, MD

Shelby, TN

No. 1 state for rental loan activity. Florida and Ohio are top contenders, both as second and third overall. Although many states have shifted places, most of the top 10 states are the same. What has been interesting is to see California jump back into the top 10 (see Table 10).

The top 10 most active counties reflect Pennsylvania’s dominance, with Philadelphia as the top market, switching places with Cook County (see Table 11). No California county made the list, while Florida and Ohio are still major players (with Cuyahoga in Ohio and Miami-Dade making the cut). Harris County also registers as a Top 10 county for both bridge and rental loan activity.

For more information about Lightning Docs, visit https://lightningdocs.com/.

Daghbandan, Esq., a partner with Geraci LLP manages the firm’s Real Estate Finance Group. Daghbandan’s practice entails all facets of lending matters across the country, including but not limited to the preparation of loan documents and addenda in all 50 states, loss mitigation efforts, preparation and negotiation of secondary market documents, including loan sales and participation agreements, line of credit/warehouse facilities, hypothecations, and securitizations. Daghbandan advises financial institutions on various lending matters, including licensing, usury and foreclosure. Daghbandan is also an expert in default management and leads the firm’s nonjudicial trustee group.

Nema

NEMA DAGHBANDAN, ESQ.

Is AI Coming for Your Job?

Integrating AI into private lending operations will likely increase profits, allowing companies to to hire additional staff, develop new products, and expand into new markets.

SHAYE WALI, BASELINE

When ATMs were introduced more than 50 years ago, there was widespread fear that bank tellers would soon be out of jobs. Yet, the number of bank teller jobs has grown faster than the labor force as a whole. If you had predicted that outcome in the 1970s, you would have been in the minority. The ATM did not replace tellers; it transformed their roles and, paradoxically, increased their numbers (Bureau of Labor Statistics, Occupational Employment Survey).

By looking at historical precedents like the ATM, you can get a sense of the impact AI and automation could have on private lending jobs. The idea that AI will replace loan processors and underwriters tends to be exaggerated. Instead, individuals and organizations that harness the power of AI will have a competitive advantage over those that do not. Eventually, AI will become table stakes, and those not using it will likely be left behind.

Institutional and fintech lenders have been leveraging AI in their operations for years. Consider the online lender Affirm for example. They have developed sophisticated algorithms that are trained on extensive data sets to help them make better underwriting decisions. According to their website, their underwriting models have been trained on billions of data points to assess a consumer’s repayment ability.

Yet it was only with the recent surge in popularity of technologies like ChatGPT that AI truly became a buzzword. This newfound attention highlights the transformative potential of AI in various applications. To understand this shift, it’s essential to explore two notable subsets of AI: machine learning and generative AI.

MACHINE LEARNING VS. GENERATIVE AI

Machine learning involves training algorithms on large data sets so they can make predictions or decisions without being explicitly programmed for specific tasks. It has been around for decades and has found applications across numerous industries. However, in the private lending sector, machine learning hasn’t resonated as strongly because lenders primarily rely on the value of the asset being financed, and assessing this value hasn’t posed significant challenges that machine learning could address.

Generative AI, on the other hand, represents a more advanced and versatile branch of AI that can create new content, such as text, images, or even entire documents. This technology holds great promise for private lenders due to its ability to analyze vast amounts of data from various files such as financial statements and legal documents. By

quickly detecting discrepancies, errors, and inconsistencies, generative AI can streamline the document review process, significantly reducing the time and effort required by human analysts. This capability not only enhances efficiency but also improves accuracy, making generative AI a valuable tool for private lenders looking to optimize their operations.

APPLICATIONS FOR PRIVATE LENDERS

Although these new technologies have numerous practical applications for private lenders, here are two with immediate potential:

Communications. Private lenders can harness the power of AI to raise more capital by efficiently producing highquality investor memos, reports, and other communications. By automating the drafting process, lenders can produce compelling, well-structured documents that attract more capital. AI can analyze past communications to generate new content that resonates with potential investors, helping lenders secure additional funding and build stronger investor relationships.

Loan processing. Loan processing is one of the most time-consuming aspects for private lenders, often proving tedious for both the borrower and the lender.

Although some borrowers may be highly organized and present files in perfect order, it is common for lenders to receive documents with incomplete or missing information. Lenders must then spend hours meticulously reviewing these documents, taking notes, and compiling lists of issues that need to be resolved. Once borrowers resubmit their documents, the review process begins again. Generative AI can streamline this workflow, significantly reducing processing time and enhancing efficiency.

Lenders looking to upgrade their loan processing functions can benefit from AI. When selecting a loan origination system (LOS), lenders should seek systems with advanced capabilities for extracting, comprehending, and summarizing information from various documents. By leveraging such tools, lenders significantly reduce the time required for loan approvals and need fewer staff to process loans, improving productivity and accelerating the approval process.

IMPACT ON JOBS

As noted, a common fear is that increased productivity due to AI will lead to fewer jobs. However, history suggests otherwise, as noted by James Benson in his book “Learning By Doing: The Real Connection Between Innovation, Wages, and Wealth.” Benson writes that before ATMs, an average urban bank branch required more than 20 tellers. When ATMs were installed, however, the number of tellers required to operate a branch dropped to nearly half. The faster and more convenient banking experience generated more demand from customers, driving more frequent visits. With new cost savings, it became cheaper to operate a branch, prompting banks to open new

ones. Benson notes that the number of urban commercial bank branches increased 43% between 1988 and 2004. As a result, the total number of teller jobs increased from 200,000 to nearly 600,000.

It is often challenging to understand how new technology will create new jobs, particularly a technology designed to drive automation. Yet, history shows that labor-saving technology often creates more jobs. For instance, in his June 6, 2016 article “What the Story of ATMs and Bank Tellers Reveals About the ‘Rise of the Robots, and Jobs,” James Pethokoukis writes that when scanning technology was integrated into cash registers, the number of cashiers increased. Likewise, he notes that when legal offices began

using electronic discovery software, the number of paralegals grew. In yet another of Pethokoukis’ examples, in the 19thcentury textile industry, the number of weavers continued to rise despite most of their work becoming automated. More automation meant the price of cotton cloth fell, and people used more of it.

It’s unrealistic to believe that the private lending market is operating at peak efficiency or that the demand for capital for business-purpose loans is being perfectly met. According to the National Association of Home Builders’ Feb. 6, 2023 article titled “Aging Housing Stock Signals Remodeling Opportunities,” the median age of owner-occupied homes is 40 years, with around 60% built before

1980 and approximately 35% before 1970. Although interest rates undoubtedly influence real estate rehab projects, swift and efficient access to capital is a crucial factor for borrowers looking to undertake more projects. By reducing friction and eliminating roadblocks for both borrowers and lenders, we can expect not only an increase in the capital used by real estate investors but also an influx of new investors entering the market. This would lead to additional revenue for private lenders.

A crucial aspect of leveraging AI for growth is the ability to reinvest

incremental earnings into new ideas. Lenders with a strong vision for innovation are more likely to succeed in the AI-driven landscape. As Jensen Huang, CEO of Nvidia, aptly noted in an October 16, 2023 YouTube interview, only companies that run out of new ideas need to worry about AI. If you believe your organization lacks the creativity to reinvest earnings, it might be time to join a company that prioritizes innovation or to become a driver of innovation within your own company.

Companies experiencing growth typically do not reduce headcount. Instead, they

invest in their workforce to sustain or further accelerate growth. Private lending companies that successfully integrate AI into their operations are likely to experience increased profitability. These profits can be used to hire additional staff, develop new products, and expand into new markets.

When automation made it cheaper to operate a bank branch, banks began opening up new branches and hiring new tellers, and tellers began focusing on more complex transactions instead of handling the mundane ones. In private lending, AI will transform job roles, enabling loan officers, processors, and underwriters to concentrate on highvalue activities and improve customer engagement. By becoming proficient in AI technologies and leveraging them to improve their work, private lending associates can ensure their relevance and value in the private lending industry.

SHAYE WALI

Shaye Wali is the CEO of Baseline, a loan management software designed for the private lending industry. Before starting Baseline, he ran a private lending business and worked on the bond trading desk at Morgan Stanley.

Wali graduated from Tulane University, where he was the captain of the nationally ranked NCAA Division I tennis team.

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Vet Your Vendors: Debt Fund Edition

Here’s how to choose the partners important for building a strong and well-oiled long-term fund.

SCOTT

WARD, AAPL EDUCATION COMMITTEE

To ensure stability, security, and crisp reporting inside the dynamic world of debt funds, a smart fund manager will, in most cases, court key third-party relationships to build a rocksolid operations platform. These thirdparty vendors play pivotal support roles in various aspects of fund operations,

from custodianship to technology platforms. They can also enhance the performance and reputation of any fund, REIT, or ongoing capital raise. Remember, seasoned investors look not only to the C -suite team of the fund but also to the key partnerships that ensure quality operations and honest reporting.

ASSESSING YOUR NEEDS

A fund, new or old, cannot begin to assemble a team of key players until they know where their needs are. From day one, therefore, a solid executive team must begin identifying the areas where third-party vendors will be

involved (e.g., fund administration, compliance, legal, and technology). So many times, fund managers experience “we-didn’t-see-that-as-a-need” moments months after they begin operations, with weak spots bubbling to the surface only once a problem arises.

The long-haul players with strong teams are a clear example of “how it's done.” Study them, and mirror their operations. If you and members of your team aren’t skilled in certain areas, then leave those areas to the third-party experts. Make sure the third-party vendors you select are not only skilled but also align with your culture and vision.

REPUTATION IS EVERYTHING

It can’t be said enough: Surround yourself with winners.

The private money debt fund space is small. Conducting business responsibly, particularly in real estate investments, has an impact on your long-term reputation.

Raising and deploying capital is more difficult now than even four years ago, so your teammates matter now more than ever. Some companies in the industry have been working together for decades. For this reason, they are the key names investors seek out to develop relationships with.

HOW TO CHOOSE KEY PARTNERS

OK, you understand you can’t do it all yourself and you’ve assessed where your gaps may be. Now let’s take a look at some common relationships fund managers seek from third-party vendors—and what you should look for with each one.

Regulatory and Compliance. A fund must have top-line legal behind it. Major law firms specialize in this space; stick with them. A person going through a divorce would not hire a slip-and-fall attorney; similarly, a fund manager should never hire an attorney who specializes in watercraft and boating issues. They are all attorneys, but they are not all the same.

Many times, you will see start-up funds and REITS use a firm that doesn’t have a solid and long-term presence in our space. Although those law firms may excel in their specialties, if their expertise is not in funds and REITS, they may miss key items that create liability for your fund. Stick with experts in this field!

Data security and back-end protection. Fund managers must have a reliable and trusted third-party vendor who

can provide data security and back-end protection for your fund. They should have systems that safeguard investor distribution and draw requests and protect against identity theft of your investors and your business. Fortunately, our industry has several rock-solid players now who are true experts, have a quality reputation, and stand by their platforms. Again, a technology relationship of this type is a must have for any capital raise because theft, scams, and fraud are at an all-time high. Artificial intelligence has rewritten the playbook for bad actors. If a debt fund does not have this key player on the team roster, it will be concerning for both investors and borrowers.

Accounting partnerships. Making an efficient monthly or quarterly distribution is the hallmark of fund performance. So too are the end-of-year accounting requirements, K-1 filings, reporting, and up-to-date monthly dashboards. Investors will want to know who is keeping the books and how they can “get a look” at them.”

Accounting is the baseline to growth, performance, and confidence in a company's effort to “do good business.” It goes without saying: When it comes to choosing an accounting partner, choose wisely, choose an expert, and choose trusted experience.

Marketing partnerships. This relationship is big because it serves two masters. The first is what your fund looks like to the outside world. As we all know, investors will not engage if they don’t understand. But they also won’t work with you if you give the impression you are “fast and loose” or inauthentic.

So many times, marketing companies think that because they do “marketing,” they can do “financial marketing.” Just as with your attorney and accounting partnerships, one size does not fit all. A marketing company that specializes in energy drinks and pickleball is probably not the best choice if they have never worked in the fund space. Sure, they can get eyeballs on your company, but will they be able to provide the best quality impression of your fund and your company?

The second master involves legal and regulatory compliance. If you're not registered to target accredited investors (B Election), it's never a good idea to use digital media to broadcast an open invitation to all investors across the U.S. with an "invest-today-and-get-a-top10-list-of-hot-markets" approach. This kind of marketing can cause significant reputational problems and lead to serious regulatory issues for your company.

Banking partnerships. Many banks are not set up for the way debt funds and REITS operate. Don’t assume that just because a bank is well known in the community or nationally they are familiar with debt fund or REIT operations. Some banks have a hard time working with large amounts of deposits, fundings, draw requests, account transfers, etc.

At the very least, interview several banks and get suggestions from your colleagues in the space. There is nothing worse than talking a bank into operating in our arena if funds and REITS aren’t their forte. Your banking relationship can make or break your success when it comes to closing your borrowers' loans and also raising capital and paying distributions.

SCALEABILITY

As you build your outside team, be sure to ask your inside team, “Can the partners we’re considering scale with us?” If they can’t, then look elsewhere.

A third-party vendor may have expertise and a great reputation; however, if their ability to scale does not align with your growth goals, then you’ll reach a point where they will not be able to serve you well.

Throughout his 25-year career, Scott Ward has successfully underwritten and closed thousands of private-money residential, commercial, and raw land investment loans. Ward has several equity funds that specifically focus on investment property throughout many verticals (all non-owner occupied), covering 11 states.

