Private Lender by AAPL

MARKET TRENDS

The Coronavirus and You

ACCOUNTING Non-Performing Notes

CORPORATE RESPONSIBILITY & ETHICS Preventing Borrower Scams

The Official Magazine of AAPL | Spring 2020

LENDER LIMELIGHT

Michael Mikhail Wanderlust Gave Him Focus

SPRING 2020

1

Rehab to Rental

Take It Down... Bridge The Gap

Build Wealth

No Bait and Switch, No Teaser Rates, No Catch.

Need a No-Money Down Fix-And-Flip Funding Solution?

Need time to season your flip to lock-in the a long-term rate?

Are you trying to build wealth through your rental portfolio?

LET US HELP!

% TAKE IT DOWN

BRIDGE THE GAP

BUILD WEALTH

• 100% Funding Up to 70% ARV • 10% Interest • 3 Points Rolled In • 9-Month Term

• 100% Funding Up to 70% ARV • 9% Interest • 2 Points Rolled In • 12-Month Term

• Up to 85% LTV • Rates Starting @ 6.25% • 1.0x DSCR • 5/1 ARM to 30-Year Fixed • 2 Points Paid At Closing

Your business is building wealth through real estate. Our business is providing efficient capital to help fund your rental portfolio. We can help you take it down, bridge the gap and build long-term wealth in your rental portfolio! Contact us today!

APPLY NOW: (866) 441-0223 rental@rescappartners.com www.rescappartners.com

2

PRIVATE LENDER

RESIDENTIAL CAPITAL PARTNERS

CONTENTS

SPRING 2020

26

06 BUSINESS S TR ATEGY

0 6

W ha t Real E s t a te Inves tor s

Pr i va te Lending Proces s

2 2

2 6 T he C oronav ir us & You

M ACRO TRE NDS

Pr i va te Lender Ou t look

30 CORPOR ATE RESPONSIBILIT Y & ETHIC S 3 0

68 M ak ing a L as t ing

72

E LEC TION IMPAC T S

Impres sion

Bes t Pr ac t ices for Wr i t ing a St and - Ou t C all to Ac t ion

78 TECHNOLOGY

C andida tes

78 T he Full y Digi t al Mor tgage

8 2

N ONPE RFORMING NOTE S

A Model for Succes s wi th Michael Mik hail

R enova ted Mul t i f amil y

Proper t y in N ew Or leans Flooded wi t h Leas es

Makes H eadway

C RY P TOJACK ING

Protec t ing Your Busines s Agains t Cr y ptojac k ing

Designing Nonper for ming

56 C A SE S TUDY

C A LL TO AC TIONS

T he U. S. Elec t ion

50 LENDER LIMELIGHT

Pr i va te Lender Sc am to K now

Note Funds

THIC S E

A ler t: W ha t You N e e d

mi t tee Sees as t he Top

44 ACCOUNTING

22 MARKET TRENDS

68 MARKETING & SALES

W ha t A A PL’s E t hic s C om -

40 LEGISL ATION

3 Way s to Us e T hird -

Improve Your Busines s

THIC S Q& A E

Pr i va te Lending Today

S TR ATEGIC PA R TNE RSHIPS

Par t y Pla t for ms to

88

E t hic al Challenge Fac ing

PE RSPEC TI V E

t he Pain Point s of t he

3 6

T he C os t of Wai t ing

10 I N V E S TOR

16

I N V E S TME NT V E HICLE S

A ren’ t Telling You A bou t

50

88 SPECIAL FEATURE

M ov ing Up Female

93 RESOURCE GUIDE 98 L A S T C ALL

T he Mos t Impor t ant Par t of t he Resume wi th B en Fer tig

58 LEGAL

58 G e t Read y for CCPA

6 4 T he Fu t ure of t he CFPB is a t St ake

SPRING 2020

3

YOU’RE

INVITED Join us for the 11th year at the largest national private lender event from the industry’s oldest and largest association. 2020 will bring you 2 days of packed sessions, 60+ exhibitors and 500+ attendees with whom to network and learn.

2020 CONFERENCE ACTIVITIES AAPL Certification Courses • VIP Nightclub Reception Catered Networking Breakfasts • 15+ Sessions & Panels Crowded Vendor Hall • Speed Networking Networking Reception • AAPL Official After Party

NOVEMBER 15 - 17, 2020

LAS VEGAS EARLY-BIRD REGISTRATION NOW OPEN

AAPLCONFERENCE.COM

4

PRIVATE LENDER

FROM THE CORNER OFFICE

YOUR ASSOCIATION UPDATE As we settle into 2020, we at your friendly American Association of Private Lenders continue our dedication to our three pillars: ethics, advocacy and education. Here’s what we’ve been up to during the past quarter.

EDDIE WILSON CEO, AAPL

LINDA HYDE

Managing Director, AAPL

KAT HUNGERFORD Executive Editor

KELLY SCANLON Copy Editor

SPRINGBOARD CREATIVE Design

CONTRIBUTORS

Nate Ashley, Katie Bean, Edward Brown, Ben Fertig, Tom Hajda, Kat Hungerford, Sam Kaddah, Ruby Keys, Tae Kim, Erica LaCentra, Beeta Lecha, Melissa Martorella, Susan Naftulin, Jadon Newman, Caleb Nissley, Sanjay Prajapati, Alex Shvaeyetsky, Rob Sobers, Nancy Wallace-Laabs,

Ethics One of the largest benefits we provide to our members is helping to safeguard their reputations. Borrowers call us daily asking us to verify membership because they trust what AAPL— and by extension, our membership—stands for. Read about what we do to protect your reputation from scammers on page 30. Our Ethics Committee weighs in on the biggest challenges facing private lenders in this area on page 36.

Advocacy Due to the COVID-19 outbreak and closure of Capitol Hill, we are postponing our 2nd Annual Day on the Hill to this fall. The private lender and real estate investor delegation will split into groups to attend meetings with the offices of senators and congresspeople to talk about issues with HMDA, S.A.F.E. Act implementation, and Opportunity Zones.

If you are interested in joining the delegation, more information and signup is available at aaplonline.com/doth.

COVER PHOTOGRAPHY

Education We’ve said this before, but AAPL members can now access Certified Fund Manager courses online at aaplonline.com/cfm.

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.

Data from our AAPL/Zelman Private Lender Survey will provide untold learning into the size and scope of the industry, while also allowing lenders to benchmark their products and operations against the market for the first time. Sign up to respond at aaplonline.com/industry-survey.

Ryan Rose

SUBSCRIPTIONS

Visit www.facebook.com/aaplonline or email PrivateLender@aaplonline.com.

BACK ISSUES

Visit aaplonline.com/magazine-archive, email PrivateLender@aaplonline.com, or call 913-888-1250.

For article reprints or permission to use Private Lender content including text, photos, illustrations, logos, and video: E-mail PrivateLender@aaplonline.com or call 913-888-1250. Use of Private Lender content without the express permission of the American Association of Private Lenders is prohibited.

Finally, lenders can educate themselves on the service providers who specialize in working with private lenders with our Private Lender Resource Guide. In this issue, readers will find Appraisals & Valuations, Lead Generation, Note Buyers/Sellers and Raising Money. Turn to page 93 to start your search. AAPL members can find all categories online at aaplonline.com/resource-guide.

As always, we appreciate the support of our members, sponsors and advertisers.

Your dollars have helped us achieve some very big goals.

LINDA HYDE

Managing Director, American Association of Private Lenders

www.aaplonline.com Copyright © 2020 American Association of Private Lenders. All rights reserved.

SPRING 2020

5

BUSINESS STR ATEGYÂ

6

PRIVATE LENDER

The Cost of Waiting Investors weigh the pros and cons of individual deeds of trust versus funds.

the investor should the investor desire to sell. In addition,

since bonds are traded, the price upon a sale may produce a loss of principal.

DEEDS OF TRUST Deeds of trust are considered “alternative investments”

because they are not freely negotiated as stocks and

by Edward Brown

bonds are. Thus, they are considered illiquid.

Most investors in the alterna-

tive space desire to lend short term—less than five years.

I

nvestors choosing

based alternative real estate

ual deeds of trust

best kept secret in investing.”

to invest in individ-

lender, called this period “the

instead of a fund

However, as interest rates

have been frustrated over

the past year, especially in California. Just after the

Great Recession, individual

deeds of trust not only were plentiful but also earned

a relatively high rate and at a conservative loan to

value. Thus, a triple threat existed, so to speak, that

attracted investor capital: a high yield, conservative

underwriting and a variety from which to choose.

Mark Hanf, president of Pacific Private Money, a California-

dropped, investors desiring a fairly high rate of return had to look to “alternative investments,” as they are called.

Bank rates for depositors was close to zero. T-bills, T-notes and T-bonds did not produce a much higher yield. Corporate bonds could produce a better distribution rate than banks or Treasurys, but there were a few risks. Corporate bonds trade similar to stocks but not nearly at the same volume; thus, the liquidity of many corporate bonds does not give as much assurance to

Generally, they do not want to tie up their money for a long

time and in an illiquid investment. The problem, however, with investing in short-term loans is that they turn over

quickly due to their nature.

Most borrowers either sell the property or refinance.

The usual premise for a bor-

rower using alternative financ-

do, it is usually six months or less. Alternative lending rates are much higher than a bank would charge, so there is an incentive for borrowers to pay these short-term loans as fast as possible. This leaves the lender with the problem of finding another loan to fund.

If no loan is found, these paidoff funds sit idle rather than earning a decent interest rate.

Quality individual loans that pay interest at 8% or more are getting harder to find, as this “best kept secret” is no longer a secret. Competition for these loans has driven rates down from where they hovered at about 10% just a few years ago. This is known as yield compression, and it is based on the laws of supply and demand. The more supply (money available, in the case of lending), the lower the price.

FUNDS AS AN ALTERNATIVE

ing—compared to a conventional loan—is the speed:

A private lender can fund

faster than a bank. Another reason for the need for

alternative financing may be due to a glitch in credit by

the borrower, but these two

issues—speed and credit—are usually short-term problems.

Here is where we discuss the cost of waiting. Many alternative lending companies have started a fund, wherein the fund allows investors to buy shares/units like a mutual fund. The fund makes the loans, and the investors enjoy

Most loans do not carry a

prepayment penalty, or if they SPRING 2020

7

BUSINESS STR ATEGY

“ The dilemma facing investors who desire to own individual deeds of trust—as compared to investing in a fund—is the fact that the fund also faces the same issues regarding borrower payoffs and idle money waiting for a new loan opportunity.”

$7 billion funded.

60,000 units financed.

Experienced. Efficient. Certain.

One-stop shop for investment loans Rental Portfolio Build to Rent Credit Lines

Single Rental Property Fix and Flip CRE / Multifamily

corevestfinance.com/aapl | 888.808.5950

8

PRIVATE LENDER

the benefits of the interest rate charged to the borrowers.

The cost to the investor is usually no more than 2%. This 2% may be a management fee or may be divided between a management fee and a service fee (for servicing the loan payments). The fund has a licensed broker who makes the loans and charges the borrower in terms of points— either keeping these points or sharing them with the fund.

The dilemma facing investors who desire to own individual deeds of trust—as compared to investing in a fund—is that the fund also faces the same issues regarding borrower payoffs and idle money waiting for a new loan opportunity.

Thus, when a loan situation is presented to the fund, the fund will make the loan if it has money available. That is almost always the case in today’s lending environment since borrowers are constantly refinancing and competition is stiff.

Fund managers are constantly looking at the loan scenarios presented, and some loans are given a downright “no” answer due to their risk. If the loan is too risky in the manager’s opinion or the loan does not fit the criteria of the fund’s

underwriting guidelines (e.g., the loan request being a third mortgage), the fund manager may then present this loan to individuals who are interested in owning loans in their own portfolio versus investing in a fund where the manager uses discretion as to which loans should be in the fund.

Since the fund’s manager wants to give the highest yield with the lowest risk to the fund, the loans that are presented to individuals are not quite the quality caliber that the individual investors have been accustomed to in the past.

Thus, individual investors may be presented with several loans with which to invest but which do not fit their investment strategy criteria. Many individual investors remember the Great Recession and are reluctant to lower their standards of lending due to the fear of losing money.

THE DILEMMA So, individual investors face a dilemma. Do they lower their standards and take on more risk? Or, do they let their money sit idle, earning no interest while waiting for a loan that needs capital?

The other choice is for the individual investors to keep standards high and accept a

file bankruptcy. Although the collateral may cover the loan, bankruptcies can take years to resolve. During this time, the lender may not receive any interest payments. The lender may get “crammed down,” meaning that a bankruptcy judge changes the interest rate on the loan to a lower rate.

The lender hires an attorney. The judge may or may not allow all the legal fees the lender has incurred to be recovered in the bankruptcy. much lower rate of interest.

In some cases, loans charging borrowers in the 6% range are not uncommon if they are of high quality (e.g., the borrower has a FICO score in the high 700s or the loan to value of the collateral is under 40%).

last (e.g., subject to the sale or

The decision these investors must make is whether it’s better to invest in a fund where the distributions are usually above 7% in today’s market and where the money never sits idle. Most funds have a lock-up period in which investors cannot access principal for at least one year.

This should not be problematic, as investors willing to invest in an individual loan would most likely have to wait more than a year to get the money back because the loan terms dictate how long the loan will

many cases, individuals are

refinance of the collateral).

Individuals desiring to invest

in loans that earn 7% will only

earn the full rate if their money is always working instead of sitting as idle funds waiting for a new loan to fund. In

finding that their money is

sitting idle for much longer

than they anticipated because

they are not willing to lend on

loans that are being presented to them. Shrewd investors

realize that accepting a lower quality loan, especially at a

lower rate than they desire,

will cost them in the long run.

Problem borrowers may cost the lender time, money and

Individual investors must determine whether these potential problems are worth choosing the loans to invest in or having a fund manager deal with these issues. People who invest in a mutual fund that invests in stocks are basically handing the decision-making process over to the manager of the mutual fund to choose the stocks. That’s not too much different than investing in a fund that makes real estate loans.

As time goes on, if the real estate lending market stays competitive, individual investors will continue to see fewer quality loans at potentially lower rates. This will continue to present problems for investors who want to stay the course of investing in individ-

ual loans instead of investing in a fund that matches the investor’s objectives regarding quality of loans, perpetuation of money continually working and a desired rate of return. Many investors may choose to change course and invest in mortgage funds, as the cost of waiting proves to be too much for the individual lender to bear. ∞

ABOUT THE AUTHOR

EDWARD BROWN Edward Brown is in the investor relations department at

Pacific Private Money and is

host of the long-running radio show “The Best of Investing.”

He has published multiple

works, appeared on CNN and has served as chairman of the Shareholder Equity Commit-

tee protecting 29,000 share-

holders in a $500 million REIT. Brown is also a recipient of a prestigious MBA Tax Award.

aggravation. Some borrowers

SPRING 2020

9

BUSINESS STR ATEGYÂ

10

PRIVATE LENDER

WHAT REAL ESTATE INVESTORS AREN’T TELLING YOU ABOUT THE PAIN POINTS OF THE PRIVATE LENDING PROCESS

by Nancy Wallace-Laabs

SPRING 2020

11

BUSINESS STR ATEGY

Working with private lenders has allowed me to scale my real estate investment business faster by leveraging OPM. An established history with private lenders has let me get deals done that would never have come to fruition otherwise.

But there are pain points. My gosh, have there been pain

points. Here’s what I wish lenders would take to heart about

how they run their businesses.

PAIN POINT 1 LACK OF FOLLOW THROUGH

to a private lender with the highest accolade you can give: investor-friendly. The lender advertised fast money with the ability to roll the note into a longer product for rentals.

My property had just gone under contract, set to close in 17 days. The property was in a highly appreciating and

As any good real estate investor

desirable neighborhood, in

of the essence. When I pur-

repair budget of less than

largest advantages I can offer

in an area with low days on

fast—pay cash, close quick.

was to fix-and-flip. Based on

business afloat, so I look for

right around $45,000. We had

within 7 to 10 business days. If

Eight days before closing I

or private lender knows, time is

great condition and with a

chase a property, one of the

$10,000. The property was

a distressed seller is that I act

market, so our exit strategy

Quick turnaround keeps my

comps, our profit would be

lenders who can fund deals

a hot property, and we knew it.

you tell me this is how you roll, that’s how your process needs to work. All too often I find

that “7 to 10 days” means “only perfect, blue-sky scenarios

that never happen in reality.”

As an example, a fellow real estate investor referred me 12

PRIVATE LENDER

still had not heard back from the lender about the closing’s status or approval. When I followed up, I hit Problem No. 1. They said I had to be preapproved for their conven-

tional funding before doing the hard money funding!

Hello! As a real estate investor, I can’t remember the last time I was able to qualify for conventional lending. I don’t even try anymore. Had they been upfront about their process, I would have immediately moved on to another private lender contact.

expect. (A typo? I still think it

Later that day, I received a preapproval letter, along with this response: “You need to understand I’ve been sick and barely limping by.” Had the private lender communicated the circumstances (a onesentence email would have done me just fine), I would have— once again—found another lender with whom to close my deal. That’s Problem No. 2.

closing, there was no time to

had to be a typo.) The lender

took the appraisal as gold and

would not work with me. There was no time to dispute it, and the seller would not extend

closing because the backup

offer was higher than mine.

At less than 24 hours to

find another lender. I termi-

nated the contract and lost my earnest money, plus an

expected $45,000 in profit.

Oh, I could have still used

the lender, but it would have

meant bringing $50,000 to the table instead of the agreed-

upon $23,000. My bottom line would likely have looked OK

even with the additional funds.

Time passes. Three days before my closing, the lender finally sends out the appraiser. The lender tells me it will not be an issue getting the appraisal turned around quickly. Usually when I hear this, I think same day or next day and that the lender has done other due diligence on the property so that the appraisal is almost icing.

Shame on me for assuming, because this is—you guessed it—the start of Problem No. 3.

But I had hit Problem No. 4:

Less than 24 hours before closing, the appraisal comes in.