Ward is a panel speaker for real estate equity investments and commercial development properties. He is also an AAPL Certified Fund Manager and a current member of the AAPL Education Committee.

SCOTT WARD

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Much Ado About Debt Funds

With billions in dry powder and a growing number of new entrants, these funds are reshaping the lending landscape and offering crucial support to an industry in flux.

GARY BECHTEL, RED OAK CAPITAL HOLDINGS

The prolonged period of economic uncertainty and high interest rates has significantly diminished commercial real estate transaction activity, resulting in a massive stockpile of dry powder waiting in the wings. With traditional funding sources stymied, a wave of upcoming loan maturities, and investment activity on pause, it’s of little wonder that a growing portion of this built-up capital has turned its attention to debt strategies. (See Jim Costello’s January 19, 2023, “US Property Deals Slumped, Price Growth Withered in Q4” and Mortgage Bankers Association’s April 23, 2024 press release “Total Commercial Real Estate Borrowing and Lending Declined 47 Percent in 2023."

The influx of capital into debt funds is significantly reshaping the private lending industry, particularly in the context of current market conditions. It seems like there’s a new fund coming onto the scene every other week, many of which are backed by the biggest names in institutional investment. Private credit funds have certainly proliferated in the U.S., rising from $436 billion in 2013 to more than $1.7 trillion in 2023, according to a Federal Reserve study of Preqin data. Direct lending, specifically, rose from $95.4 billion to nearly $794 billion, including $220 billion in dry

powder, over the same period. (See Joe Palmisano’s “Real Estate Debt Funds: Pouncing on the Opportunities.”)

The universe isn’t as vast when it comes to commercial real estate debt specifically. Prequin reports a total of 59 funds raised $24 billion in 2023, and another three vehicles closed on $1.7 billion as of midMarch 2024. Since 2019, U.S. managers launched nearly 500 new real estate debt funds—all of which are vying for a piece of the $2.8 trillion pie of mortgage maturities being served over the next four years.

Private capital has proven to be an invaluable tool that’s helping to keep the wheels of the commercial real estate industry turning. The influx of new entrants to the field will certainly play a major role in the continued evolution of the capital markets. Yet to determine how big of a role—and how the story will likely play out—we must first look at how current fundamentals are shaping up amid the broader market reset.

INTEREST RATES’ NEW NORMAL

Skyrocketing interest rates brought commercial real estate activity to an effective standstill as property owners and tenants put off major decisions until rates fell back into a favorable range. Transaction volume fell by 50% and

cap rates widened by 60 basis points year over year in the second quarter of 2023, per CBRE. Average property prices were down 22% from their March 2022 peak, with office assets falling as much as 40%. (See CBRE’s March 7, 2024 press release “Cap Rates Approach Peak Levels Despite Tighter Lending Standards and Potential Distress, CBRE Survey Finds.”)

The first three months of this year saw more of the same. The $31.6 billion in closed sales was not only a 28% drop from first quarter 2023 but also marked the lowest volume recorded since 2013, according to an April 17, 2024, report from Altus Group “US Commercial Real Estate Transaction Analysis—Q1 2024.” Refinancing activity was also low because lenders have been eager to work with troubled borrowers; a flurry of modifications and extensions has kept the level of distress low.

Although the approach has kept many lenders out of trouble and given borrowers some breathing room, it’s only delayed the inevitable. Roughly a third of the $930 billion in debt maturing this year was originally set to mature in 2023. (See Mortgage Bankers Association “2023 Commercial/Multifamily Annual Origination Summation.”)

After 11 hikes in two years, the Federal Reserve left interest rates unchanged again

in May 2024, as Chairman Powell remains intent on bringing inflation down to its 2% target rate. This means it’s unlikely to see rates move down until the end of the year—at best. Many experts cited via major media outlets don’t expect to see significant movement until 2025. Until then, CRE players must adjust to the reality of higher borrowing costs. (See transcript of Chair Powell’s May 1, 2024 press conference.)

Today, one of the fundamental questions circulating in the finance arena is how much longer lenders can play the extend-and-pretend game. Resetting property values, reduced NOIs, and higher-for-longer interest rates are progressively testing the limits of most conventional lenders’ flexibility.

The other question is how much longer before rates come back down, and it looks like we’re nearing a consensus. The more market participants accept this new rate environment, the more movement we’ll see in transaction activity. Faced with the market’s realities and out of lifelines from lenders, a growing number of borrowers will find themselves out of options. Even the most patient sponsors will be driven (or forced) to make a move. Whether that’s a refinance, sale, or default depends on several variables.

SIDELINED BANKS MIGHT BE OUT FOR GOOD

Regional bank failures and subsequent retrenchment by traditional lenders severely depleted the amount of debt capital available in the market, and there’s little indication that banks will loosen their grip on their purse strings. Recent Federal Reserve surveys found that more than two-thirds of banks have tightened lending standards, and the Mortgage

Bankers Association reported a nearly 50% drop in origination volume for CRE.

With increased regulation (such as the upcoming implementation of Basel III guidelines)—and as delinquencies and defaults of bank loans ultimately rise—the pressure on traditional capital sources isn’t likely to ease. A 2023 year-end study by Fitch Ratings reported that nearly 1,900 banks with assets less than $100 billion held commercial real estate loans aggregating over 300% of their equity, which the Federal Deposit Insurance Corp. says may indicate significant exposure to CRE risk. (See the BIS’s September 11, 2023 notice “Governors and Heads of Supervision Endorse Initiatives in Response to the Banking Turmoil and Reaffirm Priority to Implement Basel III.”)

Many banks are shoring up their reserves for expected loan losses, while some are even taking steps to ease their CRE burden by selling off notes, often at a significant discount to underwritten asset values. Some are also tapping alternative lenders to help restructure some loans, or for capital infusions themselves. While this is providing

an opportunity for some alternative lenders to increase their CRE debt holdings, the trend is far from widespread; for now, the deals seem to be limited to quiet one-off trades or large portfolios from troubled banks that only the biggest players will attempt to tackle.

Given these developments, don’t expect banks to increase their appetites for CRE lending. And since that segment has historically provided about half of all U.S. commercial property loans, it leaves a massive funding gap that many other capital sources will be unable—or unwilling—to fill. (See Zoe Sagalow’s April 30, 2024 “US Banks Selling Commercial Real Estate Loans to Get Ahead of Stress, Diversify.”)

PRIVATE CRE DEBT MINDS THE GAP

The chasm in debt availability left by the retrenchment of traditional lenders will become even more noticeable as transaction activity picks up. At $220 billion, Preqin’s estimate of private real estate debt funds’ dry powder is a mere drop in the $5 trillion bucket of outstanding loans. A broader slowdown

Exorcising Hobgoblins: Removing Antiquated Clauses from Loan Documents

Many of these clauses, cobbled together over decades or more, contain antiquated clauses that no longer serve their intended purpose.

STEVE ERNEST, GERACI LLP

So that you don’t have to Google it, a hobgoblin is a mischievous imp (or sprite); a small, ugly creature that causes trouble. Something that causes fear (like a boogeyman).

Embarrassingly, legal documents are replete with hobgoblins. Innovation isn’t just about technology, data analytics, or risk assessment

methodologies. Sometimes, it’s about rethinking the very documents underpinning our industry—the loan agreements themselves. Many of these agreements, cobbled together over decades (perhaps even centuries), still contain antiquated clauses that no longer serve their intended (or any) purpose. It’s

high time we examine and remove these relics to streamline processes, reduce confusion, and foster a more transparent and efficient lending environment.

THE HISTORICAL CONTEXT

Loan documents evolved from handshake agreements to complex legal instruments

filled with jargon and clauses designed to protect lenders from a variety of risks. The lawyers got involved, you see. A document that means “I’m giving you $, which you will pay back; if you don’t, I can sell your house,” has become 140 pages long.

Lawyers are both superstitious and lazy. They use documents that worked before.

So, a smart lawyer wrote a contract during the 1800s, and everyone in his firm copied it for a hundred years. Each would reword this-or-that. Periodically a clause would be added to address new rules, regulations, law, or a problem arising in another matter. Never, though, is anything removed.

Historically, these clauses were vital. They addressed issues ranging from the financial instability of borrowers to the lack of regulatory framework governing loans. The financial landscape has dramatically changed. The regulatory framework is robust (perhaps you have noticed), financial markets are more transparent,

and technology allows for real-time data analysis and monitoring. Many loan documents haven’t caught up with these advancements. They are still riddled with terms and conditions that made sense in the past but are now contrary to existing law, redundant, confusing, or just unnecessary.

Let’s delve into some of these antiquated clauses and discuss why they need to be retired.

LEGALESE AND JARGON

The language used in many loan documents is an area ripe for modernization. Legalese and jargon make loan agreements difficult to understand, leading to confusion and potential disputes. Clear, plain language should be the standard for all loan documents. Have you ever read any of the following in documents: “witnesseth,” “to wit,” “heretofore?” Do you know what any of them mean? They’ve just been copied and pasted since before Hector was a pup. And here they are—hobgoblins.

Simplifying the language in loan agreements can enhance transparency and trust between lenders and borrowers. It can also reduce the time and cost associated with negotiating and finalizing loan documents. By prioritizing clarity and simplicity, lenders can improve their customer service and foster stronger, long-term relationships.

PERSONAL GUARANTEES

Personal guarantees were historically used to ensure the borrowers had obligations and to provide additional security to lenders. However, in today’s diversified and often corporatized business environment, personal guarantees can be a major deterrent for potential borrowers. Additionally, contracts of guaranty might be unenforceable and provide payment defenses. Is the loan to the borrower/ entity really made to skirt an antideficiency statute and enable collection against the individual guarantor? These sorts

of “sham guaranty” arrangements are forbidden in some jurisdictions. The risk here is that the lender chooses to foreclose without going to court, based on the belief they can collect on the guaranty. But if they later discover the guaranty can’t be enforced, they lose the chance to recover the remaining debt. If the lender had known this beforehand, might they have opted for a court foreclosure? Perhaps.

CHOICE OF LAW PROVISIONS

Choice-of-law provisions dictate which jurisdiction’s laws will govern the interpretation and enforcement of a loan agreement.

These clauses were historically included to provide certainty and predictability, especially in transactions involving parties from different jurisdictions. However, they can sometimes complicate matters unnecessarily, particularly when outdated or overly complex legal frameworks are chosen.

Do you even know which jurisdiction your document chooses? Do you know why? If the answer to either question is “no,” then take a hard look into it.

Some jurisdictions have more ”friendly” statutes for lenders. Choose those. Some choice-of-law provisions are selected because the lawyer you used 50 years ago

knew the law there—and nowhere else. Get rid of those. In today’s globalized and interconnected world, lenders and borrowers benefit from choosing jurisdictions that are not only predictable but also modern and efficient in handling financial disputes. Updating choice-of-law provisions to reflect jurisdictions with streamlined legal systems can reduce litigation costs, speed up dispute resolution, and provide a more equitable legal landscape.

Furthermore, selecting jurisdictions that embrace digital documentation and electronic signatures can enhance the efficiency of executing and enforcing loan agreements. What is the rule of evidence

related to using copies in lieu of originals in the jurisdiction you’ve selected? Seems like you should know. This approach aligns with the broader trend of digital transformation in the financial sector and supports the move toward more agile and responsive legal frameworks.

VENUE PROVISIONS

Venue provisions specify the location where any disputes arising from the loan agreement will be litigated: Where will we go to court? Although these clauses were initially designed to provide convenience and predictability for lenders, they can often place an undue burden on borrowers, especially when the chosen venue is distant or inconvenient.

Similar to the choice-of-law provision, know why you’ve chosen this. Is it a holdover from the venue nearest the office of the attorney your dad used when this was his company? Selecting the venue nearest your lawyer’s office does make some sense; however, that selection can’t be made without being relative to some other fact. The venue must have a reasonable relationship with the transaction (i.e., situs of the collateral; principal place of business of the lender, or borrower, or guarantor). Don’t pick Wyoming as the venue unless you’ll later be able to articulate why.

USURY LAWS

Usury laws, which set maximum allowable interest rates, were established to prevent lenders from charging excessively high rates that could exploit borrowers. These laws have a long history, dating back to ancient civilizations, and they have been incorporated into modern legal frameworks. However, the application and relevance of usury laws can vary significantly across

“ IN TODAY’S GLOBALIZED AND INTERCONNECTED WORLD, LENDERS AND BORROWERS BENEFIT FROM CHOOSING JURISDICTIONS THAT ARE NOT ONLY PREDICTABLE BUT ALSO MODERN AND EFFICIENT IN HANDLING FINANCIAL DISPUTES."

jurisdictions, often creating confusion and legal challenges in the private lending sector.

Some jurisdictions (like California) have so many exceptions to usury there isn’t much left after applying them. However, a lender must fit into an exception or the penalty for violating usury will likely eliminate all interest due or collected on the loan. Do you qualify for an exception? Are you sure? Best to verify.

In today’s complex financial landscape, some usury laws may appear outdated or overly restrictive, particularly given the sophisticated risk assessment and mitigation tools available to lenders. Modernizing usury provisions within loan documents can involve:

1 Reevaluating interest rate caps. Adjusting interest rate caps to reflect current economic conditions and market dynamics can ensure lenders remain competitive while protecting borrowers from predatory practices.

2 Incorporating flexibility. Introducing flexibility in interest rate provisions to account for varying risk profiles and

economic environments can benefit both lenders and borrowers. This might involve tiered interest rates based on creditworthiness or specific loan purposes.

3 Transparency and disclosure. Ensuring interest rate terms are clearly disclosed and easily understood by borrowers is crucial. Transparent practices build trust and reduce the risk of disputes related to perceived unfair lending practices.

4 Aligning with market standards. Reviewing and aligning usury provisions with contemporary market standards and regulatory guidelines can help lenders maintain compliance while offering competitive loan products.

DEFAULT INTEREST PROVISIONS

Default interest provisions are designed to penalize borrowers for late payments by increasing the interest rate applied to the outstanding balance. Although intended to incentivize timely payments and compensate lenders for the increased risk and administrative burden, these provisions can sometimes be excessive and counterproductive.

High default interest rates can exacerbate a borrower’s financial difficulties, making it even harder for them to get back on track. This can lead to a cycle of default and delinquency, ultimately harming both the borrower and the lender. Modernizing default interest provisions involves several considerations:

1 Reasonable penalties. Setting default interest rates that are reasonable and proportional to the actual increased risk and administrative costs can prevent undue financial stress on borrowers while still providing a deterrent against late payments.

2 Grace periods. Incorporating grace periods before default interest rates kick in can provide borrowers with a buffer to manage short-term cash flow issues without immediate penalization.

3 Transparency and clarity. Clearly outlining the conditions under which default interest rates will apply, along with the specific rates and potential penalties, ensures that borrowers are fully informed and can take proactive steps to avoid default.

4 Flexible arrangements. Offering flexible repayment arrangements or temporary forbearance in cases of genuine financial hardship can help borrowers recover and ultimately benefit lenders through improved recovery rates and long-term borrower relationships.

By modernizing default interest provisions, lenders can create a more supportive and sustainable lending environment that encourages responsible borrowing and repayment while minimizing unnecessary financial distress.

PREVAILING PARTY ATTORNEY FEES

Prevailing party attorney fees provisions dictate the losing party in a legal dispute

must pay the legal fees of the winning party. These clauses were intended to deter frivolous lawsuits and ensure the prevailing party is not financially burdened by the cost of litigation. Determining who “won” isn’t always so easy. If you sued for $400,000 and recovered a judgment for $135,000, did you prevail? It will be for the court to decide.

Change your provisions to specify that all attorneys fees and costs of collection, including litigation, will be added to the balance owed by the borrower. That way, all you need to do is win. Easy, right?

CONFESSION OF JUDGMENT CLAUSES

Many confessions of judgment clauses are outdated (or outlawed). This clause allows a lender to obtain a judgment against a borrower without notice or a hearing. Historically, it was used to swiftly deal with delinquent borrowers. Today, it’s considered draconian and has been outlawed in many jurisdictions.

Confession of judgment clauses to some jurisdictions undermine the principles of fairness and due process. Modern lending practices and legal systems provide more balanced and just ways to handle defaults. Removing this clause not only modernizes loan agreements but also aligns them with contemporary legal standards and ethical practices. Does your jurisdiction allow confessed judgments? If not, this clause can be cut.

THE PATH FORWARD

Transitioning away from antiquated clauses requires a concerted effort from all stakeholders in the private lending industry. Here are some steps to facilitate this change:

1 Review and audit existing documents. Conduct a thorough review of current

loan agreements to identify clauses that are outdated or redundant. Engage your attorneys to ensure compliance with current laws and regulations.

2 Embrace technology. Leverage modern technology to streamline processes, from application to reporting. Automated systems can handle tasks that were once managed through restrictive clauses and outdated reporting requirements. Consider using Lightning Docs, the official legal documents of AAPL. They comply.

3 Don’t be a fossil. Polish up a bit. Stay fresh. Be young (again).

STEVE ERNEST

Steve Ernest has an extensive transactional and litigation background, having filed and brought thousands of commercial cases to judgment. His focus has been for clients in the financial sector, successfully defending the world’s most prestigious luxury automaker in antitrust, warranty, and fraud cases. As regional counsel to nationwide lenders, he has written their credit, purchase, and other transactional documentation as well as export compliance, FCPA, and other regulatory compliance. As outside general counsel to several clients, he has navigated their employment, corporate, and real estate needs.

Ernest received his undergraduate degree from The American University and his Juris Doctorate from the University of Miami School of Law (cum laude).

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Fintech Entrepreneur Embraces Second Act

Liquid Logics began not merely as a business venture but as a culmination of a young boy’s dream and a series of fortuitous events.

In the realm of fintech, particularly in the niche of private lending solutions, Liquid Logics’ story emerges not merely as a company that has transformed the private lending landscape but as a narrative rich with innovation, determination, and a relentless pursuit of growth.

And, filled with ”a series of unintended consequences,” adds Sam Kaddah, Liquid Logics’ president and CEO.

Sam, a visionary entrepreneur, founded Liquid Logics in 2004. His journey from aspiring immigrant to technology innovator encapsulates the American dream. As the company embraces generational transition with the addition of Sam’s son Alex Kaddah as chief data analyst, the narrative expands, seamlessly blending generational wisdom with fresh perspectives and new technological insights.

PROLOGUE: SAM KADDAH’S AMERICAN DREAM

As a kid growing up in Damascus, Syria, Sam Kaddah saw a picture of Disney World and Epcot Center and dreamed he would one day see the magical theme

Sam Kaddah has been driving growth at Liquid Logics since 2004.

LENDER LIMELIGHT WITH SAM & ALEX KADDAH

“I ended up at Wichita State because of the ease of the paperwork,” he said, foreshadowing two of the tenants of his future company—speed and simplicity for clients. “It was easy for me to come to the state that was known as a strong center for aviation engineering programs and being the place where Cessna, Boeing, Learjet, and, of course, Raytheon were founded,” he added.

After earning a bachelor’s degree in electrical engineering with a minor in computer science, Sam stayed in Wichita to work for Raytheon. Due to a family health situation, he made an unplanned move to Kansas City, Missouri, where he later became the director of the upper Midwest practice for e-security and e-commerce implementation at EY, covering seven states.

A PLOT TWIST: FROM ENGINEERING TO FINANCE

Unexpectedly, Sam found himself shifting to the financial industry. His global experience at GE led Microsoft to recruit him for their internal global marketing and sales systems. But during a brief break he took before joining Microsoft, a friend asked him to evaluate his bank’s struggling national lending platform.

“They asked me to come in and as a friend, take a look and just tell them what’s going on, just give them a little bit of advice,” Sam said.

Sam addressed the issues at the bank and then moved on to Microsoft as planned. Despite being offered the CTO position at the bank, he couldn’t see himself working there instead of

In 2001, Sam transitioned to GE Transportation/Global Signaling, leading the company’s global technology and productivity group. Managing 13 sites across four continents, his days began early with calls to India and continued with meetings spanning Europe, the Americas, and Asia. These roles expanded his knowledge and expertise with technology and, importantly, with complex system management. He also eventually earned an MBA with a focus on information systems.

Microsoft, where he would be running global operations and command a higher salary. “It just didn’t add up,” he said. But in another twist of fate, shortly into his tenure at Microsoft, the bank decided to outsource the software development and have it sold back to them for an eight-figure number over five years. Sam said that knowing such a large contract for outsourced LOS software was at play, he realized there was an opportunity to start his own company, with the bank as his first client.

Assuming the role of entrepreneur in May 2004 allowed Sam to tackle the inefficiencies he observed in loan origination and servicing. The company’s online lending application allowed loan officers and brokers to complete processes swiftly, even before fintech and SaaS became known terms.

“It was easy for me to come to the state that was known as a strong center for aviation engineering programs...”

—SAM KADDAH

THIS OR THAT

TEXT OR CALL?

Both: Call

PEN OR PENCIL?

Both: Pen

TEA OR LEMONADE?

Sam: Tea

Alex: Lemonade

COMEDY OR MYSTERY?

Sam: Mystery

Alex: Comedy

BBQ OR PIZZA?

Sam: BBQ

Alex: Pizza

MOUNTAIN OR BEACH?

Both: Beach

S A M KADDAH

NIGHT OWL OR EARLY BIRD?

Both: Night owl

READ OR PLAY A GAME?

Sam: NA

Alex: Games

PLAN AHEAD OR WING IT?

Sam: Wing it

Alex: Plan ahead

“Our claim to fame at the time was in three and a half minutes, you get an application and approval on the fly,” Sam said.

RIDING OUT THE CONFLICT

Every great narrative has an element of conflict. Sam’s story is no different. His efforts to establish and scale Liquid Logics met numerous challenges. Transitioning from a secure corporate environment to the uncertainties of a startup required a significant shift in strategy and operations. Sam’s leadership through technological challenges and economic downturns, notably the 2008 financial crisis, underscored his resilience and strategic acumen. Four years into the contract with the bank, the economy shifted, and Sam had to adapt.

“By 2008, we had moved on … and had been succeeding,” he said. “Then the financial collapse happens, and I find myself on the fifth year of the [bank] contract with zero income from my most serious customer and 70 people working for me.” But, he said, “I knew how to turn it around.”

Sam took a chance and adapted the software for smaller banks. “I signed up 33 banks and rebuilt it.”

By shifting the company’s focus from major banks to more agile smaller lenders, he ensured Liquid Logics’ survival and subsequent growth.

A NEW CAST OF CHARACTERS

By 2014, Sam had “stumbled” across the private lending industry. “We ended up servicing an industry that had no systems, no processes, and an outdated servicing software,” he said.

Recognizing the need for modern solutions, he developed a comprehensive system

“Part of what makes us special is our clients being partners with us.”

—ALEX KADDAH

that allowed Liquid Logics to drive the private lending industry forward.

Today, Liquid Logics provides next-generation cloud-based platforms primarily for private money lenders. The system was built around the borrower experience, with an emphasis on simplicity and speed throughout the entire loan life cycle, from processing and origination to servicing and fund management.

ANOTHER CHAPTER: ALEX KADDAH BRINGS NEW GENERATIONAL INSIGHTS

The narrative of Liquid Logics began a new chapter with the entry of Alex Kaddah into the business. With master’s degrees in both data and AI systems, he brings new perspectives on using technology to solve traditional problems.

Alex’s approach, aimed at integrating more AI and machine learning into the company’s products, is focused on enhancing decision-making and operational efficiency. The younger

FAVORITES

MOVIE/TV SHOW?

Sam: Hunt For Red October / Big Bang Theory

Alex: Parks and Rec

PLACE TO TRAVEL?

Sam: Dubai

Alex: UK

SEASON OF THE YEAR?

Sam: Late summer

Alex: Fall

MUSIC GENRE?

Sam: Classical

Alex: Anything besides metal

WEEKEND ACTIVITY?

Sam: Driving around

Alex: Sleeping in GUILTY PLEASURE?

Sam: Tesche/Tedesco’s parties in Vegas

Alex: DoorDash fast food after 10 pm

Kaddah’s role signifies not just continuity, but a planned evolution geared toward maintaining the company’s competitive edge in a fast-evolving fintech landscape.

RECURRING THEMES

Under the Kaddahs’ leadership, Liquid Logics has consistently prioritized technological advancement to enhance user experience. The company’s flagship products, the end-to-end Nova platform and the private-label Loansizer, have set industry standards for efficiency and reliability. These products embody the Kaddah’s vision of a system that not only addresses current market needs but also anticipates future demands, ensuring that Liquid Logics remains ahead of the curve, largely by continuing to make their products relevant to their clients’ entire operations.

“Technology by itself can stay in a vacuum and doesn’t do much,” he said. “But I coupled it with my Six Sigma and process automation experience from the big corporations. So, we did not create just the technology part; we created a complete workflow system.”

“Part of what makes us special is our clients being partners with us,” added Alex.” We have today 17 systems … and my vision is to continue driving that forward and adding new verticals. … Those are going to be directly under my direction. Obviously, we want to stop short of nothing but the best. If there’s a new technology, we want to incorporate it into our systems as we see it necessary. We don’t want to put out something just to say it’s there, however.”

The Kaddahs, who both played soccer in school, note the game has influenced their approach to business and innovation.

“In a weird way, soccer is organized chaos,” said Sam. There is no standard plan you can follow, so you really want to coach to be flexible, to be able to make changes on the field as you go. So, I look at how I’m coaching and moving things forward with my team here [at Liquid Logics] as putting them on an everchanging field and allowing them to make decisions back and forth. We can stop for a teaching moment and adjust the play. If we have to adapt daily, that’s OK. And the team reacts it to in a smart way.”

This philosophy has permeated Liquid Logics’ operational attitude, fostering an environment where innovation is continuous and encouraged. The company’s agility in adapting to industry changes has not only helped it thrive but has also established it as a leader in developing solutions that are both innovative and necessary.

Alex, growing up witnessing his father’s commitment and grit in an ever-changing industry, has inherited not just the mantle of leadership but also the intrinsic values of perseverance and adaptability.

Alex views his role as both a privilege and a responsibility, aiming to ensure the company not only adheres to its founding principles of innovation, resilience, and integrity but also evolves to meet future challenges.

“At Liquid Logics, we are constantly evolving,” said Alex. “One of our core beliefs we share is that we’re constantly on the move. You can’t catch us if we keep on moving, and we keep moving that target.”

Looking to the future, both Sam and Alex are focused on expanding the company’s technological footprint, venturing into new markets, and enhancing their offerings to meet the evolving demands of the private lending industry.