It’s $20,000 less than what the lender and my own 15+ years of experience as a real estate broker and investor led me to

a buttoned-up process, clear

I was no longer willing to do business with this lender.

While the unexpected can and will happen, the sum is that

this was a lender who was not remotely prepared to fulfill

their 7- to 10-day closing prom-

ise. At any point in the process, the lender should have had the

follow-through that would have allowed the deal to either move forward or let me find a new lender. Fast closings require and tactful communication

if there are delays, and some flexibility if there are otherwise overwhelming details

that point to profit all around.

PAIN POINT 2 NO BIG-PICTURE VIEW When I have the time, I’ll

shop my deals to multiple

private lenders. Right now,

I’m working with three private money lenders who each

“When all else is similar, I’ll choose a lender who won’t bring a deal to a grinding halt over pennies.”

calculate points and interest payments a bit differently,

but their end results differ by

Sometimes I’ll work with peo-

potential lender how profit is

across lenders, it’s not pennies

ple who have capital—gener-

calculated, I took the tradi-

that are going to impact my

ally via self-directed IRAs—but

tional approach of rounding

decision. The working relation-

who are new to private lending.

up or down to minimize errors

ship certainly will though.

While showing one such

since funds were being paid

pennies. With terms so similar

back to multiple investors. The new lender’s biggest gripe?

“8% of $20,000 is $1,600 per year or 133.33. You have it down as $132 so it’s short each month. That’s $5.94 loss of funds over the duration of the 18-month loan.”

While the new lender gets a pass— at least he’s detail-oriented and conscientious!—I’ve run into similar issues with experienced lenders who miss the forest for the trees. When all else is similar, I’ll choose a lender who won’t bring a deal to a grinding halt over pennies.

OPTIMIZE PERFORMANCE

The advisory, assurance, and tax professionals at CohnReznick work to understand your strategic objectives, helping you optimize fund performance and manage risk.

Are you ready to achieve your vision? Let’s get going.

Visit us at: cohnreznick.com/industries/financial-sponsorsand-financial-services

SPRING 2020

13

BUSINESS STR ATEGY

PAIN POINT 3 MONEY-GRUBBING AT TERM RENEWALS We’re all in the business of making money. I don’t begrudge lenders their points. But one practice that makes me grind my teeth is charging excessive points at term renewal. Yes, I know that you offer 12-month term and six-month term loan products.

There was a reason I chose six months: I didn’t think I’d need 12 [tongue-in-cheek]. But when my six-month note suddenly needs another 60-90 days, making me pay more than I would have on your 12-month loan product feels like moneygrubbing. (Because it is.)

While some fee makes sense (1/2 point anyone?), duplicating the original 1-2 points does not, as you don’t have the original underwriting and operational costs to consider. When the circumstances warrant, it may also make sense to just extend the note on the same payment terms, charging points and/ or higher interest only if the real estate investor surpasses the extension expiration date.

It’s hard for me to bring repeat business or build relationships with lenders who charge excessively at renewals, because they have proven there’s no such thing in their world.

14

PRIVATE LENDER

PAIN POINT 4 NICKEL-AND-DIMING ME If I am paying 2 points and 10-12% or higher for your money, please roll your fees into a lump sum. While I recognize that this amounts to the same thing to my bottom line, seeing a long column of fees on the settlement statement or loan origination sheet feels like nickel and diming. Banks do it because they must. That’s why I prefer private lenders—you have more freedom in how you go about things. Additionally, this freedom would allow a lender to do one better: pay your own fees from the points.

As an example, if you are a self-directed IRA account holder using your capital to fund private loans, if I’m paying 2 points up front, I would ask that you pay the $30 wire fee.

Perception is everything, and lenders who charge fee upon fee seem less on the up-and-up than lenders who keep fees to a minimum.

PAIN POINT 5 NOT LETTING ME BUILD TRUST Like many real estate investors, I am a relationship-seeker.

There’s nothing worse than

demonstrating to a lender that you know what you’re doing, think you’ve given them everything they need and then have them tell you there’s one more thing. Then one more thing.

Then one more thing—until I feel nitpicked half to death.

As an example, I was approached by a self-directed IRA account holder who had money he was looking to lend but had not done so before.

I educated him on the risks and rewards of lending and the best methods to go about it. I provided several private lender references as well.

In addition to all the standard documents private lenders use to protect their funds, he wanted a legal document that guaranteed him his money back. While some of this was his inexperience, it’s also demonstrative of the kind of person who should not be a lender: I bent over backward for him, but he was never going to trust me enough—or extend me the same courtesy.

Then there are the lenders with whom I’ll successfully complete a deal, bring another one to the table, and who will still treat me like they don’t know me from Adam. If I went through the trenches with you, unless it went horribly and was all my fault, that should count for something. If you know my experience and that

my judgement is solid, be willing to look at me and the deal through that lens, rather than the microscope you use for an unknown (and possibly badly equipped) investor. ∞

ABOUT THE AUTHOR

NANCY WALLACE-LAABS Nancy Wallace-Laabs is a

licensed real estate broker

in the state of Texas. She has more than 15 years of real

estate investing experience,

owns several rental properties and manages properties in the North DFW area.

Her new book, “Winning

Deals in Heels,” hit No. 1 on

Amazon’s Best Seller List for Real Estate Sales & Selling.

She and her husband own KBN Homes, LLC, a real

estate investment company

that’s making neighborhoods great again, one home at

a time. By actively seeking homes that are difficult to sell and compassionately representing owners in

distress, KBN Homes offers hope, relief and options to sellers while also creating

opportunities for investors.

Over 1,300 Private Lenders Can’t be Wrong

# AMC in America for Private Lending

“HIGHEST INDUSTRY RANKING” -MORNINGSTAR

“SERVICE PROVIDER OF THE YEAR” -AAPL

“FASTEST GROWING AMC” -INC 5000

Not All AMC’ AMC’s are Created Equal

Only one AMC has been rated one of America’s fasted growing businesses five years in a row, voted top mortgage services provider, and received Morningstar’s highest industry ranking for quality.

-735SPRING 2020

15

BUSINESS STR ATEGY

3 Ways to Use Third-Party Platforms to Improve Your Business These platforms can improve operational efficiencies, save time and enhance marketing efforts.

by Jadon Newman

A

s is the case

cessful business leaders know

forms can boost your business

Third parties can provide

with any

better. There are many things a

either a product or a service (or

business,

company can do to augment the

and make your life easier.

your primary

strategy of “just selling more.”

goal is to generate growth and to make money.

Many companies abide by the philosophy that the way

business and increase your bottom line is to incorporate third-party platforms into

to improve their bottom line is simply to sell more of their

16

PRIVATE LENDER

that simplifies your business processes and saves you time,

One strategy to improve your

your day-to-day operations.

product or service. But suc-

EFFICIENCY

sometimes a hybrid of both)

Most people would agree that “time is money.” It may be more accurate to say that time

making your operation more efficient and more profitable.

Often, a third-party platform

can either make you money,

comes in the form of a piece of

Here are three ways taking

or it can cost you money. It’s

technology, either an appli-

advantage of third-party plat-

up to you to decide which.

cation suite like Microsoft

Office or a cloud-based service like a project management application. As an example, think about how technology applications like Word or QuickBooks have streamlined business workflow and added flexibility to countless business operations. With the speed at which technology evolves, we’re experiencing near constant improvement in

business systems (theoretically,

already conducted thorough

fundraising efforts. Using these

at least) and, subsequently,

due diligence on the products

platforms can result in an enor-

the speed with which we’re

they offer. Some even provide a

mous time savings for busi-

able to produce results.

back office to support servic-

nesses in the financial sector.

There are also many examples

ing and the other functions

Third-party platforms can

of third-party investment plat-

associated with the investment

be beneficial to a company’s

forms that increase operational

opportunities they offer.

efficiency without generat-

Aside from operational

obvious examples of this at

ing a significant expense.

support, some third-party

work today are advertising

The companies behind these

platforms provide investment

campaigns on social media

financial platforms have

capital or augment your own

or services with broad capa-

marketing efforts. The most

SPRING 2020

17

BUSINESS STR ATEGYÂ

bilities to incorporate social media management, email marketing and other individual functions into one plat-

would require an abundance of time and resources.

PEACE OF MIND

form. Some platforms offer industry-specific marketing services. Such platforms exist for real estate agents, private lenders and financial advisors. If all the companies in those verticals had to develop their own platforms themselves, the capital outlay and operational expenditures could be cost prohibitive and

18

PRIVATE LENDER

Third-party platforms can also bring peace of mind to the companies that use them.

An investment platform, for example, implies a certain level of reliability. Having served numerous businesses, thirdparty financial platforms will have been tested, refined and improved over time. Because it

takes years to build a platform and streamline its functions, a firm that offers such a platform has put in the time and effort to ensure its reliability and that it meets client expectations.

ance standards can face. Any financial platform bears the liability for ensuring that those standards are met, relieving some or all that burden for businesses using the service.

Another way that a third-party platform can offer peace of mind is through security. This is particularly relevant in the financial industry because of compliance standards. Anyone in the industry is familiar with the headaches that team(s) responsible for achieving and maintaining compli-

Compliance in the financial industry obviously includes an immense amount of legal expertise and due diligence.

Rapid technological advancements increase the urgency and need to satisfy data security protocols. Information security is especially paramount in

“ Working with a thirdparty platform can provide a disinterested and unbiased perspective on your own operation.” the financial industry, where vast amounts of financial and often personal information is collected and stored. If you run a business with a dedicated IT department, you already understand the costs and complexities that accompany the technological requirements of maintaining adequate data security measures. That’s why it’s valuable to avail yourself of a third party — whether it’s an application or a full financial platform—to absorb some of that cost and to help improve the bottom line of your business.

VARIETY, PERSPECTIVE AND EXPERTISE Great things are rarely achieved in a vacuum. They are often the product of outside collaboration with

others who have differing experiences and areas of expertise. For example, if you’re a private lender, you might have knowledge of only a few specific markets. But if you want to boost the growth of your business by expanding into other markets where you may not have the foundational knowledge you need to operate confidently, you could probably use some help. By engaging the right platform, you can expand your business and your options.

A third-party platform can provide a lot of operational benefits as well. For private lenders, this is where engaging a platform with additional back office support can bring some substantial value to the table. Even if your company has a staff with experience in underwriting and servicing loans, you can almost certainly benefit from the outside expertise that comes with

using a third-party lending platform. Additionally, if your goal is to grow your lending operation, you likely will need the additional bandwidth a third-party platform can provide, at least in the short term.

Finally, working with a thirdparty platform can provide a disinterested and unbiased perspective on your own operation. Perhaps a service that provides underwriting services declines to fund a loan that your company would normally fund. What might you be able to learn from that feedback? Maybe they know something you don’t.

The same goes for something like loan servicing processes that differ from those of your own company. This outside expertise may serve as a safety net and provide a broader foundation upon which to grow your business.

matter what your goals or your needs are, you can get there more quickly and with less effort with a little help from the expertise and efficiency that third-party platforms provide. ∞

ABOUT THE AUTHOR

JADON NEWMAN Jadon Newman is the founder and CEO of Noble Capital

Group, a private equity firm based in Austin, Texas.

With more than 18 years of experience in the financial

services industry, Newman

specializes in private lending,

THE PAST IS THE PROOF

private equity investment and strategic venture capital.

Businesses have a lot to gain from pursuing strategic partnerships and taking advantage of third-party platforms. No

SPRING 2020

19

Focus on what matters most to you – growing your business.

Fast Approval

Our Mission Our mission is to make lenders more successful by empowering them to give borrowers the best experience possible.

Seasoned Team

Easy Process

Credit Buy Box Purchase Rate: 6.99% + Loan Amount: $75K - $2MM Max Term: 24 months Credit Score: 600 minimum Type: 1st lien, lender participation permitted

Loan Purpose & Property Types Fix and Flip/Value-Add, Cash-out Refinance, Stabilized/Rent, Ground-up Construction.

Contact Us: lenders@alphaflow.com (212) 381-0902 20

PRIVATE LENDER

lenders.alphaflow.com

Our Offices: 564 Market St Suite 450 San Francisco, CA 94104 135 Madison Avenue New York, NY 10016

OR SFR ( 1-4 units, Condo, PUD )

Multi-family Residential ( 5-9 units )

New AlphaFlow Lending Platform The most efďŹ cient way to sell your loans

Instant Feedback Real-time feedback - see if your loan fits our "credit box" via our proprietary Loan Sizer Simplified interface to upload loan tapes and supporting collateral One-click submission for soft-approvals

Real Time Visibility Credit insights on loans to complement your underwriting Transparency into the status of loans being reviewed for purchase More efficient way to communicate with your dedicated investment team

STEP ONE

STEP TWO

STEP THREE

Apply Online

We’ll Get In Touch

We Buy Your Loans

Complete our simple application process in minutes.

We'll evaluate loans within 24hr and give you fast feedback.

Receive funds fast! Our customer support team SPRING will 2020 21 guide you each step of the way.

MARKET TRENDSÂ

PRIVATE LENDER OUTLOOK Here’s how 2020 is shaping up for private lenders.

by Sam Kaddah

What is the state of the private lending industry in the U.S.?

Unlike the national housing market, there is no such thing as a national private lending market. There are 392 defined Metropolitan Statistical Areas (MSAs) in the country. If you consider the distribution of the remaining regional economic markets outside those MSAs in the 50 states, you end up with 501 unique regional and local markets.

Each has its own unique characteristics and performance metrics.

22

PRIVATE LENDER

So, while it’s important to understand trends, everyone in the private lending industry should approach the question about the state of the industry differently.

THINK MORE NARROWLY First, they should ask, “What is the state of the regional markets I play in? Most importantly, what are the key differences and how I should adapt to those markets?

Products, rates, prices and economic trends vary widely. For example, if you are in Memphis, you may want to know the local differences from one street to another. But, if you are in Kansas City, you want to consider a flat set of fees that makes the deal economics in a stable market make sense.

In Eugene, Oregon, the metric shifts to Dutch construction and rehab economics.

Given those dynamics, focus on the most accurate actionable data that is based on the metrics for a targeted MSA or a state.

LOOMING RECESSION? With fast developing events at the time of this update, markets around the world have frozen

and COVID-19 is creating stock market disruptions. It is natural for credit providers in turbulent cycles to freeze credit and for liquidity to disappear.

Make no mistake, without major governmental bailouts around the world, the global economy will shrink by 22%.

Some even estimate by 35%.

IMPACTS ON PRIVATE LENDING Here’s what’s happening with lenders as a result of the market turmoil: L oan aggregators who

receive most of their funds from the institutional channel are feeling the pressure to freeze liquidity and, indeed, most seized or significantly slowed down.

S econdary market loan

aggregators funded by Wall Street and institutional funds have already tightened their underwriting guidelines.

D raw requests to com-

plete existing projects accelerated. In fact, we are seeing a 183% increase in that area.

C onstruction is clas-

sified as an essential business and can stay open in many states, so

rehab fix-and-flip and construction continues.

P rivate local and tradi-

tional funds have a pressure to meet their target investment returns more so than institutional investors. So, they are looking for opportunities to raise rates to compensate for their higher risk factor.

P rivate local and tradi-

tional funds have more flexibility than institutionally-backed funds.

Whoever is more flexible and creative will win and will also command higher interest rates.

F lexible local lenders

are still lending, and they are extending loan terms by 90 days with the expectation they can take over national lenders who are caught with their pants down.

$ 2 trillion dollars of

stimulus is on its way. But there will be winners and losers. Global government stimulus is coming.

A ll indications point to a

restart of the economy in 60-90 days. Coupled with pressure for everyone to go back to being productive, we will see a bounce back.

WHAT’S IT ALL MEAN? Take a deep breath—the glass is still three-quarters full. The same money sources that are freezing the liquidity today will have pressures to lend and reinvest it instead of staying idle. They will have tighter guidelines, but that opens the market back up to the traditional private lenders and private funders, who will enjoy their wider margins.

Private lenders in local markets will know how to manage the risk better than national institutionally-backed lenders.

Those local lenders and will once again thrive and keep the private lender sector going.

The market is also seeing draw requests accelerate. This means there’s an opportunity, at least in the short term, for laborers who lost their jobs to join that workforce, accelerating the completion of projects. With $2 trillion dollars of stimulus coming in the U.S.—and the rest of the world looking at similar measures—the current situation will dissipate faster than people anticipate. Yes, it will mean higher rates, tightening of LTV and ARV, but also it means a reasonably healthy restart of the economy.

SPRING 2020

23

MARKET TRENDSÂ

ORIGIN OF C APITAL INTO THE U.S. For Commercial Real Estate, 4-Qtr. Moving Sum, Billions of Dollars

$120

$100

$80

C anada A sia

$60

Middle East Europe

$40

Rest of World $20

Source: Beacon Economics

$0

07

08

09

10

11

12

13

14

15

16

17

18

Quick.

Creative.

Flexible.

We are a direct private lending firm that provides financing solutions to real estate investors.

Contact us at 1 (888) 833-0381 to learn more about our residential and commercial loan products. www.grandcoastcapital.com borrow@grandcoastcapital.com

24

PRIVATE LENDER

19

And don’t forget, prior to the

was a decline in single-family

emergence of the coronavirus,

rentals by 546,287 units and

for the private lending industry, perhaps the biggest impact we have seen is that the industry grew up during the last several

an increase in multiunit demands to 542,952. And, an additional 297,379 multiunits were purchased directly

years. It has emerged from its

for owner occupancy.

infancy and started to mature.

Now, if you are wondering

Institutional capital started to

where this new capital is

flow to the space, providing liquidity to brokers and local lenders. This most notably created a totally new market for long-term finance of rental single and multiunit development and rehab.

entering the U.S. market from, the answer may surprise you. As you can see, Canada tops the charts.

CORRELATING INDUSTRY DATA

To put things in perspective, according to Beacon Economics, the western markets’ rental A space housing outpaced B and C units, growing 4% last year. Additionally, there

Last year at the AAPL national conference, we correlated

data for the industry to share a general insight and trends.