“At the end of the day, the private lending space is still driven by human connections and interactions,” said Alex. “We’re just lucky enough to be the link between multiple parties and lenders and helping them have success by virtue of us or through a connection from us to someone else. That’s what really continues our success and drives us forward.”

TO BE CONTINUED …

Legacy can take many forms, ranging from the passing along of ethics and core values, or the transfer of wealth, even setting an example that guides the future of others.

Sam quickly dismisses those traditional notions of legacy when asked about his own and how he’d like the next several chapters of the Liquid Logics tale to play out. For him, the concept of legacy transcends the success of Liquid Logics. It’s about creating a lasting impact that will continue to influence the industry long after he has stepped down.

“I don’t know that there’s such a thing as, quote, unquote, ‘legacy.’ But I do think there’s a continuity. As long as there’s a continuity, there’s a thought process where people still remember you. And hopefully they’ll remember what they’ll think of as the ‘primitive’ ways I did things,” he said, “and how the next generation made it actually come into the next century. I may have invented the steam engine, so to speak, but now we have electric cars. … That continuity is what I believe legacy could be.”

Private Lender Transforms Entrepreneur’s Business Future

By financing an office, commercial warehouse, and land deal in Renton, Washington, 1892 Capital Partners changed a business’s trajectory.

CHARLES FARNSWORTH, 1892 CAPITAL PARTNERS

THE OPPORTUNITY

The borrower, a savvy entrepreneur in the construction supply business, sought to purchase a 1,200-square-foot wood frame office, 9,600 metal pole commercial warehouse and 5.91 acres of prime industrial land in Renton, Washington, south of Seattle.

Initially leasing the property with a purchase option, the borrower faced

a critical regulatory hurdle: obtaining a No Further Action (NFA) letter from the relevant regulatory agencies due to possible contamination that occurred prior to the borrower’s lease. Although the purchase option did not have to be exercised until the NFA was received, the moment this clearance was secured, the clock started ticking—with just six months to finalize the purchase.

In the face of unpredictable interest rates, traditional financing options were hard to come by, leaving our client with just 30 days to to find an alternative.

CAPITALIZING ON PROPERTY APPRECIATION

During the past five years while our client worked toward NFA status, yet

LOAN DETAILS

Lender // 1892 Capital Partners

Property Location // Renton, Washington

Property Highlights // Office, commercial warehouse and industrial land in prime location: 1,200-square-foot wood frame office, 9,600 metal pole warehouse on 5.91 acres of prime industrial land south of Seattle.

Year Built // 1969

Loan Type // Purchase/bridge

Loan Term // 6 months with two 3-month extensions, as needed, for a total of 12 months

Purchase Price // $6,900,000

Loan Amount // $7,500,000

Lender Points // 3.0%

ARV // 60%

Loan to Purchase Price // 105%

Interest Reserve // Yes

Fees Financed // Yes

Cash to Close // None

Rehab Costs // None

Exit Strategy // Refinance or sale

Borrower Credit Score Considered // No

Borrower Experience Level/Background // Experienced

experiencing numerous delays due to the pandemic, the property’s value soared to $12.5 million. The seller, likely banking on our client missing the six-month purchase window, stood to benefit significantly. Meeting the deadline was a must.

The team at 1892 Capital Partners worked hard to fast-track appraisals, scrutinized the NFA documentation to ensure no further unforeseen cost of clean-up, and stepped in with an acquisition loan that covered the full option price. Our

comprehensive solution also financed associated fees and established an interest reserve, ensuring the borrower could comfortably manage the debt while exploring refinancing or sale options.

INNOVATIVE FINANCING SOLUTIONS

Our borrower is now finalizing a refinance, having unlocked the property’s equity by exercising the purchase option. Because 1892 Capital Partners is not constrained by traditional bank financing or stringent

underwriting, the borrower was able to get 105% of the purchase price financed, enabling the transaction to close without any cash upfront from the borrower.

EMPOWERING ENTREPRENEURS WITH FLEXIBLE FINANCING

This case showcases the importance of adaptability, speed, and the ability to deliver creative financial solutions to face modern real estate challenges. By understanding the nuances of the market and the needs of borrowers, private lenders can empower businesses to seize opportunities and achieve their goals. Success hinges on more than just properties—it’s about partnerships. Innovative and flexible approaches make all the difference.

CHARLES FARNSWORTH

Charles Farnsworth manages 1892 Capital Partners’ private lending. He has more than 30 years of experience in real estate investment, finance, and banking, After graduating from the University of Puget Sound, he founded a finance company, raised private capital, and served as vice president in corporate banking and private wealth management.

In 2008, Farnsworth returned to private capital, managing secured debt portfolios and real estate investments. In 2021, he joined 1892 Capital Partners to expand a real estate debt-secured lending portfolio for Corliss Management Group LLC.

Condo Project to Help Relieve Affordable Housing Challenge

The 36-unit Fort Worth, Texas, condominium construction project is expected to help address the city’s affordable housing shortage.

TIM BOORD, NAVIGTOR PRIVATE CAPITAL

Direct private lender Navigator

Private Capital recently funded a ground-up 36-unit condominium project at 123 Merritt Street in Fort Worth, Texas. After closing the loan in November 2023, the borrower went right to work. With a $6 million construction budget, the borrower is putting up two buildings— one with 18 one-bedroom units and the other with 18 two-bedroom units.

The units will feature high-end appliances and finishes, including vinyl plank flooring, granite countertops, and custom cabinetry. On-site amenities include in-unit washer/dryers, private balconies, and abundant parking.

THE OPPORTUNITY

Affordable housing options across the U.S., including in Texas, are limited. The

Merritt condominium project helps fill this gap. It offers single-family residential homes at an attainable price point in bustling downtown Fort Worth.

During the past decade, population growth in Tarrant County, where Fort Worth is located, has averaged 1.4% annually. This exceeds the nationwide population growth rate of 0.5% by a large margin. This growth coupled with strong employment

LOAN DETAILS

Lender // Navigator Private Capital

Client/Borrower // Louis Clark

Location // 123 Merritt Street, Fort Worth, TX 76114

Original Architecture Style // New Construction

Square Footage // 42,471-squarefoot vacant lot

Original Year Built // 2024

Loan Amount // $6,918,000

LTV // 62%

LTC // 81

Interest Rate // 12%

Length of Loan // 2 years

Anticipated Rehab Costs // $5,292,027

Credit Score Considered // Yes

Client/Borrower Experience Level // High

opportunities has created a powerful demand for housing. The Merritt project is positioned to meet this demand.

SOLUTIONS & OUTCOMES/ RESULTS OF LOAN

The construction process is ongoing. The 36-unit project is slated for completion in May 2025. The borrower

expects to begin sale of the units in advance of project completion.

EXIT STRATEGY

The units will be listed for sale with the expected sales price for the units between $225,000 to $400,000. Once these condominiums hit the market, they are expected to sell swiftly.

Tim Boord is an accomplished mortgage executive with more than 25 years of experience working with leading banks and real estate companies. His broad mortgage experience includes operations, client development, credit analysis, property evaluation, pricing, underwriting policies, and loan quality.

Boord is a founding member of Navigator Private Capital. He developed the customer profile, UW guidelines, process and procedures, and budget. He is continually working on customer acquisition to grow production while protecting capital principal.

TIM BOORD

3 Ways to Transform Your Sales Operations

Solving problems, communicating, and marketing are the three ways your loan origination team can grow revenue.

ALEX BURIAK, JET LENDING

In the lending industry, being able to navigate challenges effectively is the cornerstone of success. Because it often falls upon the loan officer to deftly maneuver these obstacles, your company’s primary objective should be to equip your origination staff with skills for doing so. Here are three ways to transform your loan officers into a team that boosts revenue and grows the company:

1 Problem-solving

2 Communication

3 Marketing

NO. 1: PROBLEM-SOLVING

Know your products. To excel as problem solvers, your team must thoroughly understand all your company’s products. Loan officers must grasp the nuances of each product, identifying what can be adjusted and what is rigid. Familiarity with how capital flows within the company, from onboarding to loan servicing or sale, is crucial. No borrower wants to be led to believe they are making progress on a loan only to find out they never qualified.

Identify potential problems. Train your team to ask probing questions during interactions with borrowers to uncover their underlying concerns. If a borrower struggles to articulate their issues, conduct a problem audit. You may wonder why you would bring up problems when there may be none.

There are always problems.

Not knowing the issue upfront is what gets you in the end. Be direct in your discussion. Your job is to ease the borrower’s concerns by offering solutions. Remember, no loan problem question is off the table as you conduct the audit. The more questions you ask, the more you will find out about the borrower’s concerns. Armed with that knowledge, you’ll have a better chance to address the problems and sell your product.

Here are some examples of audit questions:

Is your primary concern related to out-of-pocket costs or interest rates?

Are you more focused on the timeframe for closing or the duration of the loan term?

Do prepayment penalties factor into your decision-making process?

When do you think you would have this project completed?

Do you need help with a refinance option to hold the property?

Is there an amount out of pocket you need to stay within to close?

How much are you expecting in funding?

How much do you think the property will be worth fixed up?

Finally, to make sure you have surmised the main focus of concern, ask: “Is your primary concern related to XYZ, and is that your deciding factor?”

Once you understand your borrower’s needs, you can sell the product that best fits their needs. The point is to ask questions to guide the borrower to the best programs, make sure they understand their risks, and gain confidence in the team. At the end of the day, borrowers end up going

with the team they feel most comfortable with that will close their deal. Be conversational but control the conversation and ensure your audit questions are answered. When it comes to asking probing questions, remind your team that when you finally get to the root problem

and can present a viable solution, your closing percentage drastically increases.

Employ the 1:3:1 method. This process involves stating the problem, offering three potential solutions, and recommending the most suitable solution. Let’s look at an example in action:

State the problem: “You said your biggest concern is prepayment penalties.”

Offer three solutions: “Here is what we can do:

We can put you in our no prepayment penalty product, but you will be at X rate. We can put you in the sixmonth prepayment penalty and offer you a better rate at X.

We can put you in the 1-year pre-payment penalty and give you an even bigger rate discount, which would be X.”

Recommend the most suitable solution: “After looking at your $60,000 rehab budget and the 95-day time-on-market in your area, I think we should do the six-month prepayment option. The reason is that I can reduce your rate, decrease your holding costs, and give you the best option for the likely amount of time it will take for repairs, sell the house, and close with a conventional lender. How do you feel about that option?

At this point, the borrower knows you are trying to solve problems and there are multiple solutions. Reiterating the problem to the borrower ensures mutual understanding and fosters a relationship of trust. Actively listening to your borrower

contrasts with the conventional approach of inundating customers with information. Encourage your sales staff to prioritize listening and ask insightful questions to keep the dialogue flowing. The more engaged the customer, the better the chance your team will seal the deal.

Nurturing the problem-solving skills of your origination team is not just a necessity; it is a strategic imperative for sustained business growth and customer satisfaction.

NO. 2: COMMUNICATION

Timely communication is key. Many loan officers and companies have failed because

communication is poor. As the borrower anxiously awaits updates on their loan approval, regular communication calms their nerves and stop fires from starting. Send daily emails reminding them they are at the top of the pipeline and when new information is available, they will be the first to know. A call once or twice a week letting them know whether there have been any changes is also helpful.

If you do not think you are bothering the borrower, you are not contacting them enough. In the world of lending, silence is not golden; it’s nerve-wracking to the borrower. Even bad news is well accepted if you communicate regularly—and you will retain your borrower for future deals.

Education is key. You are teaching the borrower the tricks of the trade. From deciphering loan terms to understanding how to calculate profits, borrowers rely on loan officers to shed light on the nuances of lending. If you can educate the borrower, you will have repeat business that becomes easier to close each time.

Document. This one is more for the internal communications. Documentation is critical to lending. Documentation allows multiple departments to seamlessly care for a loan as it walks through your underwriting and operations processes to closing. A system of checks and balances between all parties, including the borrower, needs to be established.

The borrower needs a firm but friendly reminder of what is needed for the file and, more importantly, the consequences of not having that information by the specified date and appropriately document the communication. This is true for all parties internal and external. Document each phone call, text message, and email. Doing so keeps everyone on task, but it’s a bit of an insurance policy for the lender when things go south too. Remember, everyone is friends until they aren’t. Documentation is your saving grace if you want to stay out of legal issues or avoid a bad reputation.

Manage your pipeline . Believe it or not, pipeline management can be a very big problem in communications. Your team (i.e., loan officers, assistants, and processors) should be meeting at the beginning and end of each day to review the pipeline. Discuss your leads from those “closest to close” to new leads, in that order, making sure everyone on the team is updated on what is needed, problems to solve, and what must be set up for the rest of the day or the next day to move the file. If you want to scale your closing numbers, your team should be able to answer any questions on an account file. The only way to do that is to meet as a team and make sure everyone is on the same page. Nothing will frustrate you, your team, or your borrower more than confusion close to closing.

NO. 3: MARKETING

All marketing boils down to how to get someone interested enough to go to your website, text you, call you, and start talking. Train your loan officers to have a mindset that they are small

independent businesses—and you just provide the capital. Have them drive the leads. Borrowers work with loan officers, not companies. People work with people they like. Make your team helpful and likable and your leads will grow.

So, how do you drive the leads?

Post on social media each day. You can use reels, memes, videos, or anything that puts you out there daily. This isn’t the company; this is the individual loan officer driving leads along with the company’s marketing. We schedule our static marketing for four months, so we know there is some daily interaction in all social media channels.