The fact is, while people talk

about rate compression, the trends reveal the opposite in many markets while the rest held steady. Only in certain pockets, like California, are we seeing declining markets. While some argue it is because of competition in larger markets and states, the numbers in Texas and Carolinas show independence of the market size and an uptick in the rates and points. But the national average stands at the end of last year at 10.867%.

In contrast, mortgage rates have dropped nearly 135 basis points since the most recent peak on November 2018. They are down 100 basis points since this time last year.

a year ago. The 30-year jumbo rate fell from 4.04% to 3.96%, with 0.26 points.

All this is clearly a strong indicator why institutional investors are interested in adding a private lending portfolio backed by real estate portfolio. The returns simply are too attractive to ignore.

Those numbers, while accurate nationally, do not represent a specific local market. ∞

ABOUT THE AUTHOR

The 15-year fixed rate fell to 3.05%, down from 4.05%

THE NUMBERS There are no national markets. Its all local. Its all about the MSA.

SAM KADDAH Sam Kaddah, president and CEO of Liquid Logics, has

E xperience // 6.64 years, 0.8 deals in the last 6 months, 1.8 deals in the last 12 months

a broad-based background

Average Loan Amount // $212,725 (2017), $218,280 (2018), $238,573 (2019)

He is skilled in building

Average FICO // 683 Average Rate // 10.867% (trends vary by state but stable in many, even trending up

in complex environments.

consensus, producing results and streamlining operations.

Kaddah’s career has been

in some key states.)

characterized by providing

Average ARV% // 62.02%

of efficiencies and revenue

leadership to meet objectives

Average LTC% // 72.56%

while maintaining quality.

Average ILTC% // 66.21%

and NextGen SaaS for the

Liquid Logics provides fintech private-equity lending space.

SPRING 2020

25

MARKET TRENDS

The Coronavirus & You Here’s how the coronavirus is affecting the private lending sector.

by Edward Brown

26

PRIVATE LENDER

W

ith the

predict both its advance

A2007 article by Thomas

ing to the

Nothing recent—like H1N1, SARS, Ebola or the seasonal flu—have proven accurate or particularly helpful models.

and economist for the Federal

world reacteffects of

the fast-spreading coro-

navirus, health officials

and economists alike are

looking to history to help

and its lasting impacts.

Instead, scientists and the media are increasingly making comparisons to the 1918 Spanish flu pandemic. While we’re constantly hearing grim news about the immediate economic effects, what is the outlook for private lending in particular? Let’s explore, using the same 1918 model that’s proven the closest to our present-day reality thus far.

THE CORONAVIRUS COMPARED TO THE 1918 PANDEMIC Governing bodies have taken similar steps to quell the spread of the coronavirus: isolation, quarantine, use of disinfectants and limitations

on public gatherings. These measures seem to be the fastest way to rid the general population of this kind of virus.

During these times, the economic effects are dramatic.

Garrett, assistant vice president Bank of St. Louis, examines

the economic effects of the 1918 influenza pandemic. The arti-

cle indicates an eerie parallel

to today’s world. Merchants in Little Rock stated their busi-

ness had declined 40%. Others estimated a decrease of 70%.

The only business in which

there had been an increase in activity was the drugstore.

One difference in the two

pandemics seems to be that

the one in 1918 was reactive, whereas the current one appears to be proactive.

In 1918, businesses were hit hard because people were

isolated and quarantined, thus few people to enter an estab-

lishment to conduct business.

Compounding that, the number of workers affected with the illness was tremendous; thus, the labor force and their income decreased substantially.

The current pandemic has,

potentially, some advantages

over the 1918 pandemic. Countries around the world have

quarantined in the early stages of today’s pandemic. And, with

such as Amazon still make home and office deliveries. The proactive measures that the world is taking will, hopefully, curtail the coronavirus so that it is short-lived and we all can get back to a relatively normal life. Still, the economic impact of this virus cannot be ignored.

Garrett points out: “Most of the evidence indicates that the economic effects of the 1918 influenza pandemic were short-term. Many businesses, especially those in the service and entertainment industries, suffered double-digit losses in revenue. Other businesses that specialized in health care products experienced an increase in revenues. Some academic research suggests that the 1918 influenza pandemic caused a shortage of labor that resulted in higher wages (at least temporarily) for workers.”

IMPACT ON PRIVATE LENDING How does this affect the private lending sector?

In early February 2020, before the U.S. government implemented guidelines to help slow

the internet, which was not

available in 1918, many workers can work at home. Companies

SPRING 2020

27

MARKET TRENDS

“Although some borrowers have canceled their applications for loans due to uncertainty, there always seems to be a need to serve the borrowing community.

People still move, loans come due, refinances as rates drop still occur—and these loan requests need a home.”

28

PRIVATE LENDER

and eradicate the virus (e.g.,

their appetite to place funds.

than 250—since lowered to 100

would-be providers of capital

no public gatherings of more

and in some cases to 10), there

was an ample supply of money flowing into private lending.

In addition, the capital markets were healthy and hungry, looking to place money in loans.

Fear and concern pushed these to sit on the sidelines, because

most tumultuous markets make investors anemic.

In addition, although federal funds rates are at near zero, many large banks have, for

The stock market was at an

the most part, stopped accept-

March 20, 2020, the stock mar-

banks will honor their com-

all-time high of over 29,500. By ket dipped below 19,000, a loss of more than 35%. Investors,

as well as bankers, pulled back

ing loan applications. Most

mitments to fund loans that

were already approved. But,

until things settle down, they

do not want to take, what they consider, undue risk.

The capital markets (those buying loans) have all but dried up.

They did not slow down. They just stopped altogether—at least for now.

Private lenders are lowering loan to values (LTVs) and charging higher points and interest as the supply of money has shrunk. Private lending companies derive most of their capital from individual investors. Many of these investors are skittish during uncertain times. When the supply of money seemed to be endless, especially in California, rates and points charged were at historic lows (in the private lending community).

The demand for loans, however, has not been dramatically affected yet. The reason for this is that the supply of money provided by conventional lenders has diminished. Since conventional lending makes up the majority of capital available to lend, this factor has more than made up for the slower demand of loans needed. Although some borrowers have canceled their applications for loans due

to uncertainty, there always seems to be a need to serve the borrowing community. People still move, loans come due, refinances as rates drop still occur—and these loan requests need a home.

Individual investors are demanding an increase in yield, even at historically low rates. This could be due to these investors attempting to take advantage of the low supply of money available for loans. It also could be that these investors remember when they were able to com-

mand a higher yield during uncertain times such as the Great Recession. The predominant reason, however, is most likely due to the unknown of how this virus will play out in the real estate market in an almost certain recession.

These investors will demand both a lower LTV on the loans they are making and a higher interest rate. Private lending companies that previously sold to the capital markets will also have to pay their investors a higher rate to attract money; thus, they will have to charge the borrower a higher rate.

They will most likely also increase their spread at what they charge the borrowers as

compared to what they pay their investors. Quality loans will be in demand for these companies. Loans that may have been marginal from a risk/reward standpoint just a few months ago will be turned down by many lenders.

If Garrett is right about a shortlived economic impact due to a pandemic, there is a window of opportunity for investors who are willing to lend. Due diligence will be very important. And, importantly, investors should not presume that a recession won’t be prolonged.

Conservative underwriting will be the law of the land, and lower LTV will be the benchmark. As one private lending company pointed out, there is always money to be made in real estate; one just needs to be prudent.

ABOUT THE AUTHOR

EDWARD BROWN Edward Brown is in the investor relations department at

Pacific Private Money and is

host of the long-running radio show “The Best of Investing.”

He has published multiple

works, appeared on CNN and has served as chairman of the Shareholder Equity Commit-

tee protecting 29,000 share-

holders in a $500 million REIT. Brown is also a recipient of a prestigious MBA Tax Award.

As of this writing, the number of illnesses and deaths worldwide have been relatively small compared to the 1918 pandemic. We can only hope that the world continues to take serious measures to limit the effects, from both a health and an economic perspective, so we can get back to “normal.” ∞

SPRING 2020

29

CORPOR ATE RESPONSIBILIT Y & ETHICS

Private Lender Scam Alert: What You Need To Know AAPL can help you identify scammers and offers important tips for curtailing their activity.

by Kat Hungerford

“Hello, you’ve reached the American Association of Private Lenders. How can I help you?”

“Hi, I don’t know if I’m calling the right place, but I found you online and was wondering if you could help me. I wanted to check whether this lender is legitimate.”

30

PRIVATE LENDER

“We don’t know every lender out there, but if they’re one of our members or we know of them, we can definitely help with that.”

“OK, it’s ABC Company.”

“It looks like ABC Company is one of our members, so that’s good. But there are scammers who will pretend to be a legitimate private lending company. Can you tell me what email, phone or website they gave you?”

“555-555-5555 and info@abc-companyllc.com.”

“That’s not the information we have on file for them, but they could have changed things. Just to be safe, let me give you the contact information we have. Call to see if you’re talking to the same person. If not, the people you were talking to before are scammers.”

“OK, let me grab a pen.”

SO, WHAT WAS THAT ABOUT? At AAPL, this conversation plays out on a near-daily basis.

Sometimes the lender isn’t a member, so we tell the borrower how to complete due diligence. We recommend finding a lender in our member directory instead if things feel even a little off-key.

The most painful conversations happen when the borrower

“Over the years, our watchdog role has saved borrowers untold financial difficulty and headache ...”

has already sent an “application fee” or “small down

form. We also recommend

they file a report with their

payment” to the “lender.” We

local police department.

can only direct them to their

And, if the scammer is

state Consumer Protection Office and the Federal Trade Commission’s online complaint

using the identity of a real

lender to perpetuate fraud, we let the lender know so

they can work with authorities from that angle.

Over the years, our watchdog role has saved borrowers

untold financial difficulty and headache, especially

since stealing money is often

SPRING 2020

31

CORPOR ATE RESPONSIBILIT Y & ETHICS

OVERVIEW

lending is relationship-based. You should feel comfortable working with the lender.

Many borrowers—especially those new to working with private lenders—think that due diligence is the exclusive domain of the lender. While any lender worth their salt has a process to vet borrowers and deals, due diligence is also the responsibility of the borrower.

J oin an approved industry association like AAPL // For borrowers who regularly work with private lenders, trusted lending resources are the secret sauce to better and more profitable transactions.

You must complete your own vetting to ensure that you:

LOAN CHECKLIS T

H ave found a reputable private lender.

Knowing the common documentation lenders will both require from and provide to you will help you:

C an afford the loan.

U nderstand the contract terms.

From your first contact with a lender through closing, you should watch for practices that put you on alert. If you question why something is necessary, ask and then verify that what the lender says is in fact true. In general, the following are red flags that may signify predatory practices: E xcessive or unexplained fees, interest rates and/or points // This can include fees for the application, processing, due diligence, underwriting and more.

Interest rates or any loan terms that seem too good to be true // In combination with excessive fees, it may signify a case of bait and switch. Victims of this tactic typically find they will not receive what was advertised only after they have sunk enough money into the process that they don’t want to back out.

P ressure to act quickly // Not having enough time to complete due diligence may mean the borrower doesn’t vet the lender properly or agrees to less-than-savory loan terms.

P repare // Being prepared and knowledgeable can help you get approved and earn more favorable loan terms.

A void costly delays // While you shouldn’t feel rushed into a decision, efficient loan progress saves you money.

P rotect yourself // Knowing what’s commonly required enables you to research and review anything unusual.

Check off each of the items below after you have provided them to the lender—or, if you’ve received them from the lender, reviewed and/or completed them.

STEP 11

Have you completed the loan application package?

Loan application Copy of driver’s license Loan disclosures Client/borrower questionnaire

HOW TO PROTEC T YOURSELF

B uilder/general contractor resume (if available)

Completing your own due diligence is your safeguard, even with trustworthy lenders. We recommend that you:

Proof of funds (if requested)

Research your lender // Look through reviews to ensure previous customers have had positive experiences. You may also want to ask for references of current and past customers.

Contact the American Association of Private Lenders // We can verify the lender and check for any unresolved Code of Ethics complaints.

Take your time with due diligence and shop around // Beyond loan terms often differing from lender to lender, private 32

PRIVATE LENDER

STEP 21

Did you outline the project?

C onstruction budget with complete details/specifications in a budget template provided by the lender lans (for new construction projects and for renovations P where additions will be created) Permits (if applicable and available at the time of the loan request)

STEP 31

Can you provide experience validation? referred: Executed ALTA/HUD P settlement statements from sale of real estate investments, OR xecuted construction contracts from E previous renovations/builds, OR B uilder/general contractor’s resume

STEP 41

Did you verify your entity?

LLCs I RS EIN on IRS issuance Stamped Certificate of Formation O perating or Company Agreement Corporations I RS EIN on IRS issuance Stamped Certificate of Incorporation I ncumbency Certificate Other (no DBAs) L ender will provide guidance on necessary documentation

STEP 51

Have you reviewed the sales contract/settlement statement? xecuted sales contract for E property purchase, OR E xecuted settlement statement or purchase agreement (if refinance)

just the first step. A scammer will keep the borrower on the hook until they have all the sensitive information that makes up a mortgage loan—and the borrower’s identity, lock stock and barrel.

With every scam we help block, we are building goodwill for our industry and making it just a little less lucrative for scammers to continue their illegal activities. Borrowers trust us because we have no stake in the outcome of their loan.

Picking up a ringing phone is priority at the AAPL offices.

Odds are it’s a borrower looking for a lender or checking up on one. If we don’t pick up, we’re leaving the door open for shady operators to step in.

The only easy way a borrower can check up on a private lender is by talking to AAPL. For our largely unregulated industry, there is no state or federally regulated government agency that tracks and licenses private lenders because most private lenders do not lend to consumers. The scammers, on the other hand, don’t care about those considerations. They’ll go after any John or Jane Doe, using lenders’ established

good name and reputation for their own ill-gotten gain.

The worst part? Unless the

borrower contacts us or finds the real private lender down

the road (which seldom hap-

pens because the borrower

walks away thinking they were scammed by a real private lender), we are unlikely to

know to act. Most victims will not report what happened to the applicable government

agency due to shame, lack of knowledge about how to go

about it, or assumptions that law enforcement can’t help them gain recompense.

So, while it is a bit outside

the scope of a typical trade

association to help borrowers safeguard against scammers, it is one of AAPL’s unsung

services that has helped lift the industry’s reputation for the

past decade. When borrowers trust us as the stand-in for

institutional regulation, that

trust also extends to our members (another reason we are so

gung-ho on our Code of Ethics)!

While it’s a top-down stopgap

that we are proud to fill, lend-

E xecuted assignment contracts (if applicable) xecuted sales contract extension E (if applicable) SPRING 2020

33

CORPOR ATE RESPONSIBILIT Y & ETHICS

ers can help—and it’s in your own best interests to do so.

Borrowers who trust that you’re looking out for them are more willing to do business with

you. You can bet scammers

never tell their victims how to be on the lookout for fraud.

Stanford Center on Longevity (bbb.org/ExposedToScams), when consumers have heard of a scam method, they are much less likely to fall for it.

WHAT CAN YOU DO TO SUBVERT SCAMMERS?

In Private Lender’s Winter

2020 issue, Marty Coyne noted in his article “Lenders to Face More Technology-Driven

Here are a few things you can do:

Challenges in 2020,” that

Educate borrowers about

for Marketplace Trust and the

Include tips about how to

according to the BBB Institute

lender due diligence //

practice lender due diligence as a regular part of your communication with borrowers. We’ve provided some starter information on page 32. Please be sure to attribute anything you use to AAPL. For easy distribution, download PDFs about due diligence and lending fraud victim recovery at aaplonline.com/directory.

Educate borrowers about common mortgage scams // Post articles about common types of scams associated with the private lending industry. Some of the most common scams (for our industry) include: P retending to be a

private lender to ask for large down payments or upfronts fees, or to fill out mortgage applications to steal the borrower’s identity.

S tealing the identities

of real private lenders (like you!), including spoofing their websites.

F oreclosure rescue

services or mortgage relief scams that promise to lower payments or change the loan terms in exchange for a fee or providing

34

PRIVATE LENDER

borrower’s sensitive information “to get the process started.”

Make it easy for borrowers to check up on you // Include the AAPL member emblem in your email signature and on your website with links back to aaplonline.com so borrowers can easily verify your status with us. For scammers who spoof entire websites without checking the details (or who keep it to make themselves

ABOUT THE AUTHOR

KAT HUNGERFORD Kat Hungerford is executive

editor of Private Lender and

project development manager at the American Association of Private Lenders. She

specializes in operations,

project management and

marketing. Hungerford also

acts as secretary for the asso-

ciation’s Government Relations Committee, which serves as

AAPL’s advocacy arm in state and federal legislatures.

seem more legitimate, assum-

American Association of Private

or that we don’t provide the

help in ensuring I was actually

ing borrowers won’t check watchdog service we do),

using the member emblem makes it easy for borrowers to uncover the fraud.

Lenders and Linda Hyde for

working with a reputable lender.

I had been working with a lender for almost a week and was

not only allowed me to check the validity of this scam artist but got me to the actual lender.

I was able to start a business relationship with the true lender!

planning on signing and sending

Without Linda and AAPL, I would

Download the member emblem

almost $5,000 in closing costs,

have been another scam victim.

until I reached out to Linda.

Thank you, Linda! Your speedy

member account and going to

“She told me that this company

and helpful response ensured

We’ll leave you with this

someone else had been portraying

met a great lending partner!”

the many people for whom

was scamming people. She gave

by logging into your AAPL

aaplonline.com/dashboard.

was a member but warned that

testimonial from one of

themselves as this lender and

we’ve picked up the phone:

me specific information that

that I wasn’t taken for 5K and I

- David Kelly ∞

“I would like to thank the SPRING 2020

35

CORPOR ATE RESPONSIBILIT Y & ETHICS

WHAT AAPL’S ETHICS COMMIT TEE SEES AS THE TOP ETHICAL CHALLENGE FACING PRIVATE LENDERS TODAY Visit aaplonline.com/ethics for more on our Code of Ethics.