Help prospects understand. Some of the most successful pieces of marketing your loan officers can produce are basic how-to videos. Remember, you are in the industry. What seems common knowledge to you now is organic chemistry to prospects. It’s your job to show them how simple it is to work with you. Offer simple information about applying for a loan, how LTV lending works, and what your construction draw looks like, for example.

Basic information about the daily interactions with originations and servicing is helpful as well. In addition, you can send these video links to borrowers who are in the process of closing their loans to educate them on what to do next. This marketing not only drives business but also saves time.

Network effectively. Yes, you must network and talk to people. Nothing is more impressive to a borrower than your initial communication when you meet them. Create digital business cards so your lending information can be saved to the borrowers’ phones, or provide them with a pre-approval letter on the spot. The next day, call, email, and text each person

you met to thank them for meeting you and to offer them either a pre-approval letter or a free evaluation of their next project. From there, put them in your regular rotation of seven, 14, 21, and 30-day touches. The person who will get those prospective borrowers is the person who contacts them first when they need it.

Solving problems, communicating, and marketing sound simple enough. And that’s the beauty of it—it is. These simple tips, appropriately managed, will do wonders for your business and your origination operations.

ALEX BURIAK

Alex Buriak, senior vice president of Jet Lending, has a long history in the investment and real estate industry. After graduating from the University of Pittsburgh and National University of Health Sciences, he spent three years running multiple clinics. His search for a better avenue to raise capital to start another practice led him to real estate.

Buriak has helped expand real estate companies to other markets and states and has solidified and modernized operations to achieve efficiency and ease of business. He regularly speaks on panels, addressing lending, business, and underwriting operations and strategies.

Buriak has bachelor’s degrees in emergency medicine and natural sciences (focus in medical sciences) and a doctorate degree in chiropractic, rehabilitation, and natural medicine.

Working Your Book of Business

Your past borrowers are essential for sustainable growth. Here’s how to develop effective strategies for engaging them, enhancing their loyalty, and tapping into their potential as repeat customers.

ANTHONY GERACI, ESQ., STRATUS FINANCIAL

You know it as well as I do: Private lending is highly competitive. Borrowers go to the lowest bidder sometimes, trying to get the best deal possible for their property. But they’re also looking for relationships, someone who can close their loan no matter what.

How do you “find” these relationships?

You already have.

Your “book of business” your roster of past and current clients is not just a record of past transactions, but a goldmine for potential future deals and a reservoir of referrals.

THE IMPORTANCE OF PAST BORROWERS

Past borrowers are a valuable asset. They’ve already been through the loan process with your institution, which means they are familiar with your procedures and have established a level of trust with your brand. Reaching out to them can be significantly

more cost-effective than acquiring new clients. You’ll save on marketing expenses and have a higher likelihood of conversion. Furthermore, satisfied past borrowers are more likely to provide referrals, helping to expand your client base organically.

DIAL IN YOUR BACK OFFICE

First things first: Do you have your back office in order? If you want past borrowers to refer business to you and continue to use you, you must make your processes as frictionless as possible. Consider hiring a virtual employee to take care of your tasks, manage your inbox and respond to your borrowers, make your back office completely seamless with accounting and reporting, and everything needed to look both professional and give your borrowers the very best experience. Even if you’re not the absolute cheapest, you’ll demonstrate that you are reliable.

SEGMENT YOUR AUDIENCE FOR PERSONALIZED OUTREACH

Before launching an outreach campaign to past borrowers, it’s crucial to segment your past borrower lists based on relevant criteria such as loan type, property type, experience, etc. Segmentation allows more personalized communication, which can significantly increase engagement rates. For instance, you might tailor your messaging differently to those who took out home loans versus those who opted for personal loans.

REGULAR COMMUNICATION IS KEY

Staying in touch with past borrowers keeps you and your lending company top of mind. People are inundated with information and easily forget. Regular updates about your services, changes in loan rates, or even informative content

related to financial management can make your communication valuable to your past borrowers. Newsletters, email updates, and personalized greetings on special occasions (like birthdays or loan anniversary dates) are effective ways to maintain contact without being intrusive.

MAKE A FRIEND OUT OF YOUR BORROWER — THEY’RE HUMAN TOO

Relationships are everything, and the lending business is no stranger to it. You have a lending business to run, and that, of course, takes precedence. Don’t make bad deals, even if someone is your friend. However, you can enhance any borrower relationship by asking about their family, dreams, hobbies, and goals. Keeping track of that shows the borrower they’re more than just a borrower—they’re a human with dreams and goals you care about.

OFFER REFINANCING OPPORTUNITIES

Market conditions change, and so do the financial situations of your borrowers. Proactively reaching out to past clients with information on refinancing options can lead them back to you when they’re considering their next financial move. Many of your borrowers may likely be coming against maturity defaults. Offer them a refinance with more time, or maybe more time with additional money for their other projects.

LEVERAGE TESTIMONIALS AND CASE STUDIES

Sharing success stories of past borrowers through testimonials and case studies can significantly influence decision-making. When potential and past borrowers see real-life examples of how your lending solutions have helped others, they are more likely to con-

sider similar opportunities. Ensure you have permission to use clients’ stories and photos; then distribute these testimonials via your website, social media, or email campaigns.

UTILIZE SOCIAL MEDIA

Social media platforms are powerful tools for engaging with past borrowers. Regular posts featuring loan advice, financial tips, or community news help keep your audience engaged. Encourage past borrowers to follow your pages, and engage by responding to comments and messages. This not only enhances relationship building but also boosts your visibility to their connections who might be potential clients.

PERSONALIZED OFFERS AND PROMOTIONS

Create offers or promotional deals specifically for past borrowers to make them feel valued and encourage repeat business. For example, offering a reduced origination fee for second-time borrowers or special terms for those referring new clients can incentivize past clients to engage with you again or refer others.

CONDUCT SATISFACTION SURVEYS

Understanding how past borrowers feel about your service is crucial. Regular satisfaction surveys can provide insights into what worked well and what didn’t. This feedback is valuable for improving your services and tailoring your outreach efforts. Additionally, it shows borrowers that you value their opinions, which can enhance loyalty.

EDUCATIONAL WORKSHOPS AND SEMINARS

Hosting educational workshops or seminars is another excellent way to keep in touch with past borrowers. These events provide value beyond just the services you offer and

position your brand as a helpful resource in financial decision-making. It’s also a great way to reintroduce your services to attendees who might be considering another loan.

NETWORK BUILDING EVENTS

Invite past borrowers to exclusive events or meet-ups that allow them to network with others. Such events not only strengthen your relationship with past clients but also provide them with additional value, making them more likely to see you as a key business partner rather than just a service provider.

IMPLEMENT A LOYALTY PROGRAM

Developing a loyalty program that rewards past borrowers for their continued business or referrals can create a long-term engagement strategy. Points-based systems, where points can be redeemed for lower interest rates, lower origination fees, or other benefits, are particularly effective.

ASK FOR THE REFERRAL

As soon as you have bailed your new borrower out of a jam is the best time to ask for a referral. Whether it’s a refinance or closing a difficult deal, now is the right time to ask for them to refer their friends. You just saved their deal they want to help you out. Ask now

Engaging past borrowers is an ongoing process that requires a strategic approach. By understanding their needs, communicating effectively, and providing them with value beyond just financial transactions, you can turn past borrowers into lifelong clients and advocates for your business.

Implementing these strategies will not only enhance your borrower retention rates but also boost your overall business growth through repeat and referred business. This

personalized, value-focused approach to client management is what ultimately separates successful lending institutions from their competitors. People always claim customer service, but they don’t practice it. Practice it, and you’ll always be profitable.

ANTHONY GERACI, ESQ.

Anthony Geraci, Esq., is the CEO and co-founder of Stratus Financial and the CEO of Geraci LLP. He followed his passion for aviation and obtained both his commercial pilot certificate and ground instructor ratings in 2020. During his instruction, he recognized a lack of available funding in the space.

Bringing a combination of legal and financial expertise to Stratus Financial, Geraci is tasked with strategy creation for the firm. Geraci is a skilled mortgage lending and securities law attorney who has authored numerous articles on real estate finance and security subjects. During the past 15 years, he has run financial funds and served as legal advisor to several lending funds totaling more than $100 billion offered and more than $200 million raised through his law firm. Leveraging his securities background, Geraci has been instrumental in securing credit lines and starting capital raising ventures to fund flight school loans for Stratus Financial.

A founding member of EO (Entrepreneurs Organization) Inland Empire and founder and vice chairman of the American Association of Private Lenders (AAPL), Geraci keeps his finger on the pulse of the financial industry.

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Stop Being Just a Lender

If you want to keep your borrowers coming back in a challenging market, work on these strategies to give them more opportunity.

ERICA LACENTRA, RCN CAPITAL

In the competitive private lending industry, lenders likely find it increasingly difficult to differentiate themselves from their competitors. As rates continue to compress and margins thin, there is little wiggle room for lenders to stand out based on pricing and leverage.

Players in the space must become more creative to draw borrowers and gain greater market share. It is therefore tremendously important for lenders to figure out ways to be more than just a financing provider and

to offer other resources that keep clients coming back. If lenders can essentially create an ecosystem that provides everything their clients need, from property leads that are suitable for their next deal through services to make closing a breeze, why would borrowers need to go anywhere else?

Here are some areas where lenders may want to consider adding resources or partnering with complementary service providers to become that one-stop shop for their clients.

AN EDUCATED BORROWER IS A SUCCESSFUL BORROWER

As real estate markets and trends shift over time, investors must stay current to experience long-term success in the space. Especially for newer investors who may still be finding their footing, it can be challenging to navigate through all the real estate data available to find what is useful.

Providing expert advice and industry insight is an area where private lenders can offer additional resources for their customers. The best part is this doesn’t have to be a big lift. The members on most lenders’ teams likely already have industry knowledge, or the lenders have connections in the industry they can partner with or refer clients to.

Getting started can be as simple as referring clients to trusted industry resources or data providers that conduct regular education about industry trends. Organizations such as CoreLogic, ATTOM, the American Association of Private Lenders (AAPL), and the National Association of Realtors (NAR) provide access to articles, webinars, and other content related to industry data and trends. Lenders can identify relevant educational content and webinar sessions and promote them to their borrowers to keep them informed.

As an additional step, lenders can summarize key takeaways to highlight what is most important to their clients or could be most helpful. This small step can help narrow down the expanse of data available in the industry and show the client their lender is providing value. Lenders can also create their trend reports based on their own origination data, the expertise of their staff, and data platforms they may have access to. Creating and releasing recurring reports that focus on up-and-coming areas of the country to invest in, what loan programs are most

popular and producing the greatest return, and more are great examples to keep your customers aware. Using those reports, lenders can also conduct quarterly webinars to provide an “inside” scoop into upcoming trends their borrowers can take advantage of to improve their businesses and reach their own investing goals.

SOURCING PROPERTIES TO DRIVE FUTURE SUCCESS

Although industry insight and access to trends can be a great benefit to borrowers, an investor simply can’t invest without access to the right properties and a constant flow of inventory to invest in. Lenders that find ways to help source deals for their clients or, at a minimum, get unique real estate investment opportunities in front of their borrowers will always have a significant advantage over their competitors. What better way to keep your borrowers coming back repeatedly than teeing up and vetting the properties you know they will want to invest in? And, of course, these properties have been vetted to fit your lending criteria!

In a time when lack of inventory is one of the biggest issues real estate investors face, lenders often have access to resources that can help their borrowers find their next deal. In real estate, relationships are everything, and private lenders often have existing relationships with industry professionals who are in the know when it comes to off-market deals.

Most lenders already have a network of real estate agents, brokers, REO agents, and investors they work with. Any of these real estate professionals may have access to properties that are not listed publicly for sale. It makes sense they should be tapping into those relationships to find

properties that could turn into their borrower’s next deal. Lenders should consider working with their borrowers to create property “wish lists” they can provide to their industry contacts. That way, when off-market properties that match that criteria cross their desk, they know exactly where to send those contacts.

Lenders should get creative with outreach to source properties for borrowers. Real estate wholesalers, looking to quickly sell discounted properties, and probate agents, handling off-market properties after homeowners pass, can be valuable contacts. By leveraging these unexpected contacts, lenders can find excellent opportunities for their clients.

TURNING TO TECHNOLOGY

One final way lenders can better equip borrowers to succeed in any market conditions is to provide them with access to the right technology. Although there are numerous tools your clients could tap into to reach their investing goals, some of the most powerful platforms provide investors with both market data and ways to source deals—all in one convenient place.

Platforms like REiDEAL Master help investors find off-market deals by identifying motivated sellers and marketing to them. Privy offers visibility into MLS-listed properties and alerts investors to potential deals based on their criteria. Lenders partnering with these tech providers to offer access or discounts to their borrowers can set themselves apart.

Another avenue lenders can direct borrowers to for off-market opportunities is social media platforms. Lenders can have their presence in Facebook groups specializing in off-market deals in various markets, or they can refer their clients to various groups in their target markets.

This is just another great way for lenders to help their borrowers tap into new opportunities and also have ongoing long-term success finding properties.

BE MORE THAN A LENDER

Long gone are the days when lenders could simply rely on their products to draw in customers. Lenders should be focusing on ways to stand out from their competition and provide additional value that keeps borrowers as long-term clients.

Ultimately, a lender’s success hinges on the success of their borrowers, so going that extra mile to be a partner rather than just a funding provider will pay long-term dividends.