MIKE HANNA, Managing Partner, Investmark Mortgage, LLC “Bait and switch” lending and truth in advertising are the top ethical challenges in the marketplace today. There are more lenders now than there were just a few years ago, and the lending environment has become hypercompetitive in some markets. Most borrowers are looking at multiple lending programs before making their final decision.

As rates have compressed, lenders are using techniques such as below market interest rates, no payments required and limited due diligence—along with novel advertising methods— to attract new investors. If the program being advertised is exactly as intended, there is no need for concern. However, in situations where there isn’t enough information on a competing product, the tendency can be to counter with the same offering.

The likely scenario is that the “bait-and-switch” program has hidden fees to recover additional funds from the low interest rate being offered. Without divulging all the details, this can put a lender matching the offer in an ethical dilemma. It also is a dilemma for the bottom line of their business, if their intent is to deviate from what is being marketed.

Explaining nuances of a hard money loan can create a lot of confusion, especially with new borrowers, who do not yet grasp the techniques used to bait them in the first place. This has been an ongoing issue. Lenders need to be cautious and not put their business or clients in a compromising position.

KELLEN JONES, President , Prospera Although the Jobs Act and other legislation have brought more attention to our space, private lenders still have a lot of autonomy.

A thriving secondary market has made it possible for new models and yield opportunities.

One of those models centers on table funding and note sales, where yesterday’s loan brokers can offer terms to borrowers as if they are the lender. Because an originator goes from 36

PRIVATE LENDER

packaging a loan for submission to fulfilling an underwriting role just to get a deal done, loan quality and what ultimate check writers expect can be compromised.

Originators are being empowered to fund like a lender because the secondary market needs the coupon, but these brokers have almost nothing at risk, very little experience in dealing with defaults and foreclosures, and everything to gain by getting a deal done. Automation tools even allow brokers to set pricing, so criteria become more important than quality.

Direct lenders, marketplaces and secondary market makers should be cautious in giving brokers this much power. And originators should treat investor capital as they would their own.

The last financial crisis was partially caused by traditional brokers being given power to originate bad loans. Let’s not make the same mistake.

KEVIN KIM, Partner/Corporate & Securities Department Lead, Geraci LLP I think it’s the same for any entrepreneur and businessperson: remembering to put integrity first.

Today’s aggressively competitive marketplace makes it challenging to operate a business.

But I firmly believe that positivity, honesty and simply doing the right thing will take a private lender further than any opportunistic or aggressive strategy. Sometimes the deal in front of you isn’t in the best interests of your company, your investors or even the borrower. And that’s OK. That’s ultimately what business ethics is all about.

BOBBY MONTAGNE, Founder & CEO, Walnut Street Finance In this period of increasing competition in private lending, it may be tempting to loosen your underwriting loan criteria to win more deals in order to hold or increase your market share. A short-term compromise on loan quality may help reverse a trend in decreasing originations, but in the long term, it may be problematic. You could put your customers, investors and employees at risk for unsuccessful projects, a poor performing loan portfolio and ultimately a declining business.

On the surface, loosening your underwriting may not seem like an ethical challenge. One could argue it is a business decision that balances risk and reward. However, if you have represented to your stakeholders that you originate quality loans and your company values the success of your borrowers, then it does become an ethical challenge. Holding solid to your underwriting loan criteria in a period of increasing competition is an ethical challenge most private lenders face today, even if it appears to be a risk management issue. Understanding it as an ethical challenge will help frame it in a way that makes it easy to see what the right decision is.

SPRING 2020

37

CORPOR ATE RESPONSIBILIT Y

SUSAN NAFTULIN, Founder & Managing Member, Rehab Financial Group, LP Unfortunately, the biggest ethical challenge facing private lenders today is the lack of ethics within the industry. The bad actors engaging in unethical conduct make it harder for the rest of us to do business and make the possibility of closer governmental regulation possible.

These unethical actors range from those that take large upfront fees from potential customers and then do not deliver a loan product at all. Or, they offer a product vastly different from what was originally contemplated, frequently baiting and switching at the last minute. They also include brokers who represent themselves as lenders and do not disclose true loan terms or that they are not the actual lender until the very end of the process.

When these things happen to borrowers, they tend to either drop out of the business altogether or be very distrustful when working with an ethical lender. It frequently takes a long time to break down the barriers built by the less scrupulous members of our community.

JEFFREY TESCH, CEO, RCN Capital Many of our members have deep roots in mortgage origination from a residential perspective. They understand the rules that govern that side of the industry. However, with the commercial world being largely devoid of the stringent regulations that govern residential originations, it is imperative that lenders always hold themselves to best practices.

As the private lending industry has become more institutionalized with large inflows of capital from very sophisticated lending partners, I have seen the “originate to a box” mentality take over. When we started RCN Capital, our platform was based on lending our own funds, which we continue to do today (augmented with additional funding partners).

What concerns me is the number of “lenders” that are originating to a takeout partner’s box with little regard for underwriting items that may give a lender pause if they were funding with their own capital. Best practice advice to the lenders in the industry who do not hold any loans on their balance sheet is to always underwrite and fund as if it was your own capital at risk. As a lender who has benefited from the inflow of capital to our industry, I am imploring every lender to put best practices into their underwriting department for the good of the industry. ∞

38

PRIVATE LENDER

OPPORTUNITY UNLEASHED

YOUR PRIVATE LENDING PARTNER Our specialty is helping mortgage brokers, realtors, and investors purchase or reďŹ nance non-owner occupied residential properties. So if you're looking for a respected private lender that offers streamlined services, quick closings, and aggressive rates, you're in the right place.

BRIDGE

RENTAL

CORRESPONDENT

Š 2020 Civic Financial Services All Rights Reserved. This is not a commitment to lend. Restrictions may apply. LTV limit is based on current, accurate appraised value. Civic Financial Services, LLC reserves the right to amend rates and guidelines. All loans are made in compliance with Federal, State, and Local laws. Civic Financial Services, LLC is a California Finance Lender under NMLS 1099109 and the California Department of Business Oversight License #603L321, AZ Mortgage Broker License #092863, FL Mortgage Lender Servicer License #MLD1536, ID Mortgage Broker/Lender License #MBL-9610, NV Mortgage License MB4419, NV Broker License #4443, NV NMLS ID #1410002, OR Mortgage Lending License #ML-5282, UT DRE Mortgage Entity License #10570639. Civic Financial Services, LLC is an equal opportunity lender.

(877) 472-4842 SPRING 2020 39 www.civicfs.com

LEGISL ATIONÂ

40

PRIVATE LENDER

THE U.S. ELECTION CANDIDATES What are the changes and challenges they represent for the housing market?

by Alex Shvaeyetsky, New Silver

Joe Biden remains as the Democratic party candidate, with President Trump running for reelection on the Republican party ticket. As of press time, these are their stated positions on housing.

As these candidates further clarify their housing plans it has become clear that there will be a giant impact on the real estate market, depending on which candidate is elected.

But questions remain about how their stances will really affect the housing market and, by extension, private lenders.

JOE BIDEN

Housing is taking a more central focus with candidates on the presidential campaign trail. A recent nationwide public-opinion poll commissioned by the National Low Income Housing Coalition found that as many as 85% of American citizens are in favor of affordable and safe housing for all, highlighting the importance of this issue in the public eye.

Former vice president Joe Biden has also thrown his hat into the housing ring. His plan is to rebuild the middle class with a specific focus on previously marginalized communities.

Biden’s housing plan will create a $640 billion injection over a period of 10 years in order to end discriminatory housing practices, provide housing assistance (e.g., offering help with down payments) and increasing the supply of homes while lowering the overall costs for individuals.

Biden has also specified that his housing plan will include provisions for the formerly incarcerated, who commonly

find it difficult to find a place to live after serving time. Under a government led by Biden’s guidance, the Department of Housing and Urban Development would award housing contracts to landlords who are open to renting to prior inmates at reasonable rates while they transition back into living in everyday communities.

Beyond this, Biden has announced his intention to launch a new Homeowner and Renter Bill of Rights that will place more stringent requirements on mortgage brokers, landlords and other real estate professionals to ensure the protection of buyers and renters during loan transactions and other processes.

On his campaign website, Biden has additionally stated that he will introduce incentives for homeowners who construct or retrofit buildings to be more eco-friendly, a recent trend that has become a highlight of the sector’s attention. Sources have similarly indicated that Biden has in the past expressed interest in updating infrastructure and general amenities in urban areas to ease other aspects of living in cities, such as dealing with traffic congestion.

SPRING 2020

41

LEGISL ATION

DONALD TRUMP Current President Donald Trump has yet to announce his formal housing plans as the election race heats up.

taxpayers from further bailouts

changes in regulation and

found it difficult to uphold

that will be detrimental.

insurance against loan defaults.

their campaign promises when

Throughout his current term, Trump has introduced sweeping reforms to taxes, previous

WHAT THIS MEANS FOR LENDING

faced with the list of tasks, pressures and duties a newly elected president faces.

That’s why the housing market

regulations, Qualified Mortgage rules and how much

Both candidates seem aware of

typically slows down during

credit the average American is

the issues of affordable housing

election years—investors

entitled to. Reactions to these

and are planning to address it

wait to see what the chang-

changes have been mixed as

if elected. The problem with

ing circumstances will bring

the middle-class buyer has

promises made on the cam-

come Election Day and how

been affected by the capping

paign trail is that they are

those changes will affect

of federal deductions for real

typically easier to execute on

their investments. As for the

competition in the housing

estate taxes, while lenders

paper than in reality. Once

lending industry, both pri-

finance market and protecting

have responded well to the

elected, many candidates have

vate and institutional lenders

Previously, however, in 2019, he announced his intention to reform the housing finance system by improving the regulatory oversight of Fannie Mae and Freddie Mac, promoting

42

PRIVATE LENDER

will see a decrease in loan

affordable housing can offer

It’s difficult to be sure what

applications when compared

exciting investment opportuni-

kind of impact Trump will

to non-election years as real

ties that will draw these inves-

have on the private lend-

estate investors become more

tors back to the sector. The

cautious of election outcomes.

construction of more affordable

official housing plans.

Over the short term, inves-

housing units will bring more

In the build up to the election,

tors consider it better to wait until after the elections before applying for a private loan since the candidate-elect will have a significant effect on the general economy. Historically, housing prices, as well as the number of buyers and sellers

inventory into the market, which could bring additional tax incentives to investors providing housing options that

served communities and are steadily addressing the need for

communities. New develop-

tunities. Whoever is elected

ments in the forms of micro

this year will have big shoes to

living could also offer unique

fill in terms of providing the

recuperate after the time of

Both candidates will also

uncertainty and speculation

have a unique impact on

has ended. It’s not only real

the private lending space

estate that is affected, how-

upon their election.

ever. Election years typically

Under Biden’s lead, individ-

such as the stock market.

providing housing to under-

economic development oppor-

chances to invest in real estate.

mance of other asset classes

candidates are focusing on

are available to underserved

actively moving in the market,

also see decreases in perfor-

ing space without any

affordable and safe housing that Americans keenly favor. ∞

see benefits such as down

In the long term, depending

payment assistance through

on which candidate is elected,

a refundable tax credit.

ALEX SHVAYETSKY Alex Shvayetsky has more

than 25 years in real estate management, property

development and investment, all of which he applies to his

work as part of the New Silver loan origination team. New

Silver is a loan originator with a focus on using data and

technology to remove friction and risk from the private lending process.

uals working with private lenders for real estate will

ABOUT THE AUTHOR

Shvayetsky holds qualifica-

Note: This is the writer’s most current information on the candidates and their stated opinions as of press time.

tions in finance, mathematics and economics from the

University of Connecticut and Brandeis University.

SPRING 2020

43

ACCOUNTINGÂ

DESIGNING NONPERFORMING NOTE FUNDS The fund structure, accounting methods and other strategies must be considered in addition to securities compliance.

by Nate Ashley, Tae Kim and Beeta Lecha

A

nonperform-

ing loan (NPL) is a type of

note that is

in default, distressed,

delinquent or otherwise

dilapidated. NPLs are inter-

changeably used with nonperforming notes, distressed debts or distressed loans.

Generally, an NPL holder no longer anticipates repayment from a borrower in accordance with the original terms.

These NPLs are sold in a private market, typically between 50 cents or 80 cents on the unpaid principal balance (UPB), depending on a 44

PRIVATE LENDER

variety of factors. Those can

may self-finance the purchase.

include length of time the

Alternatively, the buyer may

note was in default, collateral value and probability of a successful outcome.

A buyer purchases these NPLs with one or a combination of these strategies: (1) modification or extension (2) reinstatement (3) borrower pay-off or (4) foreclosure.

An analysis of these notes, including borrower information and exit plan, is crucial

sponsor in a fund structure and gather a pool of investors to raise capital or set up a direct investment model where the investors are noteholders themselves via whole or fractional interests. In a fund model, the buyer will typically act as the fund manager in a general partner/limited partner structure and deliver profit

when purchasing these NPLs.

return to these investors.

Logically, the same buyer

When setting up the fund, how-

needs money to purchase these

ever, the fund manager should

notes. If fortunate, the buyer

consider the following issues.

SECURITIES EXEMPTION The fund manager must first

understand that when accept-

ing money from an investor, the manager is selling securities.

Accordingly, the fund manager must either register the fund

securities with the Securities and Exchange Commission

(SEC) or be exempt under one of the securities laws. One of

the most popular exemptions implemented in the private

investment arena is Regulation D, Rule 506 or, alternatively,

Tier 2 Regulation A offering.

FUND STRUCTURE From a fund structure perspective, there are two prevailing strategies typically implemented in the NPL space: open-ended versus closed-ended. Both have sound reasoning, but there are implications to these strategies.

CLOSED-ENDED VERSUS OPEN-ENDED FUND A closed-ended fund is a structure that has a definite capital raising and closing

period. The typical timeframe ranges between one to three years. As soon as the target maximum is raised, the fund closes the offering and begins operation. This way, all the investors have the same admission and accounting period, and the fund is generally easier to administer.

On the other hand, the fund manager is restricted from additional capital raise. The typical raise is between $1 million and $5 million in a close-ended fund. If the manager wants to raise additional capital, he or she needs to set up another fund.

This results in additional legal and/or tax costs.

A closed-ended fund strategy works in the NPL space because there is an inherent and substantial risk when purchasing notes at a discount.

There is an uncertainty of when (or if ) the notes will perform and when investors will be paid. Closing the offering limits the exposure of risk of payment to the investors.

Conversely, an open-ended fund is a structure that has an indefinite and ongoing capital raise. The open-ended fund typically has a higher max

offering ceiling and a much longer time horizon. Because it is an ongoing raise, the admission and accounting period differs, and the fund is exposed to certain investor payment risks. These concerns can be mitigated by diversifying the portfolio through performing note acquisition or origination, or reperform the NPLs. Nevertheless, in either model, the fund manager should be aware that NPLs need time to reperform, modify or otherwise produce income. To account for that expectation, a fund manager may provide additional features not seen in SPRING 2020

45

ACCOUNTINGÂ

traditional mortgage funds: (1) cumulative preferred return (or otherwise deferred return), (2) longer lock-up period, (3) performance-based rates, or (4) the choice to form a close-ended fund. To be sure, an openended fund can be liquidated when the manager wishes to do so, or simply cease raising capital. Ultimately, investor appetite and risk tolerance matters.

DISCOUNT RECOGNITION NPLs are purchased at a discount, which is the difference between the UPB and the acquisition cost.

Implicitly, the fund will need to adopt a tax method of accounting for recognition of the discount into income.

The two available methods for tax purposes are:

01 T he cost recovery method.

02 T he market

discount method.

Several factors should be considered in determining which method to use, including whether the fund

46

PRIVATE LENDER

which allow new investors into the fund over the fund’s life.

The rate of amortization will correlate to the expected principal payments received over the remaining life of the loan.

If the fund manager expects to receive all the payments, then a straight-line method of recognition is practical. The amount of amortization will be a function of the total discount over the expected number of payments to maturity. is closed-ended or openended, because there will be an impact on the timing of taxation for the investors.

Neither the cost recovery nor the market discount method is permitted under generally accepted accounting principles (GAAP), further increasing and complicating the accounting.

Either approach can be used in a fund environment; however, the preferred method for a fund with investor money is usually the market discount method.

Whether the cost recovery method or the market discount method is selected, the UPB is recorded as an asset with the discount recorded as a contra-asset on the balance sheet. When a payment is received, interest income is always reported as income,

and the principal reduces the UPB and cost basis.

The cost recovery method can only be elected if the purchase is considered speculative, where there is a strong possibility that the cost basis and a portion of the discount may not be collected. Under the cost recovery method, income recognition on the discount is deferred until the cost basis of the NPL is recovered. The cost recovery method works in situations where the fund is closed-ended and not admitting new investors during the life of the fund.

This method defers taxation of the discount into future years.

A second tax method is the market discount method, which amortizes the discount in tandem with the principal payments as they are received.

This method is more appropriate for open-ended funds,

MODIFICATIONS AND FORECLOSURES Modifications can be an attractive alternative to foreclosing on an NPL. While the fund may not recover all the UPB’s obligated payments, offering new manageable terms can result in a pay-off that produces a favorable yield.

It is critical to understand the accounting implications of modifications as it may lead to an unintended outcome. For tax purposes, if the modification results in a significant modification, then there is a new loan. The new loan will be recorded at fair value, meaning any difference between

the old and new value will be

This occurs when there is a

a recognized gain or loss. Be

change in any of these items:

sure to consider the amount

A nnual yield of greater

of the discount that hasn’t been amortized, as it will factor into the gain or loss.

A loan modification is considered “significant” for tax purposes when based on all the facts and circumstances, the legal rights or obligations that are altered along with the degree of alteration are economically significant.

than 25 basis points or 5% of the annual yield

of the unmodified loan.

T iming of payments,

deferring the period the greater of five

years or 50% of the original note term.

O bligor or security.

T he nature of the loan.

F inancial or account-

ing covenants.

period of good faith negotiations.

If the modification is a significant modification, then the lender must issue a Form 1099-C, Cancellation of Debt to the borrower.