Erica LaCentra, chief marketing officer at RCN Capital, is responsible for planning, developing, and implementing the company’s marketing plan as well as overseeing the marketing department.

Joining RCN Capital in 2013, LaCentra led a strategic rebrand to position the company for nationwide expansion. Her ongoing efforts have rapidly expanded RCN’s customer base and elevated the company to a national brand.

LaCentra currently serves as a member of the American Association of Private Lenders’ (AAPL) Education Advisory Committee and is the marketing and communications chair for AREAA Boston. She holds a B.S. degree in advertising with a minor in fine arts from Suffolk University.

ERICA LACENTRA

2200+ Attendees each year across SFR West and SFR Awards event programs.

12 Hours of unparalleled networking opportunities. 280+ Industry pioneers taking to the stage on our speaking faculties.

150+ Service providers showcasing groundbreaking market solutions.

This series of articles will examine due diligence in various hyperlocal markets that tend to be representative of their region.

We’ll look at some primary markets, secondary markets, recreational markets, rural/agricultural markets, and others. Within the context of a selected market, we’ll consider current trends, demonstrate differences, and identify unique diligence factors that savvy lenders and investors should be aware of.

Here’s an overview of the three factors we’ll be discussing for each market:

Local refers to understanding a market from the MSA level as well as its specific location within the MSA. These factors are broad, and they help evaluate the market’s type and size (i.e., primary, secondary, tertiary, rural, remote), economic drivers, size of the buyer pool, and typical buyer profiles.

Hyperlocal refers to understanding a specific neighborhood, its submarket, investment dynamics, and other neighborhood-level intelligence.

Unique diligence factors are specific diligence factors that are important to check within a certain local/hyperlocal area. They are important to examine to ensure the environmental health and safety of the property. For example, throughout much of Atlanta, as in other markets, finished basements are often incorrectly reported. The presence/ absence of a finished basement can typically have a significant impact on property value.

Hyperlocal Due Diligence: A Look at Atlanta, GA

Strong economic drivers have helped the Atlanta metro maintain "hot spot" status; nevertheless, lenders should be aware of several critical due diligence developments.

RODNEY MOLLEN, RICHERVALUES

Real estate investors are very familiar with “Location, location, location.” That adage actually tells us more than we might think. It represents three due diligence factors critical to the success of any investor: local, hyperlocal, and unique diligence factors.

The first installment in the series focuses on Atlanta, Georgia, which has been a hot spot for real estate lending and investing for years, even as other traditionally “hot spot” markets have experienced fluctuations.

LOCAL

Atlanta is typically categorized as a primary market. It has strong economic drivers with

a large, sustained pool of buyers. Buyer profiles cover the spectrum from rental, workforce housing, urban, suburban, executive, luxury, and retirement.

The following are some important trends we’re seeing, based on aggregated data from all properties analyzed (but not necessarily purchased) by lenders and investors on RicherValues, either by clients conducting their own analysis or by ordering our evaluation reports.

Declining market demand. Market demand scores have been steadily declining, largely driven by inventory levels that have been steadily climbing. Table 1 illustrates the

3. % OF DEALS BY ARV VALUE

change in market demand score from 1.6 months to sell in January 2023 to 3.5 to 4.5 months from March to May 2024. Although these levels are higher than compared to six months ago, they remain at decent levels. Historically, many industry professionals consider five to six months a healthy range, but it’s also the tipping point at which markets switch from sellers’ markets of low inventory to buyers’ markets of high inventory.

Moving back into pockets with greater price variation. After enjoying some local pockets of simpler deals (i.e., properties located in neighborhoods where home prices show less variation) from June to September 2023, investors and lenders are moving back into areas that exhibit more price variation. The implication is that lender/investor deals being analyzed are beginning to require greater levels of diligence within the valuation world to ensure they accurately quantified the deal.

Table 2 shows the FSD (forecast standard deviation) score from January 2023 to late May 2024. You can think of the FSD as a reverse confidence score. It measures the accuracy of analytical models used to determine a property’s value. A lower score means the model has more effectively identified sales price drivers, yielding greater confidence in the valuation. A higher score indicates an area has greater variation in sales prices and it was harder for the models to determine what specifically is driving price; therefore, a human touch is likely needed to sort through the details and ensure valuation conclusions are accurate.

A shift away from $250,000 to $400,000 After Repair Value (ARV). There has been a steady decline in the percentage of deals analyzed by lenders and investors that fall within $250,000 to $400,000 based on ARV. Although still a staple, this value band has seen a steady decline that has led to a 5- to 10-point drop in the percentage of mid-level properties as the focus shifts to both ends of the value spectrum. There has been a 3- to 5-point shift toward properties with less than $250,000 ARV and 5- to 8-point shift toward properties with greater than $750,000 (see Table 3).

Although inflation may have pushed some properties into the higher value ranges, based on growth in the under $250,000 range, we can infer that shifting appetites or shifting availability of deals are the primary drivers rather than inflationary issues.

Heavier construction. After enjoying a resurgence of light rehab deals with properties in moderate/maintained condition (C3-C4) from March to November 2023, there has been a noticeable 5- to 10-point shift away from these lighter rehabs. The percentage of deals in poor to very poor condition (C5-C5.5) has increased

steadily from November 2023 to May 2024. Analysis of new construction (built or to-be-built) has remained steady and strong—in the 15-20% range (see Table 4).

Back to outer areas. In most MSAs, there’s a constant fluctuation between deals in the inner core (urban/suburban) areas versus outer areas (lower density suburban and outlying). Atlanta is no exception. The percentage of deals in lower density suburban or outlying areas recently increased to 25% from March to May 2024, after averaging 18% from October 2023 to February 2024. (see Table 5). This means investors are procuring or analyzing more deals in outer

areas of the MSA as opposed to central/ core areas and cities. This can be a common market response when inventory is low, although it could also be due to investor competition or saturation in more central, popular areas of the larger market.

HYPERLOCAL

Much of the Atlanta MSA is suburban and has lower density markets. As with any MSA, investors and lenders must do their best to understand a specific location, gathering neighborhoodlevel intelligence on the immediate area, submarket, and investment

dynamics. The metrics to be searched for should be measured at the hyperlocal level to help quantify hyperlocal activity, supply/demand balances, investment activity, and other factors.

Here is a short list of factors that we commonly see as important for Atlanta properties:

Market demand activity, including inventory, renovation activity, and other factors. These are important in basically every hyperlocal area in the country.

Age and historic or development districts—old does not mean historic!

Sometimes borrowers/agents will try to brand properties as “historic” (for old and heavy work needed) or in a “development area” (for rundown neighborhoods). Lenders should not take the marketing at face value and instead uncover whether an old property is actually historic and/or if it’s in a historic area or an area designated for development and revitalization.

Neighborhoods, often drawn with invisible lines, can critically impact property value. These lines might reflect school districts, golf courses/ country clubs, or certain property specs like style/vintage/lot size.

For the subject property and surrounding areas, which asset class (A/B/C/D) dominates the area? And what about for the subject block?

Crime statistics can be a tangible way to evaluate hyperlocal areas, perhaps even with income-level demographics.

UNIQUE DILIGENCE FACTORS

Atlanta has experienced sustained infill redevelopment and renovation for more than 10 years, and we’ve generally found the area to be “analysis friendly” (if that’s a

term!), meaning we haven’t found too many unique pitfalls. Still, there are a few key items that are common for conducting diligence and valuation assessments in Atlanta and the surrounding areas, including:

Multiple and overlapping MLS bodies. Many areas of the MSA are potentially covered by more than one Multiple Listing Service (MLS), so listings can appear in one or both. This is important to be aware of when you conduct valuation assessments because duplicated listings can inaccurately weight property analysis. Work with a platform that has access to all the area databases, ideally one that works to eliminate duplicates. Better still, keep an eye out for duplicate listings.

Finished/unfinished basements. These data fields are commonly incorrect, either intentionally or unintentionally misreported. It’s important to conduct extra diligence on subject properties and nearby comparables with respect to above/ below grade square footage numbers.

A mix of sewer vs. septic. With a wide variety of vintages throughout many pockets of the MSA, it’s important to make sure you understand sewer/septic, particularly for large value-add renovations and/or new construction projects.

Year built/new construction vs. renovation. Sometimes, MLS agents will list properties as new construction when the property has been renovated, or vice versa. This can occur when a misinformed agent inputs information in error, or it could be an intentional misrepresentation. In either case, checking county records can help, although that’s not always an ideal source. Many comps, therefore, require a hands-on analysis to ensure you’re conducting your analysis with the most accurate information. Neighborhood-level factors such as different sides of the train tracks, cemetery

or other factors. Many pockets host a spectrum of asset classes (A/B/C/D) within a relatively close-knit area, and analyzing stats “on paper” or from a simple map can sometimes lead one astray.

Although there’s always so much more to say, this short look into the popular Atlanta MSA provides guidance not just for lenders and investors active in Atlanta but for all lenders. This market-based approach provides an opportunity to see how local, hyperlocal, and unique diligence factors all play an important role in understanding prospective deals and making smart lending decisions.

RODNEY MOLLEN

Rodney Mollen is the founder and CEO of RicherValues, a software and valuation services provider that delivers highquality, comprehensive intelligence for lenders and investors on any residential asset nationwide. Mollen has more than 20 years of experience, including acquiring, managing, renovating, and selling over $1.2 billion in REO and NPLs nationwide from 2008 to 2013 as COO of an Arizona-based investment firm.

Mollen has previous experience with small-cap to Fortune 50 companies as a consultant with Sibson Consulting in Los Angeles. Mollen has also acquired and managed his own private real estate deals for infill residential redevelopment. He began building the technology prototypes for RicherValues in 2017, with a commercial launch in January 2019. Mollen earned master’s and bachelor’s degrees in economics from UCLA.

A First-Hand Account of Our New Fraud Reality

Discover how to safeguard you and your clients by avoiding common fraud tactics in the private lending industry.

ALESONDRA MORA, FLIPCO FINANCIAL

We often live with a false sense of safety when it comes to fraud: We know it can happen, but we don’t ever think it will happen to “me.” The blunt reality is fraud is happening every second of every day.

Private lending is no exception and even more ripe for the taking than ever before.

Not all fraud is a multimillion-dollar scam. Consider this situation that occurs often in companies: A new team member is on the job for the second day at XYZ company. By the end of the day, said team member is on the phone with a major national bank accompanied by HR.

Why? The team member had just purchased and provided $1,000 in gift cards to a scammer. The team member didn’t think she’d be targeted for phishing since her email account was just two days old. She read the email too fast and saw a manager’s name in the email contact preview (versus actually looking at the full email address). The request—a manager requesting gift cards to show appreciation for a borrower—wasn’t out of the ordinary.

And that’s exactly where fraud thrives—in the subtle variances that are overlooked or don’t present

glaring red flags. So much fraud exists because it looks “normal.”

Remember these three words in any financial transaction: Trust, but verify.

FlipCo Financial was founded on the core value of “by investors, for investors.” The founders analyzed the pain points that often killed good deals and created a product that removed funding obstacles. The result is a program that does not require credit checks, personal guarantees, or third-party appraisals or inspections. It is also “doc-lite.”

All this streamlining comes with a higher level of risk tolerance: The very barriers that have been removed for investors act as vetting mechanisms that also protect against fraudulent transactions.

This is where a title company becomes more integral to the funding process. By producing clean title reports, validating borrowers through doc signing and recording, wiring instruction confirmations, and much more, the title company provides a level of security and comfort.

But what if the title company itself is the scam?

Fast forward from email phishing scams involving gift cards to an even costlier

example of fraud, where we graduate to the five- and six-figure club of wire fraud plaguing private lending. The words “wire fraud” are possibly the two most feared words in finance. We’re reminded of its costly potential daily.

So, recently when we received a transactional funding request at Flipco Financial, we followed our

standard practices. We collected our due diligence documents, A-B/B-C contract, responsive title company, clean title report, and call to verify wire instructions. Check, check, check, check.

Transactional funding should be a quick turnaround. Funds never leave the title. Briefly, here’s how the process works: Wholesalers use it to purchase a property

and quickly resell it to an end buyer/ investor (usually within days or a week). Because the wholesaler nearly always has the end buyer ready to go, the funds for the wholesaler’s original purchase never leave title. Instead, they go to title and are sent back to the lender when the wholesaler promptly resells the property to the end buyer. Funded and done.

But, there we were, almost 24 hours out from when funds should have been sent back—and they hadn’t been. After our deep dive following this unfortunate series of events, we pieced together how we got “got.”

The “wholesaler” created a fraudulent title company by stealing the identity of an existing one, going as far as registering

the fake title company address literally across the street from the real one. They stole staff headshots, names, and titles and created coordinating emails and a website.

But what about the property? It was legit! Unfortunately, the actual owner has been dealing with numerous liens being placed on their home by fraudulent lenders as it gets passed from one company to another.

And the end buyer? Non-existent off paper, just like the title company.

There were no glaring red flags in the transaction but rather a combination of multiple low-grade “Oh, that’s normal” variances. We did trust and verify. We followed our process of working with a title company to produce a clean title report and called the title company to verify the wiring instructions. Initial checks on that title company came back clean, because a real, legitimate title company did in fact exist.

Again, the other variances that we overlooked seemed plausible: Because the end transaction of our “wholesaler” to the end-buyer was completed at the end of the day, they told us the accounting person had left already for the day, and the wire would be sent in the morning. Just missing an end-of-date wire cut-off and the final fundings being pushed to the following morning is not uncommon. But when we still couldn’t get confirmation in the morning, the scam came tumbling down. In hindsight, another small clue that something was amiss was the timestamps on the signed documents. They were barely minutes apart—almost instantaneous—as if it was the same person completing the signing (and as it turns out, it was!).

TIPS FOR COMBATTING FRAUD

Here are some key takeaways for better protecting your team against fraudulent transactions.

Validate all parties associated with a transaction with the coordinating licensing board. This can include brokers, title companies, appraisers, inspectors, and realtors. Confirm they are licensed and are in good standing. Also, confirm that the information provided to you matches.

Do not let the fear of losing a funding control the underwriting. In today’s slower market, lenders, loan officers, and brokers alike are holding onto deals much tighter, trying to find workarounds for deals they would have previously passed on.

Leverage your network. Although there is not a universal “Do Not Fund” list any of us can cross reference for new borrowers, we can build a network of collaborative colleagues open to having frank conversations about whether you should work with certain parties.

Validate wiring instructions. How were the instructions provided? Through a secure message or a standard email? Always call to verify wiring instructions before sending a wire. If there is a lastminute change to the instructions, be sure to complete additional verification.

Original copies are the best. Be cautious of borrowers who can only provide screenshots of documents, scans of printed documents, and/ or photos of computer screens.

Know who you’re doing business with. In a digital age, using only text and email can be tempting. Keep in mind,

however, not being able to speak to a new contact via phone or an in-person meeting (if local) can be a flag.

Using document verification or AI underwriting tools does not make you untouchable. You still need internal checks and balances. There are no guarantees with any software.

Trust your gut. In this digital age, it is easy to be lulled into a false sense of security by relying on technology and routine procedures. Yet, the human element—our instincts and due diligence—remains our strongest defense.

By continuing to share our stories and strategies, we can collectively fortify our defenses against the everevolving tactics of fraudsters.

ALESONDRA MORA

Alesondra Mora has been cultivating creative approaches to real estate marketing for the last decade. She’s worked within various aspects of the real estate industry, ranging from real estate brokerages, legal, finance management, active investing to private lending.

Currently, she is director of sales and marketing at FlipCo Financial in Houston, Texas.

Create Your ‘Gold Standard’

Private lenders can ensure quality and mitigate risk by streamlining their loan origination policies and procedures.

EVAN BRODY, REHAB FINANCIAL GROUP, LP

As a lender, whether you’ve been in business for years or are relatively new, you have undoubtedly established policies and procedures spanning multiple departments and impacting all your business functions. These policies aim to ensure the overall quality of loan originations and ultimately protect you (the lender) and your affiliated partners from unacceptable risk, all the while maximizing returns for investors.

UNDERSTANDING THE CHALLENGES AND RISKS IN LOAN ORIGINATIONS

Loan originations involve various challenges and risks. One of the primary challenges is the time-consuming nature of the process. Manual data entry, document verification, and communication between multiple parties can lead to delays and errors.

Borrowers must often act quickly in an ever-challenging and competitive real estate environment, putting pressure on

the lender to close the loan as quickly as possible. Lenders must rely on third-party vendors, and knowing when to order services (e.g., appraisals, inspections, title, etc.) is critical to getting the deal done in the prescribed timeframe. Inefficiencies, repetitive or duplicative work, and challenged communications can result in lost opportunities and increased costs. Another significant challenge is the risk of lending to borrowers who may default on their loans. Evaluating borrowers’

creditworthiness requires careful analysis of their financial history, income, and other factors. Failing to conduct thorough due diligence can lead to a higher risk of defaults, impacting lenders’ profitability. The lender must take a holistic approach when evaluating a borrower’s ability to repay the loan. Understanding both quantitative and qualitative factors and questioning the details when something seems amiss is critical.

In addition, staying in compliance with regulatory requirements is crucial in the lending industry. Failure to comply with them can result in penalties and reputational damage. Keeping track of these constantly changing rules throughout the loan origination process adds another layer of complexity.

Lenders must partner with industry experts and ensure their employees participate in continuing education to understand the challenges in a complex lending landscape.

DEVELOPING AND IMPLEMENTING STANDARDIZED LOAN POLICIES AND PROCEDURES

Developing and implementing standardized loan origination policies and procedures is crucial. Standardization ensures consistency, reduces errors, and improves efficiency. The following are six critical steps involved in developing and implementing optimized policies and procedures:

1 Identify and document current processes. Identify and document the loan origination processes, including capturing the sequence of activities, roles, responsibilities, inputs and outputs at each stage, and critical data points that must be collected and analyzed. This provides a baseline for streamlining and optimizing the processes.

2 Analyze and identify areas for improvement. Analyze the documented process-

es to identify areas for improvement. Look for bottlenecks, duplicated efforts, and manual tasks that can be automated. Engage stakeholders to gather feedback and insights into pain points and potential improvements. Policies and procedures should be living, breathing documents that improve over time.

3 Design streamlined processes. Design streamlined loan origination processes based on the analysis you’ve conducted. This involves eliminating unnecessary steps, automating manual tasks, and integrating technology solutions where applicable. Ensure the redesigned processes align with regulatory requirements and industry best practices.

4 Document standardized policies and procedures. Document the standardized loan origination policies and procedures clearly and concisely. Include step-by-step instructions,

guidelines, and templates where applicable. Make the documentation accessible to all stakeholders involved in the loan origination process

5 Train and communicate. Conduct training sessions to educate stakeholders about the standardized policies and procedures. Communicate the objectives, benefits, and expected outcomes of the streamlined processes. Challenge the end-users to question everything. Address any concerns or questions stakeholders raise to ensure buy-in and successful implementation.

6 Monitor and continuously improve. Establish a monitoring mechanism

to track the effectiveness of the standardized policies and procedures. Collect feedback from stakeholders and measure key performance indicators (KPIs) to identify areas for further improvement. Continuously adapt and optimize the processes based on insights and feedback.

BENEFITS OF OPTIMIZING POLICIES AND PROCEDURES

Optimizing policies and procedures in loan originations offers lenders several benefits. First, efficiency gains can be achieved by automating manual processes and reducing

paperwork. Optimizing policies and procedures with effective technology enables lenders to make data-driven decisions. Lenders can identify trends, assess risk profiles, and make informed lending decisions by capturing and analyzing data throughout the loan origination process. This helps manage risk and enhance profitability while providing an enhanced customer experience that will drive satisfaction and retention.

FIVE SPECIFIC COMPONENTS OF AN EFFICIENT, STREAMLINED PROCESS

An efficient loan origination process comprises several vital components that

work together to optimize the process and reduce risk. These components include:

1 Automated application and data entry. Implementing an online loan application system allows borrowers to submit their applications electronically, reducing the need for manual data entry. Automated data entry eliminates errors, provides enhanced security for personal and private information, and allows for quick and efficient collection of critical, required data.

2 Document management and verification. Using document management systems and digital verification tools enables lenders

to store and verify borrower documents electronically and securely. This reduces paperwork, improves efficiency, and enhances data accuracy.

3 Credit analysis and risk assessment. Thorough credit analysis and risk assessment are crucial in ensuring quality loan originations. Using a credit scoring model, lenders can evaluate borrowers’ creditworthiness and assess the risk associated with extending credit. This helps lenders make informed lending decisions.

4 Compliance checks. Adhering to regulatory requirements is essential

in the lending industry. Automated compliance checks ensure lenders comply with anti-money laundering (AML), know your customer (KYC), and other regulatory obligations, reducing the risk of non-compliance and associated penalties.

5 Streamlined communication and collaboration. Effective communication and collaboration among lenders, borrowers, and other stakeholders are vital for a smooth loan origination process. Using digital communication tools and secure portals facilitates real-time communication and document sharing, reducing delays and improving transparency.

LIQUIDITY SOLUTIONS FOR PRIVATE LENDERS

Fidelis Investors is a dedicated strategic capital partner for private money lenders throughout the United States. Our platform helps lenders, like you, raise capital by e ciently selling loans. Since 2009, the Residential Investment Team has successfully transacted in over $3.0 billion of whole loan purchases

“ ENSURING THAT ONLY QUALITY LOANS ARE ORIGINATED REDUCES THE RISK OF DEFAULTS AND IMPROVES LENDERS’ RETURN ON INVESTMENT."

ENSURING QUALITY CONTROL

Quality control is a critical aspect of loan origination. Accurate and complete data allows a lender to evaluate a borrower’s creditworthiness, understand the value of

the underlying collateral, and ultimately assess the risk of a deal and price it appropriately. Ensuring that only quality loans are originated reduces the risk of defaults and improves lenders’ return on investment. When properly implemented,

the following strategies will help ensure quality control in loan originations:

1 It is essential to conduct thorough due diligence on borrowers. This involves verifying their financial information, employment history, and creditworthiness. By doing so, you can accurately assess the risk associated with lending to them and make informed decisions regarding loans while properly pricing a deal based on each borrower›s profile.

2 Implementing a robust risk assessment process is crucial. This involves evaluating borrowers’ risk profiles by using credit scoring models, analyzing historical data, and considering external

factors. By assessing the likelihood of defaults, you can determine appropriate loan terms and requirements that align with and lower the borrower’s risk level.

3 Compliance with regulatory requirements is of utmost importance. Implementing automated compliance checks and maintaining accurate and up-to-date

records is imperative. This reduces the risk of noncompliance and prevents associated penalties and the significant cost of fraud.

4 Regular audits and reviews of loan origination processes are essential to identify gaps or improvement areas. Lenders should implement a robust

quality control system, completing checks and balances throughout the process, from application to payoff. External auditors can be engaged to assess compliance, data accuracy, and adherence to both internal policies and procedures and outside covenants. Any findings

Checklist for Streamlining Loan Origination Policies and Procedures

Optimizing Standardized Loan Origination Policies and Procedures

 Identify and document current processes.

 Analyze and identify areas for improvement.

 Design streamlined processes.

 Document standardized policies and procedures.

 Train and communicate.

 Monitor and continuously improve.

Components of a Streamlined Process

 Automated application and data entry

 Document management and verification

 Credit analysis and risk assessment

 Compliance checks

 Streamlined communication and collaborations

Ensuring Quality Control

 Conduct due diligence on borrowers.

 Implement a robust risk assessment process.

 Implement automated compliance checks and keep records up-to-date.

 Implement a robust quality control system.

 Invest in ongoing staff training and development.

Technology Options

 Loan origination software

 Digital verification tools

 Data analytics and reporting tools

 Artificial intelligence and machine learning

 Digital communication and collaboration tools

Best

Practices for Monitoring and Optimization

 Establish KPIs.

 Engage stakeholders.

 Conduct regular process reviews.

 Invest in continuous training and development.

 Stay informed and adapative.

should be promptly addressed to maintain quality control.

5 Lastly, invest in ongoing training and development programs for staff. Keeping them updated on industry best practices, regulatory changes, and emerging trends can help eliminate problems before they arise. It is also vital to ensure that all staff is adhering to the policies and procedures required. Provide an open forum for staff discussions to share knowledge. This commitment to continuous improvement ensures that staff remains well-informed and equipped to handle any challenges in the lending process.

From time to time, it may be necessary to extend a loan when the borrower does not pay off the lender by the maturity date of a loan. When it comes to loans on extension, it is essential to assess the duration carefully while providing fair terms to borrowers and adequately considering the lender’s cost of capital. While loan extensions can give borrowers more repayment flexibility, it is crucial to determine when a loan has been extended for too long and why the extension is needed. Prolonged loan extensions may increase the risk of default and foreclosure and ultimately sabotage the lender’s and borrower’s profitability. Lenders should monitor the length of loan extensions and consider implementing measures to avoid potential issues.

Even if a borrower is consistently making timely payments, lenders must establish a transparent process for handling default and foreclosure if the borrower’s financial situation changes or the length and terms of the deal make it untenable for the lender to continue to keep the loan on their books. Stale, dated loans may impact a lender’s ability to recycle

capital, impede a line of credit, and ultimately affect a lender’s ability to make additional profitable loans. By having a predefined process, lenders can minimize the impact of defaults, foreclosures, and other negative consequences resulting from over-extended loans. Insurance coverage status is another factor to consider when dealing with loans on extension. Lenders should regularly check whether the borrower’s insurance policy has expired or is still in effect. Insurance plays a crucial role in protecting the lender’s and the borrower’s interests in case of unforeseen events such as accidents or natural disasters. If insurance has expired, it is crucial for lenders to promptly address this issue and ensure that adequate coverage is reinstated quickly to avoid fraud or lapse of coverage.

For lenders to mitigate the risks associated with loan defaults, data tracking is also essential. Lenders can identify early warning signs of potential defaults by monitoring and analyzing borrower behavior and payment patterns. These warning signs may include a consistent delay in making payments, frequent requests for payment extensions, or a significant increase in debt-to-income ratio. Regular outreach to the borrower to assess credit, income, and assets allows the lender to stay ahead of significant changes in a borrower’s situation. Recognizing these signals enables lenders to take proactive measures to address the problem, such as contacting the borrower to discuss potential solutions or offering alternative repayment plans, loan modifications, or “outside the box” alternatives for repayment.

As for whether and when to re-run credit for borrowers, it depends on various factors.

“

WARNING SIGNS [OF DEFAULT] MAY INCLUDE A CONSISTENT DELAY IN MAKING PAYMENTS, FREQUENT REQUESTS FOR PAYMENT EXTENSIONS, OR A SIGNIFICANT INCREASE IN DEBT-TO INCOME RATIO."