T he borrower is

A forbearance would not be considered a significant modification provided:

considerations of the fair

in bankruptcy.

Foreclosing on NPLs has a

similar effect as loan modi-

fications, but with different value. At the time of foreclo-

sure, there is a new asset with

T here is no written

the previous loan considered

I t does not exceed

Considerations should be given

or oral agreement. two years plus any

as noncollectible debt.

to the valuation method of

LIQUIDITY SOLUTIONS FOR PRIVATE LENDERS Smith Graham Investment Advisors is a dedicated strategic capital partner for private money lenders throughout the United States. Our platform helps lenders, like you, raise capital by efficiently selling loans.

Since 2009, we have successfully transacted in over $1.5 billion of whole loan purchases.

Institutional Note Buyer

Common Sense Purchase Guidelines

Long Term Strategic Partner

140 Broadway, New York, New York 10005 contactmre@smithgraham.com 212-487-5086 www.smithgraham.com

SPRING 2020

47

ACCOUNTING

recording the fair value of the real estate owned asset (REO).

A BPO may not represent the actual long-term value. Foreclosed assets can come with renovations and carrying costs if the intent is to sell. The value of the REO should factor in selling costs such as open house staging or commissions at sale.

REOs in the portfolio are always subject to ongoing impairment testing, but within reason you can quantify the expected differences between the fair value and net gain at disposition.

PHANTOM INCOME AND TAXES You may notice that NPLs have more situations where income is reported, even if there aren’t any cash proceeds. This “phantom income” is taxed to the investors as the income is recognized. The timing of recognition of income versus timing of cash distributions may vary widely, resulting in a taxable event without cash to pay the tax. Fund managers may want to time the disposal of some of the fund loans or REOs to have cash reserves on hand for distributions.

While there are asset strategies such as syndications that renovate properties before they generate income, a portfolio of

48

PRIVATE LENDER

loans can imply cash flow in the minds of investors. When creating the offering, consider how the portfolio supports the waterfall to investors.

Will there be a distribution of cash monthly based on payments from reperforming loans? Should the fund incorporate incentive fees or acquisition/disposition fees for loans that will be held for less than six months?

Another surprising factor for fund managers is that foreclosing and holding REO assets may lead to tax implications for the investors in other states.

Thirty states consider foreclosing on even only one parcel of real estate located within that state to be a nexus-creating activity resulting in a state tax filing. Within the context of an NPL fund formed as a passthrough entity, investors will receive multistate K-1s for each year there is a foreclosure or REO asset held in another state. The fund may need to withhold taxes from the investor’s distributions and pay taxes directly to the state.

CONCLUSION

quences. The considerations described here add another layer of complexity the sponsor must be aware of in addition to the securities compliance.

Nevertheless, a well-thoughtout offering with a strong team around a fund manager can successfully launch and maintain the fund. ∞

ABOUT THE AUTHORS NATE ASHLEY Nate Ashley is a fund accounting supervisor at Spiegel Accountancy Corp. He provides accounting and consultation services to

private lending and nonperforming note

funds. Ashley works with distressed debt

fund managers on mitigating issues related

to non-cash income and the valuation of foreclosed assets.

TAE KIM

Tae Kim is a corporate and securities

attorney at Geraci LLP, AAPL’s general

counsel, whose practice involves advising

clients on securities compliance in private and public offerings, fund designing and

preparing offering documents. Kim and the

Corporate and Securities team work closely with clients to establish mortgage funds, real estate acquisition funds, syndications, real

estate investment trusts (REITs) and Qualified Opportunity Funds.

BEETA LECHA Beeta Lecha is a principal at Spiegel

Accountancy Corp. She leads the Taxation

and Fund Accounting practices. Lecha has 13 years of private equity and alternative

investments experience, primarily focusing on private lending and real estate funds.

In addition to fund accounting and investor reporting, Lecha provides

Designing an NPL fund can be complicated. Without careful consideration, the design can lead to adverse tax conse-

tax strategy, tax planning and tax compliance for fund managers and real estate investors. Lecha is a member of the American Institute of Certified Public Accountants (AICPA) and the California Society of

CPAs (CALCPA). She serves on the Education Advisory Committee of the American Association of Private Lenders (AAPL).

SPRING 2020

49

LENDER LIMELIGHTÂ WITH MICHAEL MIKHAIL

A Model for Success Traveling and living internationally helped Michael Mikhail “find himself”—and gave him the mindset to discover his calling.

by Katie Bean

F

or some entrepreneurs, the ultimate goal is creating a

company that can run just as successfully without

them as with them . Michael

Mikhail, founder and CEO of Stratton Equities, sees his business completely differently.

“I’m never absent. I help on every single loan. … I haven’t taken a vacation and I won’t take a vacation. I think we would lose the quality control that makes us what we are,” he said. “This company is my life and my lifeline. I wouldn’t know what to do with myself if I wasn’t here.”

Mikhail has put all of his energy into running the company since he started it in June 2018. Within six months, and as his company’s sole employee, he had brought in $1 million in gross revenue. Since then, the company has expanded to nearly 10 team members.

Mikhail wants to continue

LENDER LIMELIGHT WITH MICHAEL MIKHAIL

to add to those numbers.

Stratton Equities offers real estate investors direct hardmoney and nonqualified mortgage loans. Dealing in direct private money, the noninstitutional lender works with parties in a real estate transaction, loaning money that is usually secured by an asset. With fewer

52

PRIVATE LENDER

underwriting requirements, loans typically close faster, in as quickly as seven to 14 days.

Stratton Equities offers a variety of mortgage programs, including fix-and-flip loans, new construction, cash-out refinance, bridge loans and foreclosure bailout loans, to name a few.

A WINDING ROAD Mikhail’s route to his current success has been a circuitous journey rather

He got a taste of the real estate industry at 19 years old, buying an investment property. He honed his entrepreneurial skills by starting and running

than a straight road.

a car wash. But real estate

His father flipped homes

appealed to him, and he con-

“before it was the cool thing

tinued in the industry—until

to do,” Mikhail said.

the Great Recession hit.

nightcap of scotch, he decided

and homeless, couch surfing

worry about. “I had no prob-

happened in my life. I lost a

he had to go away for a while.

and sleeping on floors. During

lems, no stress. Wake up, go to

lot of money,” Mikhail said.

He was down to his last few

a stint in Dubai, he worked

the beach, go to the gym, hang

The experience left him ques-

dollars, so he pawned gold

as a trainer, capitalizing on

out with friends,” he said.

his expertise from competing

But in 2017, he decided

“After 2008 happened, a lot

tioning how to move forward.

Mikhail said he took a night-

wrestling medals and jewelry, coming up with $3,900.

time hike to clear his head and

He traveled around the world

ponder his next move. Sitting

for five years, visiting 19

on a rock with a cigar and a

countries. He was nomadic

in physique body building.

to close that chapter and

Among his realizations from

return to the U.S.

that time: “It’s hard in other

Back in New Jersey and “dead

parts of the world to do what you can in the States, to start an LLC and build a business from the ground up,” he said.

broke,” as he described it, he lived at his grandmother’s house until he could get his feet back on the ground.

During his journey, Mikhail

He took a job at a nearby

said, there wasn’t much to

mortgage lending firm and

THIS OR THAT CALL OR EMAIL? CALL. I TELL EVERYBODY, YO U HAVE TO DO IT OVER THE PHONE.

IN EMAIL, YO U’LL NEVER GET THE FULL SCENARIO.

ANDROID OR APPLE?

DEFINITELY APPLE.

SNEAKERS OR FLIP-FLOPS? ARE WE ON THE BEACH? NICE LEATHER SANDALS

IF I’M ON THE BEACH; IF NOT, THEN SNEAKERS.

POOL OR POKER? NEITHER. I AM THE ONE MAN ON EARTH WHO DOESN’T LIKE AN Y SPORTS.

NIGHT OWL OR EARLY BIRD?

WHEN I WAS YO U NGER, I WAS THE EPITOME OF A NIGHT O WL. NO W, I GO TO BED BY 10:30 AND WAKE UP BET WEEN 4:30 AND 5:30. BY WAKING UP THAT EARLY, YO U GET AN EXTRA M ON TH O U T OF YO UR YEAR. I GET SO M UCH STUFF DONE THAT I WO ULDN’T HAVE AT 8 O’CLOCK IN THE M ORNING.

SPRING 2020

53

LENDER LIMELIGHT WITH MICHAEL MIKHAIL

quickly realized the company’s shortcomings, especially in lead development. He decided he could do better himself.

FOCUSING ON THE GOAL Around the time he decided to start Stratton Equities, Mikhail took a lesson from nature.

He was driving around, he said, and began to notice the squirrels. They spent 100 percent of their time on the essentials: finding food and water and building nests.

“They have 24 hours a day.

They’re very efficient.

They’re not watching TV, they’re not on Instagram.

They’re able to accomplish their goals because that’s all they focus on,” he said.

GEARING UP Though Michael Mikhail spends most of

his efforts on building Stratton Equities, he does have one hobby.

“I’m a big car guy,” he said.

Earlier this year, he ordered a BMW M8 Competition, the fastest car BMW has made. He also has a BMW M6 and a Mercedes-AMG GT R.

54

PRIVATE LENDER

And that’s what he did as he started the company: He was hyperfocused on building the business. He didn’t go out or pursue relationships.

Those sacrifices contributed to his success, Mikhail said.

The company is beginning to scale, although it hasn’t been as fast as he’d like.

“Hiring is the hardest thing. I’m picky about who I bring on board,” he said.

Though he receives a lot of resumes for potential loan officers, Mikhail said he’s not interested in remote workers.

He’s only hiring those who can work full time, on-site at the company’s Pine Brook, New Jersey, headquarters.

With as many specialized loan programs as Stratton Equities offers, Mikhail said it takes about three months to fully train his loan officers.

“Our customers have an issue, a problem that needs to be solved,” he said. “They come for programs that you can’t find outside of our company.”

His current staff helps him solve both customers’ problems and business challenges. He said the employees he’s assem-

“ A lot of people look at me now. People think I just landed here. They think I don’t know what it is to be broke or struggle. I didn’t land here. I had to work up to here.”

— MICHAEL MIKHAIL

bled are “like the A-Team,” all bringing different skills and personalities to the table.

Mikhail said he also finds it rewarding to see his team achieve, which helps support their families and grow the business.

“We all need accomplishments.

It’s human nature,” he said.

He is also gratified that Stratton Equities helps all types of borrowers, many of whom have had bad experiences elsewhere.

“We don’t have upfront fees, other than appraisal fees.

If we can’t close a loan, we don’t close a loan,” he said.

“We have a stellar reputation. You won’t find anything bad about us online. It took a lot of work to get there.”

billionaire when he was 20 years old: If you want to make it, you have to be a bit selfish and give people a limit.

Mikhail said he has to say no if friends or family ask for money, and it’s not because he wants to be mean. He wants to preserve capital to continue investing in the business. He also sees the value in working toward a goal, like he did.

“This company completely changed my life and turned it around for the better.” ∞

‘I DIDN’T LAND HERE’ To Mikhail, it’s important that people recognize the work that went into the venture.

ABOUT THE AUTHOR

“A lot of people look at me now.

People think I just landed here.

They think I don’t know what it is to be broke or struggle,” he said. “I didn’t land here.

I had to work up to here.”

He sees Instagram posts where people guess how soon they can become a millionaire.

“They want it overnight. They want to snap their fingers and become a millionaire,” he said.

“It’s a false way of thinking.”

KATIE BEAN Katie Bean is a former newspaper and magazine editor

who loves telling the stories of businesses and great leaders.

She is based in Kansas City.

Mikhail also remembers advice he heard from a

SPRING 2020

55

CASE STUDYÂ

RENOVATED MULTIFAMILY PROPERTY IN NEW ORLEANS FLOODED WITH LEASES A hard-working military veteran renovated

an 8-unit multifamily property in the FEMA Flood Zone X region of New Orleans.

T

56

he dilapidated property was purchased in May 2018 as an investment property. The vision was

the loan was funded, work resumed on installation of a new roof, exterior staircases at the back of units, new front and rear

a straightforward fix-and-flip. Renovation began

exterior doors and new windows and casings.

shortly after the purchase.

Interior renovations included new lighting, flooring, painting,

As with many fix-and-flip projects, significantly more items

cabinetry and granite countertops in kitchens as well as the

needed repair than first thought, including the foundation, sub-

installation of new mini-split A/C systems. New appliances

flooring, exterior walls and trim. All were suffering from termite

and bathroom fixtures, including bathtubs and sinks, were

damage or rot. They were completed before a loan was needed.

also installed.

After realizing that more funding would be needed to complete

All units featured two bedrooms, one bathroom, a living room

the project, the borrower sought out a fix-and-flip loan. After

and a kitchen.

PRIVATE LENDER

Lender // Jcap Private Lending Borrower // Shinnah Brown Location // New Orleans, Lousiana

BEFORE

Originally Built // 1920 Square Feet // 5,706 Loan Amount // $675,000 LTV // 99.26 Credit Score // Yes Borrower Experience //

Experienced Interest Rate // 10.88%

AFTER

Length of Loan // 12 months Rehab Costs // $675,000 Summary of Opportunity //

The property had a $680,000 original value. After rehabilitation, it was anticipated to be $1,100,000.

BEFORE

With only eight units in the renovation scenario, the property achieved stabilization during the renovation process.

Stabilization near the date of completion was well-supported by absorptions within the local market. Renovations were completed June 8, 2019.

AFTER

SPRING 2020

57

LEGAL

Get Ready for CCPA Here’s what a CIO can do to prepare for compliance with the new California law governing how personal consumer information is handled.

by Tom Hajda

O

n Jan. 1, 2020, the California

Consumer Pri-

vacy Act (CCPA)

went into effect, placing

a new compliance burden on companies for the way they gather, store and

disseminate information.

Passed to provide more power to consumers to protect their identity, the CCPA provides a mechanism for California residents to identify what data is being collected from them, learn how it is stored and shared, and request it to be deleted.

The act also places requirements on businesses to make changes to their compliance policies to support these new

consumer rights. For this reason, it is imperative that CIOs familiarize themselves with CCPA, identify which section of the law applies to them and determine how to prepare for and stay in compliance.

HOW CIOS CAN PREPARE It is crucial for CIOs to carefully analyze how this new law will impact their business, examine the requirements of the law and penalties for violations, and evaluate their company’s readiness for compliance and strategy for minimizing risk.

Specifically, a business that collects consumer information is required to: I nform consumers about

what personal information is collected.

58

PRIVATE LENDER

I nform consumers about

how their personal information will be used.

I dentify the categories of

personal information the company has collected.

I dentify the categories

of sources where the

information is collected.

D isclose the purpose of

collecting a consumer’s personal information.

D isclose the categories of

third parties with whom

the information is shared.

I dentify the specific

pieces of personal

information collected from consumers.

CIOs must be proactive in identifying what part of the law relates to their business and

determine how each component applies to daily operations.

Here are some points to consider when preparing for compliance with the CCPA. Determine if your business is required to be compliant with CCPA // The first action you should take is to determine whether the law applies to your business and whether you need to be compliant. This determination could be a challenge if you do not have the right data.

In particular, CIOs find it hard to determine what categories of information their company collects and how that personal information is processed and used.

Businesses can determine if they fall under the aus-

pices of the law by asking the following questions: D o you conduct busi-

ness in California?

D o you collect any

“It is crucial for CIOs to carefully analyze how this new law will impact their business, examine the requirements of the law and penalties for violations, and evaluate their company’s readiness for compliance and strategy for minimizing risk.”

California resident’s

personal information,

or does someone else collect that information on your behalf?

D o you generate

annual gross revenue above $25 million?

D o you annually buy, sell,

receive for commercial

D o you alone, or jointly

To make this determination,

with another entity,

a company typically deploys

poses and means of

along with a Data Protection

personal information?

to determine how much data

determine the pur-

a data mapping analysis,

processing consumers’

Impact Assessment (DPIA)

If you answered in the affir-

purposes or share for

mative to some of these

their organization collects and how it uses that information.

commercial purposes

questions, then you will need

The information gleaned from

the personal informa-

to develop a strategy for

the DPIA provides insight

tion of 50,000 or more

determining just how much

and assists in understand-

California consumers

data you collect and whether

ing how to go about meeting

it is applicable to the law.

compliance requirements.

aged 16 or over?

UNDERSTAND AND DEFINE THE INFORMATION FLOW Here are some tips for dissecting the data and determin-

ing the level of compliance required of your business.

Follow the information flow

into the company and identify

the lifecycle of that information to minimize what data needs to be collected. This process

SPRING 2020

59

LEGAL

includes identifying how data arrives from inside California and moves out of state, or if it is gathered from or shared with outside suppliers or vendors.

Also identify how information is transferred internally or externally and if that information flow is governed by your company’s security procedures.

Finally, all people with access to personal information must be trained on their requirements under the law.

BREAK DOWN THE INFORMATION First, identify the type of data being collected in your data mapping analysis and examine what category it falls into.

Identify which employees come in contact with personal data, how the data is stored and the security of where it is stored.

Identify the transfer methods for the data and how the data was collected from the consumer. Identify the information

information that shields certain data from being viewed by unauthorized individuals

or from being compromised

Once the data flow is identified and defined through the DPIA analysis, implement appropriate policies and procedures to control how personal

are ways to do this so that no matter how the data travels

through the company, in any

format, controls are in place to keep it secure and protected.

Pre cis ion

ty yal Lo

Innovativ e

PRIVATE LENDER

place various types of encryp-

through a database hack. There

al ion ss

60

A company can also put in

Pro fe

• Online Portals • Multi-lender Loans • ACH & Direct Deposit • No Note Minimum/Maximum • Property Taxes & Insurance payments • 1098’s, 1099’s, and CA 593-I’s • And more! Contact For More Information.

who has access to that data.

Integrity

Our Services Include:

information is handled and

tion techniques for personal

DESIGN AND IMPLEMENT SECURITY CONTROLS

Relia bili ty

er stom Cu Care

flow internally within the organization and who is responsible for that information at each stage and their access level.

(800) 646-3445

noteservicingcenter.com newacct@noteservicingcenter.com

UNDERSTANDING YOUR OBLIGATIONS UNDER CCPA Once you identify that

your business falls under

the CCPA’s data collection

requirements, it is critical to understand your company’s obligations under the law.

Study up on consumer rights

and the protections provided under the law. Develop a

compliance strategy for your organization that provides a pathway for becoming

compliant. Since the law

does not currently have a

regulatory body responsible for compliance oversight, it

is the responsibility of your organization to determine

which requirements apply,

which policies need to be in

place to ensure proper secu-

rity protocols and that autho-

rized employees are handling consumer data appropriately.

After going through these

compliance check procedures, the CIO should have a fairly

strong understanding of how data is processed, how the

business uses that personal

information, the information lifecycle, who administers the data and the risks that

come with noncompliance.

You can now use this information to develop a well-defined CCPA compliance strategy and identify all the risks and roadblocks that could hinder compliance and expose the company to violations.

S TATES THAT HAVE PA SSED OR ARE CONSIDERING CONSUMER PRIVAC Y L AWS

MOVING THE PROCESS FORWARD Now that you have a better understanding for determining whether CCPA applies to your organization, it is important to have a well-constructed plan for implementing compliance.

Here are some additional steps to consider when developing a comprehensive compliance plan: C reate a privacy model

and plan for taking steps to meet CCPA compliance requirements.

U pdate policies and

procedures to include CCPA’s requirements with specific attention to California consumer rights. This includes opt-in/opt-out rights pages on all websites your organization controls.

C reate external proce-

dures that allow consumers to opt out of data collection, along

I llinois

SB 3153; AB 4640

N ew York SB 5642

HB 2785

SB 2323 / AB 3818

HB 3051

SB 1177

HB 3358

SB 224 / AB 3739

L ouisiana HB 465

M assachusetts SB 120

M aryland

SB 613 / HB 901

N evada

SB 220 – PASSED, effective 10/1/2019

N ew Jersey

SB 3153; AB 4640 AB 4902; SB 2834 SB 2634

SB 4411 / AB 6351 AB 465 AB 3308 SB 7736 O regon

AB 2866

Pennsylvania HB 1049

R hode Island

HB 5930 / SB 234

Washington

HB 1854 / SB 5376 HB 2046

SPRING 2020

61

LEGAL

ABOUT THE AUTHOR

TOM HAJDA Tom Hajda is senior counsel

with the Geraci Law Firm. He

with internal proce-

dures for how to handle consumer requests.

C reate toll-free phone

numbers and email

addresses specifically to cater to consumers who wish to request

removal or deletion of personal information.

C reate strong security

measures to protect and safeguard consumers’ personal information

and access mechanisms to control the authorized use of data.

C reate processes

that enable your

company to reply to consumer requests

62

PRIVATE LENDER

within the required 45-day timeframe.

C reate processes to

inform third-party partners of any consumer data requests that are made of your company.

D evelop policies and

procedures to handle any unexpected incidents, such as a data breach, that define how the company mitigates damages.

Train your employees

to understand CCPA requirements and explain how your organization informs consumers of their rights under the law.

While the CCPA is California’s version of a data privacy law, many countries and states have begun revising existing

privacy laws or creating new laws that govern how personal consumer information is gathered and disseminated.

With data security breaches becoming more prevalent around the world, more emphasis is being placed on developing strong regulatory rules on the handling of consumer information. While CCPA does not apply nationwide, 11 other states proposed similar regulation for the 2019/2020 legislative sessions. Regardless of the immediate necessity of following regulation, it is critical for CIOs to understand these new laws and take proactive steps toward developing internal processes to ensure compliance. ∞

has more than 30 years of

experience providing advice

with respect to consumer and business regulatory matters, compliance management,

nationwide state licensing,

governmental supervision and

examination management, corporate governance, strategic

acquisitions and other matters.

Hajda has designed and

executed for clients regulatory compliance strategies,

including the Bank Secrecy Act, Home Mortgage Disclosure

Act, Equal Credit Opportunity

Act, Truth in Lending Act, Real Estate Settlement Procedures

Act, Fair Housing Act, Privacy, and Information Security.

Which Lender Checks All the Boxes vide y Pro e h T oint Do ated P r c i d e fo A D ntact of Co r Deals? u A l l Yo

Able Are They ast, er F to Deliv ent e Conv ni ?

Options Funding

A re T h e y Co m m i t t e d t o t h e H i g h e s t L ev e l of C u s t o m e r S e r v i c e?

I t ’s N o M y s t e r y T h a t i t ’s RC N C a p i t a l !

By Pairing You With a Dedicated & Knowledgeable Point of Contact, We’ll Never Leave You Guessing Who You Should Call to Fund Your Next Deal.

RCN CAPITAL, LLC IS LICENSED AS A CALIFORNIA FINANCE LENDER UNDER DEPARTMENT OF BUSINESS OVERSIGHT LICENSE NUMBER 60DBO-46258. ARIZONA MORTGAGE BANKER LICENSE BK-0932325. OREGON MORTGAGE LENDING LICENSE: ML-5571; NMLS COMPANY ID: 1045656.

SPRING 2020

VISIT RCNCAPITAL.COM

EMAIL INFO@RCNCAPITAL.COM

63

CALL 860.432.5858

LEGAL

THE FUTURE OF THE CFPB IS AT STAKE

The current structure of the CFPB as created by Title X of the Dodd-Frank Act allows for a single director of the CFPB appointed by the president, but not removable by the president, except for-cause. However, Article II, Section 3 of the Constitution empowers the president to “take care that the laws be faithfully executed.” If the

The Supreme Court’s decision has the potential to heavily impact current lending practices.

by Caleb Nissley and Melissa C. Martorella

president can only remove the director of the CFPB for-cause, then perhaps the structure of the CFPB has impinged upon the president’s constitutional authority. This is the issue the U.S. Supreme Court is set to decide in a ruling to be issued sometime this summer.

On March 3, 2020, the U.S. Supreme Court heard oral arguments in Seila Law LLC v. Consumer Financial Protection Bureau. The issue in this case is whether the structure of the Consumer Financial Protection Bureau (CFPB) violates Article II, Section 3 of the U.S. Constitution.

IMPLICATIONS FOR PRIVATE LENDING One possible outcome of the Seila Law case is that CFPB directors would now be removable for any reason, much as other agencies cycle appointments under new presidency terms. A ruling in favor of Seila Law could also call into question all the CFPB regulations that affect the private lending industry.

64

PRIVATE LENDER

Some of the laws the CFPB enforces include the Truth in Lending Act (TILA), the S.A.F.E. Mortgage Licensing Act, the Home Mortgage Disclosure Act (HMDA) and the Fair Credit Reporting Act (FCRA). These laws and others that the CFPB enforce shape the contours of the private lending industry. Note that, in particular, the private lending industry exists within TILA’s “business purpose” exemption as interpreted and enforced by the CFPB. If the CFPB or any other federal regulator stopped enforcing TILA, regulation of the private lending industry would be left for the states to enforce.

In an attempt to insulate the CFPB from political pressure, the Dodd-Frank Act takes several steps, including funding the CFPB through the Federal Reserve System rather than through Congress. In addition, it makes the CFPB director, who is originally appointed by the president and approved by the Senate for five years, removable from his or her position only for “inefficiency, neglect of duty or malfeasance in office.”

The stark differences in how the CFPB has been run under a director appointed

by President Obama versus how it has been run under

President Trump illustrates

how much politics can affect the operation of the bureau.

During the tenure of

Obama-appointed Director

Richard Cordray, the CFPB

collected an average of $59.6

million in consumer restitution per case of illegal consumer financial practice. But after

The contrast between the actions of the Obama director and the Trump directors highlight how the CFPB’s for-cause removal provision can impinge upon the president’s power to implement more borrower-friendly or lender-friendly policies.

BASIS FOR LEGAL CHALLENGE

his departure and Trump’s

appointments of Mick Mul-

vaney and Kathy Kraninger,

the CFPB collected an average of $2.4 million in restitution

The plaintiff in this case, Seila Law LLC, describes itself as a California-based law firm

operated by a solo practitioner

woefully inadequate. However,

working primarily to defend

Seila Law declined to provide

clients from creditor lawsuits

further responses and chal-

and to resolve consumer debt.

While still under Director Cordray, in early 2017, the CFPB began investigating Seila Law for unlawful practices in advertising, marketing and

lenged the enforceability of the CFPB’s demand on the grounds that the CFPB was unconstitutional. The lower federal courts ruled against Seila Law, and Seila Law appealed

sale of debt relief services.

to the U.S. Supreme Court.

In conducting its investiga-

Seila Law’s case rests upon

tion, the CFPB issued a Civil Investigative Demand to the firm. According to the CFPB,

the doctrine of separation of powers arguing that Congress impinged upon the president’s

Seila Law’s response was

per case, a 96% decline.

SPRING 2020

65

LEGAL

power by limiting his/her

ability to remove the director of the CFPB. Lower courts

have upheld the constitutionality of the for-cause removal

limitation of single directors,

although such cases have never reached the Supreme Court.

The only similar case to reach

the Supreme Court previously was Humphrey’s Executor in

1935, and while the Court also

upheld the constitutionality of the for-cause removal limitation, the case applied to five

“For private lenders, the Court’s decision has the potential to heavily impact current lending practices.”

Federal Trade Commission

(FTC) directors, rather than a single director. The single

director issue arose before the D.C. Circuit in 2016 in PHH

Corp. v. CFPB, when then Judge Kavanaugh, who was on the

court, ruled against the structure, but this case was never

heard by the Supreme Court.

In its brief to the Supreme

Court, Seila Law argued that

the CFPB is unconstitutionally structured for several reasons: (1) the CFPB limits the president’s otherwise expansive power to remove principal

officers, (2) Humphrey’s Executor, which restricts removal

power, does not apply, should

66

PRIVATE LENDER

not be expanded and is bad law and (3) the novelty of the CFPB’s structure is constitutionally problematic.

The arguments for the CFPB’s current structure set out by the lower courts who decided this case and in the En Banc decision in PHH Corp. and by constitutional scholars are (1) the CFPB’s structure is analogous to the FTC in every way relevant under Humphrey’s Executor, (2) removal power jurisprudence has never considered internal checks within an agency to be a substitute or corollary to presidential oversight, (3) the means of independence employed by the CFPB is not novel, and even if it is, the parties give too much weight to its novelty and (4) Humphrey’s

Executor should not be overruled because doing so would put into question the constitutionality of other independent federal agencies that are vital to a functional government.

POTENTIAL OUTCOMES Due to the Supreme Court’s conservative, agency-unfriendly makeup, it is a real possibility that the Court will at least strike down the for-cause provision. While Seila Law has requested that if the court finds the removal provision unconstitutional, the Court should strike down the entirety of Title X

because the removal provision is inextricably linked, it is unlikely the Court will accept this drastic remedy of abolishing the CFPB altogether.

In the initial PHH Corp. v.

CFPB decision, then-Judge Kavanaugh ruled that the proper remedy would be simply to sever the for-cause removal provision. If Justice Kavanaugh, who is among the most outspoken critics of the administrative state, ruled for limited severance, the other conservative members of the Court are unlikely to take a more extreme position,

especially at the risk of being accused of judicial activism.

policies will more directly

For private lenders, the Court’s decision has the potential to heavily impact current lending practices.

and, therefore, the private

If the Court determines the for-cause removal provision is constitutional, the status quo will remain with regards to lending practices and policies.

for-cause removal provision is

If the Court finds the for-cause removal provision is uncon-

If this happens, the future of

stitutional but can be severed from Title X, the president will have the authority to hire and fire the CFPB director at will, meaning the sitting president’s

impact CFPB enforcement

ABOUT THE AUTHORS

lending community at large.

In the highly unlikely scenario where the Court finds the unconstitutional and cannot be severed from Title X, the CFPB will no longer have constitutional authority to exist. the bureau and its regulations affecting the private lending industry will remain uncertain unless the president and Congress can pass legislation resolving the issue. ∞

MELISSA MARTORELLA Melissa Martorella Esq. is a senior

banking and finance attorney with the firm and focuses on representing

nationwide private lenders who transact throughout the country. She can be

reached at M.Martorella@GeraciLLP.com.

CALEB NISSLEY Caleb Nissley is a third-year law student at the University of California Irvine Law

School and incoming associate for Geraci Law firm. Before joining Geraci Law firm,

he studied finance and political science at

university and spent several years working

in finance and on legal issues at J.P. Morgan, the California attorney general and the Ohio attorney general.

Geraci LLP, AAPL’s general counsel, is the nation’s largest law firm that focuses on the representation of nonconventional lenders.

SPRING 2020

67

MARKETING & SALES

Making a Lasting Impression

WHO? There are two things to

consider as you address the “who” portion of your com-

pany description: who you are and who your customers are.

state the name of your com-

Potential clients should have no questions about what you do after reading through your company description.

key owners or members of

WHERE?

First, focus on who you are.

This is your opportunity to

Here’s how to write a good private lender company description.

pany as well as identify any the management team who are crucial to the business.

by Erica LaCentra

Once you have addressed

who you are, start thinking about who your customers

are and how you can appeal

W

ith the

rise in the number

of private

lenders in the industry, it’s important to create a company description that will

allow you to stand out from your competitors and be

memorable for the long term.

So, what exactly makes a good company description?

At the heart of it, your company description should accomplish two main goals. First, it should give readers a very clear idea of what your company does.

Second, it should explain the void that your products or services are filling in the industry.

68

PRIVATE LENDER

Beyond that, writing a company description is not as complicated as you would think and typically follows a very simple template.

ESTABLISHING THE BASICS As you begin developing your company description, it’s important to address basic information that customers will be looking for about your business.

The easiest way to start is by outlining the “who,” “what,” “where,” “when,” and “why” of your company and build from there.

loans would include something like “XYZ Lender specializes in providing investors with short-term loans that finance the purchase and renovation of 1-4 family non-owner occupied properties.”

to them in the rest of your company description.

WHAT? This is where you should talk about just what it is that your

company does, specifically the products or services you offer.

Again, write this part of your

description with your customers in mind. As a lender, it is

especially important to get as descriptive as possible with this portion. Clearly define

what loan programs you offer and what niche you cater to.

For example, a good description for a private lender that specializes in fix-and-flip

Like the “who” part of your description, there are two things you need to address when it comes to “where”:

01 W here is your company located?

02 W here do you

offer your products or services?

It’s important to note where your headquarters is located as well as where any additional branches are located. From there, it’s easy to transition into providing information on where your company operates and what states you lend in.

Including these pieces of information makes it easier for your customers to find you, and it gives your company greater visibility in the areas where you are looking for new clients.

WHEN?

within the company can help achieve the same result.

Your company description should include details on when your company was founded. In the world of private lending, investors are looking for lenders that have a proven track record. Mentioning when your company was created can help show that you are a seasoned lender in the industry.

For example, there is nothing wrong with a company description that says “founded in 2019.” But, it would be good to include a sentence about how “the founder of the company has over 20 years of experience working with financial companies like ABC Capital, XYZ Financial and Private Lenders LLC” to establish additional credibility.

However, what does that mean for private lenders that are just starting out? For newer private lending companies, mentioning the level of experience of key leadership

WHY? The final piece of your description is your “why.”

This is your opportunity to

talk about why your company was formed and also to delve

into your company’s mission.

To develop this portion of

your company description, ask: “What void existed

START CRAFTING YOUR COMPANY’S STORY Once you have the basics outlined, it’s time to bring your company description to life.

that made it absolutely

As you start pulling all the

company to address it?.”

you are also addressing what

necessary to create a new This is your chance to really

connect with your customers.

Your “why” should strike a

chord with potential customers

core pieces together, make sure your company specializes in and what sets your company apart. What does your company stand for in the industry?

because you are recognizing

Also give customers a bit of

experienced in the industry

future. Since the private lend-

company will help fulfill it.

itive, this is your opportunity

a recurring need they have

insight into your company’s

and then explaining how your

ing industry is highly compet-

SPRING 2020

69

MARKETING & SALES

to distinguish yourself from your competitors and give your brand some personality. A good company description should read like a short story that will captivate your potential customers and finish with a clear call to action that will direct those customers to take the next steps to connect.

For example, the following is a company description for RCN Capital that calls out all the key pieces of a good company description: R CN Capital is a national,

direct, private lender. // “Who” the company is.

We provide short-term

and long-term commercial loans for the purchase of non-owner occupied residential and commercial properties, financing of renovation projects and bridge funding. // “What” the company does.

We lend to experienced

real estate professionals, investors and contractors throughout the country. // “Who” the ideal customer is for the company.

R CN Capital LLC was

established in South Windsor, Connecticut in 2010 to provide time-sensitive bridge financing to real estate investors to fund the purchase of non-owner

70

PRIVATE LENDER

occupied residential and commercial properties, provide bridge loans and provide real estatebacked lines of credit. // “When” & “Where” the company was founded.

F ormed towards the end

of the recession, RCN Capital has benefited from a turbulent housing market in which many real estate investors see great opportunity. A lack of liquidity in the credit markets and increased regulation of the banking industry has restricted conventional financing as an option for investors in fast-moving and competitive real estate markets. As the nation’s premier direct private lender, RCN Capital helps fill this void. // “Why” the company was created and “What” niche does the company cater to.

A s a direct private lender,

RCN Capital takes a commonsense approach to underwriting, with all approvals made in-house.

We are dedicated to providing quick responses to time-sensitive loans, often with the ability to close in as few as 10 business days. At RCN Capital, we value referrals and our brokers are protected.

We are committed to the highest level of customer service, because our success lies in building relationships. // Value added benefits of working with the company, & what sets the company apart from competitors.

F or more information on

our company or our loan programs, or to apply, visit our website at www.RCNCapital.com. // Clear call to action for potential customers.