Lenders may re-run credit at specific intervals, such as annually or every few years, to assess the borrower’s current financial situation and creditworthiness. However, in cases where there are early warning signs of potential defaults or significant changes in the borrower’s financial circumstances, lenders may need to re-run credit earlier than planned. Doing so enables them to make informed decisions about the borrower’s ability to fulfill their loan obligations and take appropriate actions (e.g., modifying repayment terms or initiating collections procedures). Lenders need to make sure, however, they have the written authority to re-run credit from the borrower before taking this step.

TECHNOLOGY OPTIONS FOR STREAMLINING PROCESSES

Technology solutions play a crucial role in streamlining loan origination processes. Here are some fundamental technology solutions that can be implemented:

1 Loan origination software. Use loan origination software that automates the loan origination process, from application submission

to disbursement. This software streamlines data entry, document management, compliance checks, and communication, resulting in faster and more efficient loan origination and providing complete transparency to lenders and borrowers throughout the process.

2 Digital verification tools. Implement digital verification tools that securely verify borrower documents, such as income statements, identification documents, and bank statements. These tools automate the verification process, reducing manual effort and improving data accuracy.

3 Data analytics and reporting tools. Use data analytics and reporting tools to analyze loan origination data, identify trends, and measure key performance indicators. This helps in making data-driven decisions, optimizing processes, and managing risk.

4 Artificial intelligence (AI) and machine learning (ML). Implement AI and ML technologies to automate credit scoring, risk assessment, and decision-making processes. These technologies can

analyze vast amounts of data and make accurate predictions, improving loan origination processes’ efficiency and accuracy while minimizing risk.

5 Digital communication and collaboration tools. Use digital communication and collaboration tools (e.g., secure portals and messaging platforms) to facilitate real-time communication and document sharing between lenders, borrowers, and other stakeholders. This reduces delays and improves transparency.

BEST PRACTICES FOR ONGOING MONITORING AND OPTIMIZATION

Ongoing monitoring and optimization of loan origination policies and procedures are crucial for maintaining efficiency and quality control. Here are some best practices to follow:

1 Establish key performance indicators (KPIs). Define and track KPIs related to loan origination processes (e.g., turnaround time, error rates, and customer satisfaction). Regularly monitor and analyze these KPIs to identify areas for improvement.

2 Engage stakeholders. Continuously engage stakeholders, including lenders, borrowers, investors, and internal teams, to gather feedback and insights into the loan origination processes. Incorporate their feedback to improve processes and address pain points.

3 Regular process reviews. Review loan origination processes to identify gaps, inefficiencies, or emerging risks.

Engage internal or external experts to provide an objective assessment and recommendations for optimization.

4 Continuous training and development. Invest in training and development programs for loan origination staff to keep them updated about industry best practices, regulatory changes, and emerging technologies. This helps them maintain a high level of expertise and adapt to changing requirements.

5 Stay informed and adaptive. Keep abreast of industry trends, regulatory changes, and emerging technologies in the loan origination space. Regularly assess the relevance and effectiveness of existing policies and procedures and adapt them as needed.

THE IMPORTANCE OF CONTINUOUS IMPROVEMENT, DATA, AND ADAPTATION

Streamlining policies and procedures in loan originations is essential for ensuring efficiency, quality, and risk mitigation. Lenders can achieve efficient loan originations while minimizing risks by implementing standardized processes, using technology solutions, and adhering to robust quality control measures.

Continuous improvement and adaptation are critical in the ever-evolving financial landscape. Regularly monitoring, reviewing, and optimizing loan origination policies and procedures ensures lenders stay aligned with industry best practices, regulatory requirements, and changing customer expectations. In addition, knowing and using critical data metrics

allows lenders to make informed decisions while minimizing outsized risk.

Lenders can position themselves for success in a competitive market while minimizing risks and maximizing profitability by striking the right balance between streamlining loan originations and ensuring quality.

Evan Brody is the controller at Rehab Financial Group, LP. Before joining RFG, Brody held several senior accounting and finance positions in the real estate and lending industries. He also spent significant time with a large family office in New York. Brody is responsible for all servicing and accounting functions, including tax and audit, loan servicing and draw management, budgeting, reporting, forecasting, cash management and treasury, benefits and human resources, as well as day to day vendor relationships.

Brody is a member of the AICPA and is a licensed certified public accountant in both New York and Pennsylvania.

EVAN BRODY

VENDOR GUIDE

If you’re looking for a service provider who has real experience working with private lenders, the Private Lender Vendor Guide is your starting point.

In each issue, we publish a cross section of specialties. These providers do not pay for inclusion. Instead, we vet them by reviewing their product offerings and talking to private lender references.

AAPL members can access all vendors online at aaplonline.com/vendors.

Accounting

Business Consultants

Default & Loss Mitigation

Legal Services

Warehouse Lenders

PushGO LLC

www.pushgollc.com (863) 284-3148

Appraisers & Valuations

Capital Providers

Data

Environmental Services

Lead Generation

Note Buying/Selling

Brokers

Funds Control

Loan Origination Services

Loan Servicing

CFSI Loan Management 

www.ThinkCFSI.com (855) 344-2374

Products & Services: Construction financing support, feasibility, funds control, inspections

BuildWallet

www.buildwallet.com (919) 985-3032

Quick Draw Fund Control, Inc.

www.quickdrawfundcontrol.com (909) 986-7405

Alfred Tech 

Secondary Specialties: Loan servicing, investor reporting/management

www.alfred.tech (424) 230-3080

Products & Services: Software for loan origination, loan servicing, and investor/fund management

Bridge Loan Network 

www.bridgeloannetwork.com (860) 432-9700

LendingWise 

Secondary Specialty: Loan Servicing

www.lendingwise.com (888) 400-6516

Products & Services: End-to-end loan origination, management and CRM software for private lenders and brokers for commercial and residential loans. Manage borrowers, brokers, investors; set up loan applications; auto-generate and send e-sign ready documents; collect documents via cloud portal; manage loans with milestones and stages; auto ACH debit from borrowers, auto credit to investors, draw management with funds control.

Development Cost Estimates

Education Fund Administration Insurance Marketing

Recruitment & Headhunting

Liquid Logics 

Secondary Specialties: Loan Servicing, Lead Generation

www.liquidlogics.com (866) 547-8430

Products & Services: Origination and servicing for private lenders, with a platform that includes a borrower portal, CRM and servicing. The Marketplace platform brings together investors, lenders, and borrowers.

Mortgage Automator 

Secondary Specialty: Loan Servicing

www.mortgageautomator.com (844) 916-1668

Products & Services: Loan origination and servicing software for private lenders, including borrower portals, automated document generation and communication, payment tracking and processing, fund and investor management, reporting and much more.

LOAN ORIGINATION SERVICES

The Mortgage Office 

Secondary Specialties: Loan Servicing, Accounting www.themortgageoffice.com (800) 833-3343

Products & Services: Loan Origination: Online loan application portal, pull credit reports, loan document generation and e-signature capability, create loan process workflow, manage loan pipeline and forecasting, integration for Mortgage Call Report. Loan Servicing: Unlimited funding sources per loan, track loan charges and advances, process payments, generate emails for borrower bills and statements, document storage, escrow administration features, letter writing, e-file tax forms.

Western Technologies Group, LLC 

www.wtgroupllc.com (732) 754-5857

Products & Services: Western Technologies Group is the premier provider of flood determination reports for professionals involved in real-estate transactions. Our clients include banks, title agencies, mortgage lenders, insurance companies, private lenders and more. WTG raises the bar in the industry, with data reports that deliver superior accuracy, and expert support and guidance from our team.

LOAN SERVICING

FCI Lender Services 

Secondary Specialty: Fund Administration www.myfci.com (800) 931-2424

Products & Services: FCI Lender Services, Inc. (FCI) is a leading national private money servicer providing a variety of services for lenders of any size; also one of the nation's oldest specialty loan servicers. CI has the distinction of being a national servicer that is rated by Fitch, with SOC 1 (SSAE 16) and MBA USAP audits assuring reviewed compliance and servicing processes for your safety. Clients include Individuals, private money investors, non-QM lenders, investment companies, private money brokers, hedge funds, credit unions and banks.

GoDocs

Loan Servicing 

www.GoDocs.com (949) 640-9081

Products & Services: Cloud-based loan closing document preparation software for commercial, multifamily, and 1-4 unit residential properties.

Servicing Pros Inc 

www.ServicingPros.com (877) 313-0095

Products & Services: 1. Loan servicing for various types: new notes/loans, fixed-rate first or second mortgages, seller carry-back financing, installment sale financing, impound/escrow servicing, private money loan servicing, specialty loan servicing, full-service suite solutions including payment collection, customer service, statements, payoffs, tax and insurance monitoring, managing delinquencies, distributions, and more. 2. Client base: individuals, private money investors, non-QM lenders, investment companies, private money brokers, institutional mortgage investors, private lenders, parties retaining servicing responsibilities for loans they originate and sell; brokers, fund managers, and capital providers 3. Additional services: online portals for brokers, lenders and borrowers; construction/bridge/holdback draw control, asset management for institutional mortgage investors, private lenders, and parties retaining servicing responsibilities for loans they originate and sell.

Superior Loan Servicing 

Secondary Specialty: Default & Loss Mitigation

www.superiorloanservicing.com (818) 483-0027

Products & Services: We do loan servicing for private lenders, brokers, fund managers, and capital providers. We offer a full service suite of loan servicing solutions including: Payment collection, customer service, monthly statements, payoffs, taxes, insurance monitoring, lender and borrower online portal, delinquencies, distributions, and more.

BSI Financial Services

www.bsifinancial.com (972) 347-4350

Essex Financial Services LLC www.essexfs.com (678) 770-5551

Evergreen Note Servicing www.notecollection.com (866) 358-6683

Fileinvite www.fileinvite.com (628) 201-0083

Land Gorilla www.landgorilla.com (805) 250-1976

Note Servicing Center, Inc. www.noteservicingcenter.com (800) 646-3445

The Private Lender Network www.thepln.com (512) 637-2841

If you are an industry vendor, nominate your company for this guide here:

LOAN ORIGINATION SERVICES (CONT.) LOAN SERVICING (CONT.)

The Key to Scaling a Mortgage Fund: Building the Right Team

A team of specialists is critical.

BROCK VANDENBERG, TALIMAR FINANCIAL

Ihave had three “ah-ha” moments during my journey in the private lending industry. The first was when I closed my first private money loan and recognized the opportunity in the industry. The second was when I made the transition from a trust deed platform to a mortgage fund platform. The third, which I will highlight here, is when I recognized that running a mortgage fund is very different from running a trust deed platform.

I funded my first private money fix-and-flip loan in 2008. The private equity fund I had been working for the prior six years had recently become a casualty of the housing collapse. Looking for my next opportunity, I randomly met a real estate investor at a mixer. He told me about how he was buying bank-owned properties at a discount and looking for capital to fund his next purchase. That kicked off my first hard money loan.

Over the next 12 years, I built a private lending company that specialized in funding fix-and-flip and bridge loans using capital from private investors. We built systems that efficiently

originated, processed, funded, and serviced our loan portfolio. The systems we developed worked well. They worked so well that we quickly recognized that we could not sustain the model.

When we launched our mortgage fund in 2020, the idea was to apply the same processes we developed through our trust deed platform. At the most basic level, funding a loan requires origination, underwriting, capital raise, closing, and servicing. The thought was with a mortgage fund, we could eliminate the per-loan capital raise and provide a much smoother close, eliminating the back and forth with the various parties in a loan closing.

After launching the mortgage fund, I quickly recognized the processes and skills required to manage a mortgage fund were much different from a trust deed platform. I found the company had split into two distinct companies. One side was the mortgage fund, which included raising capital, fund management and accounting, reporting, investor correspondence, and other tasks. The other side

was the lending platform, which included loan origination/underwriting, loan closing, and loan servicing. To effectively manage both required a team of specialists who could execute within each function and, most importantly, take me out of the day-to-day.

I spent the next month drafting each major function of a mortgage fund and the ideal skills required for each. I concluded that the main components of a mortgage fund were loan origination, underwriting, closing, servicing, investor relations, accounting, and marketing.

Again, as I look back on my journey in the private lending industry and the three major “ah ha” moments that brought me where I am today, I realize each step required a very different set of processes and skills. As I scale our mortgage fund, I constantly test new ways to make the process more effective to ensure we meet our No. 1 goal: to exceed the expectations of both borrower and investor clients.

THE GOLD STANDARD

AND MOST WIDELY USED BUSINESS

About Lightning Docs

Lightning Docs offers a fully automated, cloud-based loan document solution.

Its brief, interview-style questionnaire allows each set of documents to be tailored to your exact terms with no redraw fees or contract period.

Documents available in all 50 states

Easily customizable to fit your needs

Easy to access and copy old files

No redraw fees or contract period

Capital markets approved

Securitization friendly

Many LOS platform integrations

Create any business purpose loan (Bridge, DSCR, fix-and-flip, and many other product types)

ARM, interest only, partial amortization, and all other amortization types

Join us for the 15th year as we bring together owner-operators, executives, and decision-makers for the industry’s premier education and networking conference. AAPL Certification Courses | VIP Nightclub Reception Networking Breakfasts | 15+ Sessions & Panels | Private Lender Roundtables Packed Vendor Hall | Networking Reception | After Party