PUTTING IT ALL TOGETHER

ABOUT THE AUTHOR

ERICA LACENTRA Erica LaCentra, director of

marketing, is responsible for planning, developing and

implementing RCN Capital’s

marketing plan as well as overseeing the company’s marketing department. Joining RCN Capital in 2013, LaCentra led

a strategic rebrand to position the company for nationwide

expansion. Her ongoing efforts

Writing a good private lender company description isn’t

difficult when you have the right pieces to work with.

Once you create it, make sure your company’s description

gets the exposure it deserves not only on your website but

on any other platform where you want to promote your business (e.g., like social

media profiles or association member directories).

Finally, just as you would regu-

larly update your resume, make sure you regularly review and

update your company’s description. As your business grows and evolves, your company

description should follow. ∞

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, the marketing

and communications chair for

AREAA Boston, and a member of the REI INK editorial board.

She holds a B.S. in advertising with a minor is fine arts from Suffolk University in Boston, Massachusetts.

MEMBERSHIP

MEANS SOMETHING. Join the oldest national association representing the private lending industry as a viable alternative for borrowing and investing.

As a member, you’ll gain prestige through our:

ADVOCACY

CODE OF ETHICS

EDUCATION

RECOGNITION

SUPPORT

NETWORKING

JOIN TODAY! AAPLONLINE.COM 913.888.1250

SPRING 2020

71

MARKETING & SALES

BEST PRACTICES FOR WRITING A STAND-OUT CALL TO ACTION How to write a call to action that will produce leads.

by Ruby Keys

You may be able to produce an engaging marketing piece for your customers; however, you will not get clicks, conversions, lending applications or any other initiative you want to accomplish if you don’t have a well-defined call that drives consumers to action.

Common private lender messages like “Apply Now” and “Call Now” fall under the definition of a CTA. But these phrases alone may not bring the desired results. A catchy, well-defined CTA makes the reader feel emotionally involved and can help drive new leads.

The following are tips for writing a strong CTA.

For most private lenders, your call to action (CTA) should

drive potential borrowers to get in touch, fill out a loan appli-

cation or get more information

stands out from other lenders and is more than a “Call Now!” Telling someone what to do after reading your marketing piece is

about your products and ser-

easy. Filling them with emotion,

to writing your next CTA so it

them to act is the tricky part.

vices. Here are the key elements

72

PRIVATE LENDER

UNDERSTAND YOUR AUDIENCE

motivating them and convincing

Most marketers understand who they are targeting in their advertisements, but before

you begin preparing a CTA,

ensure you know your target demographic, how to speak to it and why those people

need your lending product.

One of the best ways to do this is to identify the problem your audience is trying to solve.

Use your CTA copy to describe how your product or service

benefits them. Borrowers are

usually looking for reliability, flexibility, fast closings and consistent phone and email

availability. Some of your leads may have been burned in the

past by lenders who underper-

formed in one or more of those

areas. Show your audience how you are different in your CTA.

PROVIDE CLARITY

CTA. Selling items with a message that states “Ships Today” creates urgency in a different

A well-written CTA is effective only if the message is clear to the intended audience.

Keep your message consistent throughout the advertisement, explaining exactly what you want the reader to do. Your message should stand out and naturally progress to the ultimate action you want them to take.

CREATE URGENCY & SCARCITY Online retailers like Amazon use urgency as an effective

way than a time limitation.

Other call to actions that create urgency may encourage your

such as “capital is limited” or “won’t last” often command immediate action.

USE ACTION VERBS AND PHRASES

audience to act “before it’s too late.” The same principle can apply to your lending business. If you are running a limited-time promotion or a first-time borrower discount, make sure to emphasize that in your copy (e.g., “Call now to lock in your low rate before it’s too late!”).

Adding the fear of scarcity is also effective in prompting consumers to act. Phrases

When you are constructing a good call to action, use action verbs. Some examples of action verbs are “take action now,” or “get started,” or “make the change today.” These action phrases often resonate with consumers and help to subliminally remove procrastination (e.g., “Apply for a loan now,” “Call now for your quote,” “Begin your next real estate investment project today”).

USE REPETITION When you want to drive a message home, nothing

works better than repetition.

Just remember: Although

repetition makes your CTA more effective, overdoing

it can also have a negative

impact if you don’t separate it with additional copy.

There are several techniques

for repeating your call to action and ensuring your message is heard loud and clear. Some

examples include requesting a customer to “call now,” but later repeating, “talk to our

representatives today,” or “our

SPRING 2020

73

MARKETING & SALES

representatives are standing

“Besides attracting their attention, your message and CTA should make the task as easy as possible for the reader.”

by waiting to take your call.”

Using repetition is espe-

cially effective when you

are issuing multiple pages

of marketing copy. Repeat-

ing your CTA on each page

reminds your reader of what their end action should be.

USE COLORFUL GRAPHICS AND INFOGRAPHICS Most consumers are visual,

202-780-2397

so a call to action designed

Expand Your Investor Loan Business

with graphics stands out.

Customers may not even know there is a call to action if it

doesn’t catch their eye against the rest of the message.

Residential Business Purpose Loans are serving a rapidly changing market. You need to align your lending business with a reliable investor partner.

Verus is an experienced investor that will help you boost your Bridge, Renovation, Ground Up Construction and Term Rental loan business.

You keep the borrower relationship, Verus buys the loan.

Brightly colored infograph-

If you provide multiple CTAs, make sure each one points to a specific task.

Bad CTA: “Qualifying your loan is a 3-step process: first, fill out our online application… etc.”

Good CTA: “Pre-qualify for a loan in less than 5 minutes by clicking here!”

AVOID GOING NEGATIVE Sometimes marketers believe that going negative either against a competitor or an individual’s life choice is effective.

Negative CTAs typically do not garner a positive response in the same way an uplifting message and action call can.

ished reading the message.

Keep your CTA honest and clear, but it’s best to deliver a positive message that draws your audience in emotionally and reminds them that the action they take will have a positive impact on their lives.

KEEP IT SIMPLE

MAKE THE PROCESS EASY

ics provide a clear message and also cement the mes-

sage with an image that may stick in customers’ minds long after they have fin-

++++++++++ ++++++++++ ++++++++++ ++++++++++ ++++++++++ ++++++++++ ++++++++++ ++++++++++ ++++++++++

Contact Mark Dellovo or Jeff Schaefer Mark Dellovo mdellovo@verusmc.com Call: 202-780-1093

Jeff Schaefer jschaefer@verusmc.com Call: 202-534-1821

Asking your audience to

perform multiple tasks in order to respond to your

CTA can cause confusion

verusmc.com

74

PRIVATE LENDER

or frustration. The result?

They may simply give up.

Besides attracting their attention, your message and CTA should make the task as easy as possible for the reader. If you want them to call or text, make sure the number is bold and

The ® Your Ultimate Lending Platform

SPRING 2020

75

MARKETING & SALES

stands out. If you want them to sign up for more information, such as a newsletter, make sure the link takes them right to the form instead of dropping them into another message string.

PUT YOUR CTA IN THE RIGHT SPOT If your CTA isn’t in the right place, organically placed within your surrounding message, you may miss out on dropping a CTA at the right time during a reader’s natural progression and decision-making process.

For example, it is common to see the CTA as the last sentence in a piece of content. But, that strategy may not work well if the content is already lengthy.

The reader may not even make it that far before clicking away.

ASK AND ANSWER QUESTIONS Customers want to know what happens when they take action and how it benefits them.

They may be skeptical of your CTA if they don’t understand what happens if they move

76

PRIVATE LENDER

forward. Assuage their fear of acting by explaining the result and when they can expect it (e.g., “If you are pre-qualified, you will be asked to provide additional documentation that may include the following items: [add list] and an appraisal and/or property inspection may be ordered…”).

REDUCE CUSTOMER FEARS Customers evaluate an advertisement with some form of skepticism. Use your call to action to assuage those fears and overcome any opposition they have by identifying and dismissing concerns you think would cause a roadblock to getting a response. Lay out the benefits you offer clearly: Do you have no prepay penalties or upfront fees? Do you not require tax returns? Do you accept exterior appraisals? Do you provide financing in all or most states?

A good approach to reducing fear is providing as much information as you can about the process without bogging down your audience. You can also discuss any limitations your offer might have and walk through what they can expect after moving forward.

A big fear of consumers is wasting their precious time. Your CTA can quell this anxiety by including a statement such as “prequalify in less than 5 minutes” or other terms that gain their trust and assure them their action is worth the effort.

MAKE AN OFFER THEY CAN’T REFUSE We have all received offers that are too good to pass up.

Keep in mind that creating a call to action promoting an offer that is too good to pass up is different from a take it or leave it offer.

When constructing this type of CTA, be clear about why the offer is so beneficial and provide a clear indication that it won’t come around again soon.

Constructing the perfect call to action takes practice, and much of that comes through trial and error. Although you may be driving leads with your current CTA, it’s important to test new techniques, from color to copy placement, to see what works best and drives the best results.

Conversion rate optimization is a crucial tool in determining

which call to action techniques are working and how well they continue to drive traffic.

Don’t be afraid to experiment with new approaches, refine these best practices and continue testing to find the CTA solution that works best for your marketing strategy. ∞

ABOUT THE AUTHOR

RUBY KEYS Ruby Keys is the vice pres-

ident of Geraci Media. She joined Geraci LLP, AAPL’s

general counsel, in 2015 as the marketing coordinator

for Geraci Law Firm. As she enters her fifth year with

Geraci, she is now the vice

president of Geraci Media, a

full-service marketing agency, which caters to the nonconventional lending space.

Experience what the Think Realty Conference & Expos have to offer:

THINK INVESTING STRATEGIES REALT Y AD 20/20

Network with top-tier real estate professionals at the Cocktail Reception.

FOR DYNAMIC MARKETS JUL 13-14 BALTIMORE

VISION INSIGHTS FOR AN REI DECADE SEP 19-20 ATLANTA

Meet 40+ exhibitors specializing in REI tools, products and services.

Attend sessions and specialty workshops on a variety of investment strategies.

Access deal-making opportunities with the biggest names in the business.

Sign up for a FREE account for 20% off tickets.

Register at ThinkRealty.com/TR-events.

SPRING 2020

77

TECHNOLOGYÂ

The Fully Digital Mortgage Makes Headway Technology advances will benefit both borrowers and originators.

by Sanjay Prajapati

As eMortgages, including eClosings, gain traction and acceptance, the mortgage industry is focused on implementing the latest technology to reduce costs, attract customers and gain efficiencies amid a competitive environment.

78

PRIVATE LENDER

It’s not an entirely smooth transition, but progress is underway.

Fitch Ratings described in a late 2019 report that “widespread eMortgage adoption remains several years away, slowed by several obstacles,” according to author Caroline Otis, a Fitch analyst in structured finance U.S. RMBS. Full-scale digital eMortgages remain elusive in the non-agency space, she noted, due to the limited number of originators and servicers that have the technology to support them. That’s not the case on the agency side, where Fannie Mae and Freddie Mac are active participants.

The mortgage sector began taking baby steps toward digital mortgages about eight to 10 years ago, with a focus largely on the front-facing mortgage application. That is still a major focus today. However, with technology advances, the industry has innovated with predictive analytics via artificial intelligence and automation in a way that is changing how mortgage applications are received, processed, underwritten, closed and sold.

Technology is able to hone the process of lead qualification

“The mortgage sector began taking baby steps toward digital mortgages about eight to 10 years ago, with a focus largely on the front-facing mortgage application.”

the closing table, all digital aspects—at least for a good

number of mortgage compa-

nies—cease to exist. But even that is beginning to change.

It’s still common for a bor-

rower to physically show up at a title company table, sit

down and reach for a pen at

closing to sign a stack of paper

documents. However, 30 states now have laws, processes and the infrastructure to support

eClosing, and Fannie and Fredand follow-up before the mortgage application is even sub-

mitted. For example, “duplicate checker” technology allows an originator to filter out duplicate leads from its customer

relationship management database. If a potential borrower visits the company’s website

and a social media page, then

contacts a loan officer directly, those three touches are able to be funneled into a single lead to avoid the wasted time and

energy required to react to all three individual “touches.”

When a large mortgage origi-

nator gets thousands of leads, it becomes impossible for a

human to adequately sort them.

Technology is imperative to make the process of sorting

leads fast and efficient. Once duplicates are removed, the

lead in which a borrower has already selected a property to buy goes into one pot, while a lead in which the inquiry is more general might go into another. Technology is then able to leverage a round-robin technique to assign the leads to individual loan officers.

Further down the mortgage pipeline, the mortgage industry continues to innovate in processing and underwriting with a variety of digital efforts that can help create better efficiencies and even price loans based on risk analysis models.

ECLOSINGS GAIN STEAM

die are actively promoting it.

In 2015, the Consumer Finan-

cial Protection Bureau (CFPB) did a pilot study of eClos-

ings. “We know that much work and further study lies

ahead,” it said after the pilot.

“We envision a world where most of the mortgage trans-

action is facilitated by tech-

nology, and where consumers have adequate time to review documents and access tools

to help them break down the complexity of the process,” it said. “In the years ahead, we believe that eClosing can pro-

vide an opportunity to deliver an improved experience for this important step in the mortgage transaction and benefit both industry and consumers.”

Once a borrower makes it through underwriting and to

software can sort the leads based on their strength. A

SPRING 2020

79

TECHNOLOGY

The CFPB noted in its pilot

Mortgages, an originator based

report that borrowers who had

in Milwaukee, announced

a chance to review their closing documents ahead of the closing date also had the time to understand them and find potential errors (and get them corrected) ahead of the closing date. eClosing technology is arriving

in mid-February that it was introducing eClosings for its borrowers—one of the most recent examples out there.

A SLOW PROCESS OF ACCEPTANCE

one mortgage company at a time. The idea of mortgage transactions facilitated by technology, as the CFPB envisioned, is happening, albeit some would say the pace is slow. GO

Although tech-savvy millennials now make up the largest share of homebuyers, not everyone is onboard with a fully digital mortgage, or an eClosing.

We’re Picky Too. Originating Only High Quality Loans

That will likely change over time as borrowers become more familiar with technology being used in the mortgage space.

Interestingly, Solidifi, which provides valuation, title and settlement services and operates a technology-based marketplace for independent field professionals, did a survey of borrowers in which 81% of consumers said they still preferred an in-person closing.

In the same survey, seven in 10 said they prefer a more digital process at the closing table.

A possible translation: We want it, but we don’t. Nearly a quarter of these professionals suffered delays during the closing process, according to the survey, and half of these delays were caused by problems with the paperwork or the filing, according to Solidifi.

GSES AND ROCKET MORTGAGE LEAD THE WAY

assets. This automation speeds up the application process for borrowers and the verification process for originators. It has also freed lenders from certain representations and warranties for eligible mortgages to be sold to Fannie Mae. Freddie Mac made a similar program available in early 2017.

Quicken Loan’s Rocket Mortgage (“Push button. Get Mortgage.”) deserves much credit for pushing the industry forward on eMortgages. The lender began offering a 10-minute mobile mortgage application in late

Call For Investment Opportunities Call For Investment Opportunities 703-260-9620

703-260-9620

www.walnutstreetfinance.com 80

PRIVATE LENDER

The conventional mortgage industry took a major step down the digital road when Fannie Mae launched Day 1 Certainty in 2016. Day 1 Certainty allows borrowers to streamline the application process by giving lenders permission to use electronic data to verify employment, income and

2015. Since then, they have run commercials in three different Super Bowls. The 30-second spot featuring former Game of Thrones actor Jason Momoa, which aired in the 2020 Super Bowl, reportedly cost more than $5.5 million. Rocket Mortgage offers borrowers conditional preapproval within just minutes.

a full framework for eMortgages exists, that’s not the case in the non-agency space.

Within two years, Quicken

had surpassed Wells Fargo to

become the largest U.S. mort-

gage originator, due largely to the growth at Rocket Mort-

gage. In early 2020, Quicken

announced that it was pausing

operations at its reverse lender One Reverse Mortgage to

move all those employees into Rocket Mortgage, according

to a report that first appeared in Reverse Mortgage Daily.

Quicken didn’t say how many employees that involves, but

Reverse Mortgage Daily ranked One Reverse as the nation’s

second reverse mortgage lender by volume in 2019, with 2,298

loans originated in fiscal 2019.

WHY INVESTORS WILL EMBRACE DIGITAL Technology that makes use of innovation such as AI,

machine learning, chat boxes

and automated tasks is fueling the use of predictive analytics in the industry. Mortgage originators will continue to explore how they can take robust mortgage, housing and consumer data that is already collected, often due to regulatory requirements, and use it to improve and predict outcomes.

Technology, for example, can be used to create universal pricing engines that will establish the price of a loan and even assign it to an institutional buyer based on the purchasers’ parameters for buying loans. Such efficiency could allow originators to close loans even faster and optimize the price at which the loan can be sold, even reducing the need for interim line financing. Investors, meanwhile, will know sooner and with greater certainty that a loan meets its requirements and is available for purchase.

Borrower and broker secured portals will allow commu-

Ultimately, technology should enable mortgage originators in both the agency and the non-agency space to earn more profit and use their staff more efficiently. Technology isn’t there to replace people. Technology is a complement to the process, not a competitor. It’s there to improve margins, profitability and productivity. ∞

nication and the ability to

upload sensitive encrypted documents as part of the

process. The underwriting process will become less

ABOUT THE AUTHOR

labor-intensive as software

programs work through a list

of tasks to make sure the loan meets all its requirements

for funding and can reduce human error at this stage.

The industry has seen

great strides in going digital, although it’s been a slow-moving beast.

To move further down the

pipeline on digital mortgages in the non-agency space,

“originators and servicers

will need to address concerns regarding enforceability,

required technology, system

SANJAY PRAJAPATI Sanjay Prajapati is the vice

president of engineering at

Patch of Land and is working on several proprietary technology projects to improve the mort-

gage origination process there.

He has more than a decade of

engineering experience working with leading companies in retail, consulting, fintech and the real estate industry.

security and showing borrower consent,” the Fitch report

says. Unlike the GSEs, where

SPRING 2020

81

TECHNOLOGY

PROTECTING YOUR BUSINESS AGAINST CRYPTOJACKING These tips can help you with detection and prevention.

by Rob Sobers

T

here’s no

money-making opportunity.

digital savings. That’s not to

all live in a

nies and personal computers

ative view of cryptocurrency.

with cryptojacking yet another

right questions to ensure they

doubt that we

Cybercrime against compa-

progressively

continues to be on the rise,

digital world. As such,

online financial transactions have become the norm for

buying goods and services.

And many companies have adopted cryptocurrency

as a payment method for

purchasing their products and services online.

The popularity of this digital currency also means

that cybercriminals have

quickly found ways to turn cryptocurrencies into a

82

PRIVATE LENDER

way that cyberhackers use a

low-risk technique to secretly mine for cryptocurrencies or steal from digital wallets.

As a private lender, it’s important for you to know whether a potential client uses cryp-

tocurrency in their business transactions. There is still

much to be confirmed about the security and stability of

cryptocurrency and the methods hackers use to steal from

say that you should have a neg-

CRYPTOCURRENCY DEFINITIONS

It’s just important to ask the

have the proper security and

monitoring solutions in place.

Cryptocurrency // Although

bitcoin is the most recognized

cryptocurrency, there are more

No company is too small for a

than 2,995 other types of cur-

cially if you aren’t aware of

ing Litecoin, Bitcoin Cash

power resources could be used

same as a token in exchange

else. Here’s what you need to

cryptocurrency works using

how you can protect yourself

that prevents digital transac-

new wave of cybercrime.

double-recorded. In fact, the

cryptojacker to target, espe-

rencies on the market, includ-

the signs your computer and

and Zcash. Used much the

to mine currency for someone

for products and services,

know about cryptojacking and

a blockchain—technology

and your clients against this

tions from being backdated or

popularity of cryptocurrency

blockchain technology is lending itself to numerous indus-

tries, including real estate and tokenization as a liquid asset.

By being encrypted for com-

puter processing when used, cryptocurrencies are timestamped, creating a secure

block of data in a ledger that

is open and shared when you have access. Each of these

blocks holds specific information, such as the number of

coins used in the transaction and the names of both the

receiver and the sender. Each

block also contains a “hash,� a

mathematical algorithm that creates a 64-bit string of characters that points to the previous block in the chain, preventing it from being modified.

Cryptomining // When cryptocurrency transactions take place and are added to the blockchain, a process called cryptomining goes into play. The information in the blockchain is updated and verified by a cryptocurrency miner using vast amounts of computing power and processing. For their efforts, cryptominers earn their own cryptocurrency for their services.

WHAT IS CRYPTOJACKING? Cryptomining is resource

and time intensive, requiring a lot of computer power. But

cybercriminals have found a

way to hack into personal and

company computers and other

devices to use these resources.

By installing software that runs a special code, cyberhackers use computer power behind the scenes to mine for cryp-

tocurrencies. Without being aware of the signs that your

computer has been hijacked,

you may never know that your computer is being used for

malicious intent. Cybercrim-

inals silently steal cryptocur-

rency that they can easily put into their own digital wallet without fear of detection.

HOW CRYPTOJACKING WORKS Cybercriminals use one of three different meth-

ods to illegally mine for cryptocurrencies.

01 C ryptomining scripts // Often sent as an

SPRING 2020

83

TECHNOLOGY

attachment or a link in an email, cryptomining scripts run in the background of your computer without being noticed. Known as “filebased cryptojacking,” hackers use malware to install and run an executable file on your computer. Within the file is a script that spreads throughout your computer and network.

“While ransomware continues to be a huge risk, cryptojacking is now one of the biggest threats to your business, organization or personal computer.”

02 B rowser-based crypto-

jacking // Cryptojacking can also happen right in your web browser.

Cybercriminals develop a script for cryptomining that they embed into websites, placing them into ads and unsecure and outdated WordPress plugins.

03 C loud cryptojacking //

Cryptojacking can also be done through the cloud, as cyberhackers gain access to your cloud services. Criminals hack into your computer code and files looking for API keys that give them entry to any cloud apps and services that you’re using. The high

84

PRIVATE LENDER

computing resources of cloud services give hackers a great deal of processing power to mine for cryptocurrencies.

THE CRYPTOJACKING PROCESS Once cyberhackers have gained entry to your computer, they can use computer resources for illicit cryptojacking. Here’s how the process works:

01 Your computer is compromised as a cryptomining file is installed.

03 Your computer resources are used to solve the complicated algorithms that make up each of the blocks in the blockchain of cryptocurrencies.

04 Working anonymously and with little risk, cyberhackers are rewarded with cryptocurrency in their own digital wallet every time they’re able to add another block to the chain.

6 TIPS FOR DETECTING CRYPTOJACKING ATTACKS

02 A fter the file is executed, cryptomining script runs in the background of your computer without your knowledge.

While ransomware continues to be a huge risk, cryptojacking is now one of the biggest threats to your business, organization or personal

computer. It’s important that you know how to detect when cryptojacking is happening to you. Here some detection tips:

01 D ecrease in computer

performance // As cryptojacking scripts run in the background, you may notice a decrease in computing performance on PCs, tablets, laptops and even your mobile phone.

02 O verheating // Cryp-

tojacking scripts are extremely resourceintensive and can cause your devices to overheat. Pay attention to overheating computers and cooling fans that run continuously.

Overheating can cause considerable computer damage and shorten the life span of your devices.

03 I ncreased CPU usage //

Stay on top of your CPU (central processing unit) usage, both in your business and at home.

By regularly using the Task Manager or Activity Monitor, you can assess whether there’s an increase in usage even when you’re visiting

an online website that

has no media content.

04 M onitor coding

changes // If you have business or personal websites, regularly

check for any changes in the files or coding.

Cyberhackers will

embed cryptojacking script in vulnerable

websites—detecting

any cryptomining code early can keep your

computer devices safe.

are always implementing

easy to know whether you’ve

ers use malware to

crime. Take the time to

following prevention tips

with cryptojacking

cryptojacking so you’re

and personal computers.

05 Regularly scan for

malware // Cyberhackinfect your computer script. Using strong

anti-virus software and regularly running a

malware scan can help you detect whether

your computing devices have been infected.

06 S tay up to date on

crypto information and news // Cyber criminals

new methods for cyber-

been compromised. Use the

read about the latest in

to protect your business

up to date with the cur-

rent trends. Use reliable sources, such as Today-

OnChain and CoinDesk.

PREVENTION METHODS

Training // Both you and your IT team need to be trained to detect a cryptojacking attack. The sooner you can recognize the signs of cryptomining in the background of your computing devices,

Even by employing the

the quicker you’ll be able to

previous tips for detecting

take the steps to remove the

cryptojacking, it’s not always

threat and prevent future risk.

SPRING 2020

85

TECHNOLOGY

Education // Education is key when it comes to preventing cryptojacking on your computer. Both you and your employees need to be trained to recognize when your computing devices are overheating or running slowly. Training also involves knowing the risks of clicking on links or downloading attachments in an email on business and personal computers. Talk to your clients about these risks when emailing secure information.

Use browser extensions // Because cyberhackers can embed cryptojacking scripts in web browsers, using browser extensions can give you added security. Specific browser extensions to block cryptomining include Anti Miner, minerBlock and No Coin.

Use ad-blockers // Online ads are another spot that hackers use to embed cryptomining code. Ad blockers can 86

PRIVATE LENDER

block malicious scripts from running on your computers.

Disable JavaScript //

Another way to prevent cryptomining scripts from taking over your computer is to disable JavaScript in your internet browser. Keep in mind that some features of a website require JavaS-

cript, so disabling may block some of those features.

QUESTIONS TO ASK POTENTIAL CLIENTS

D oes your IT team actively

monitor for cryptojacking scripts and infections?

D o you have official

employee security training? What

does that cover?

D o you have any cyber

insurance in place?

Cybercrime continues to be

ROB SOBERS

one of the biggest security risks

Rob Sobers is a software

for businesses and individuals. Cryptojacking, with its massive potential for profit, will keep giving hackers the

Below are a couple of ques-

ABOUT THE AUTHOR

incentive to siphon resources

engineer at Varonis specializing in web security. Based in

New York City, he has turned

his passion for developing and design into a career. He co-

authored the book “Learn Ruby

tions you can ask a potential

from your computing devices.

the Hard Way” and founded

client about the security

Use the tips and advice here

tracker for parents. Follow him

measures they have in place.

D oes your business use

or accept cryptocur-

rency in any capacity?

W hat protocols do

you use to protect

your crypto assets?

to minimize the risk for your private lending business and your clients. Make sure to keep up to date on cryptojacking detection and prevention techniques so you can protect your business and personal computer networks. ∞

Munchkin Report, an activity on Twitter @rsobers.

A APL BENCHMARK

Your journey to nationwide private lending industry data begins here. FREE. AAPL and Wall Street housing research firm Zelman & Associates have partnered to launch the private lending industry’s first and only research-firm-backed benchmark data survey. This quarterly survey will gather key information on everything from origination volume to loan terms and foreclosure rates.

Survey respondents will receive these quarterly analytic reports FREE: • AAPL/Zelman Private Lending Report • Zelman’s most popular report, the Housing Market Overview

Sign up today at aaplonline.com/industry-survey.

SPRING 2020

87

88

PRIVATE LENDER

SPECIAL FEATURE

Moving Up Female Running a woman-owned business in the male-dominated private lending industry comes with challenges.

by Susan Naftulin

Who do you work for? Wow, you’ve got guts to do this. You don’t look like the owner. Who are you here with? Who backs your business? Are you here all by yourself? How do you do it with kids?

Does your husband mind you working?

It may be hard to believe, but

Then there are the non-AAPL

AAPL conferences. The last

the organization led by a man

I’ve heard all the above at

few years have been better

because there are more women in the group and, hopefully, because more men are conscious of what they say and maybe how they think.

groups. For example, there’s

who will remain nameless but likes to keep the room very

cold and tries to build himself up as some sort of celebrity.

I have met him a few times.

Each time he has looked me

up and down, decided I am

not worthy of being his eye candy and dismisses me as if I was not even standing in front of him. These groups are not worth my time or money, so I don’t give them either.

It is not easy being a female in a predominantly male business.

From the beginning, I had my champions. Paul, Dan, Mark, David, Bobby and Mike—hopefully you are reading this and know who you are. You have treated me as an equal from day one. There are others, who will not be named, who try to make me feel “less than.”

Whether this is on purpose or subconscious, I don’t know. It really does not matter. I don’t give them any time or attention.

IT’S STILL ‘WORTH IT’

but he was also aware of this and raised his daughters to

be strong and independent.

Most important, we learned

never to have to rely on a man to take care of us. We were

taught to work hard, to have

the last laugh and to be tough.

My sister is a physician, and I am the owner of a private lending company, which I

founded after a successful law career. I would say Dad did it right. And saying that is not

to take away from my mother,

who was a force to be reckoned with in her own way. Mom and Dad passed away three and a half years ago, but they were

both so proud of their strong,

independent adult daughters.

When I began practicing law, my firm’s policy was that

women were not allowed to wear pants to court. How

The point is, just because it wasn’t easy to achieve success in this industry, doesn’t mean it wasn’t worth it or cannot be done.

crazy is that? This was not in

I was raised in a family in which my dad worked outside the home and my mom stayed home to take care of the house and family. Dad was somewhat of a chauvinist in his relationship with my mother,

them when I was confident that

the 1950s; it was the 1990s.

I followed the rules and never wore pants to work on court

days. But, I made sure to wear I would not be going to court.

Other women attorneys in the

firm did the same. From time to

time, emergency court appearances would occur and one of us would go to court in pants.

SPRING 2020

89

SPECIAL FEATURE

The sky did not fall in and

“My motto for sexism in the workplace (and in life in general): Don’t be a victim.

Don’t allow the ignorance of others to become a barrier and an excuse.”

there were no repercussions.

Over time, pants were acceptable in court. It may sound like a small victory, but it is indicative of what my style has always been. I keep my mouth shut, follow the letter of the directive and work subtly to change it.

NO VICTIMS, PLEASE My motto for sexism in the workplace (and in life in general): Don’t be a victim.

Don’t allow the ignorance of others to become a barrier and an excuse. If you cannot work with someone, work around them or find a new place to work. The worst thing you can do is accept the status quo and do nothing to change it.

In my first job out of college, I did not receive a deserved promotion because a man in a similar position, with fewer qualifications, was promoted.

I was told that although I was more qualified, “he had a wife and child to support.” I quit

AUDIT, TAX & FUND ACCOUNTING Over 20 years of experience working with Private Lenders

A Strategic, Innovative & Responsive Partner Spiegel Accountancy Corp is a full-service CPA firm, specializing in real estate & private lending. spiegelcorp.com | (925) 977-4000 | info@spiegelcorp.com 90

PRIVATE LENDER

people. It comes from inside.

Nothing feels better than answering the stupid questions with the answer that I built my company on my own, from the ground up by being smart, determined, aggressive and organized. If that is an issue for someone, that is their problem, not mine. ∞

that job that day and told them

complimentary, sometimes

found a better job in a matter

well-represented in senior

exactly why I was leaving. I

of days and never looked back.

During the next year, no less than nine female co-workers from the old company fol-

lowed me to the new company.

The new company still exists; the old one is out of busi-

ness. Was the exodus of so

many women a contributing factor? Who knows—but it

gives me great satisfaction.

not so nice. But, women were management and paid commensurately with men.

The only time I spoke with him about his actions was when he gave tickets to sporting

events to men in my position but not to me. I pointed out

that it was a bad idea to treat one of the company’s female

attorneys differently than the men. It was simply ignorance

I also bristle at women who

on his part. Once I pointed

or perceived offenses in the

and other women executives

unpopular opinion, but unless

able to change his behavior by

mobility, limits your income

tional, not confrontational.

ignore it and move forward.

ZERO TOLERANCE

are oversensitive to offenses

this out, he regularly gave me

workplace. This may be an

our share of the tickets. I was

it affects your upwardly

being humorously conversa-

or makes you feel unsafe,

The CEO of the first mortgage company I worked for regu-

larly commented on women’s appearance and clothing

choices. Sometimes he was

Being the owner of Rehab Financial Group, LP has not been without challenges. At times I have been described

as “bossy,” when a man like me would be called a leader.

I have been told that I can be “bitchy” when a man would be called direct. I have been called “shrill” when a man would be called assertive. The list could go on and on, but who cares? It really doesn’t matter.

Ignore it and move forward.

ABOUT THE AUTHOR

I once had an employee who had a problem working for and with women. I tried to work with him, and he did become better with me, but not with female co-workers. After he called a female co-worker “blondie” and “girlie” in the same conversation, I terminated his employment. I will not tolerate it for a second when I see it being done to someone else.

SUSAN NAFTULIN

My personal and business success speaks for itself. I am a woman business owner in a male-dominated industry, but you know what? I don’t need affirmation from outside

Susan Naftulin is co-founder, president and managing

member of Rehab Financial

Group LP. Prior to forming RFG, Naftulin held several senior

management positions in the

mortgage industry, including general counsel, managing

attorney, chief operating officer and senior vice president for both privately and publicly

held mortgage lenders. In each position, she was responsible

for multiple aspects of the company, including loan origination and documentation, licensing and regulatory compliance,

servicing, default management, litigation management and human resources.

SPRING 2020

91

Is this what borrowers see when they look you up?

A APL DIRECTORY

We’ve launched our all-new member directory, but your profile needs your input in order to look its best!

Log into your AAPL member dashboard at aaplonline.com/dashboard to add your: • • • • •

92

Company logo and description Industry sector Service area Contact information YouTube or Vimeo video

PRIVATE LENDER

RESOURCE GUIDE

RESOURCE GUIDE “Do you know any appraisers who specialize in working with private lenders? And not just people who work with financial institutions, but actual private lenders? The last guy I talked to was so confused.”

Replace “appraisers” with

“attorneys,” “accountants,” “loan servicers,” etc., and

KAT HUNGERFORD Private Lender Executive Editor

we at your friendly American Association of Private

Lenders get this question on a near-daily basis.

Enter our brainchild, the Private Lender Resource Guide. In each issue, we

publish a new cross-section of service provider specialties:

W inter // Accounting, Legal, Default & Loss Mitigation

S pring (this issue!) //

Appraisers & Valuations, Lead Generation, Note Buying/ Selling, Raising Money

S ummer // Property Insurance, Development Cost Estimates, Education Fall // Loan Origination

Services, Loan Servicing, Loan Underwriting, Investor

If one of those specialties sounds like you, you can nominate yourself at

aaplonline.com/resourceguide-nominations.

Oh, and one more thing before you dive in: AAPL members

can access all categories and service providers online at aaplonline.com/resource-

guide. So, members: You don’t have to wait for the print issue to find the latest updates!

Reporting/Management

SPRING 2020

93

RESOURCE GUIDE

APPR AISERS & VALUATIONS APPRAISAL NATION

a ppraisalnation.com (866) 735-0901 S ervices // Residential & Commercial Appraisals, Conventional Products, Desktop Appraisals, Desk Reviews, Re-certs of Value/Draw Inspections, BPO Interior/BPO Exterior, Commercial BPO, Rental Portfolios, As is + ARV, ARV Only, Hybrid Appraisals, Flood Certs

BERNHARDT APPRAISAL

p ortlandresidentialappraisal.com (971) 288-1328 S ervices // Divorce Appraisal, Probate Court Proceedings, Bankruptcy Appraisal, TAX/IRS Appraisal, Property Tax Appraisal, Estate Planning Appraisal, Date of Death Appraisal, Planning for Purchase, FSBO

PCV MURCOR

p cvmurcor.com (855) 819-2828 S econdary Specialties // Default & Loss Mitigation S ervices // Appraisal Management, BPOs and Alternative Valuation Management for Residential and Commercial, Disaster Inspections, Asset Management & Disposition, Title & Settlement Services, Risk Exposure

94

PRIVATE LENDER

LEAD GENER ATION PEERSTREET

p eerstreet.com (844) 733-7787 S econdary Specialty // Raising Money S ervices // Marketplace for real estate loan investments

PRIVATE LENDER LINK

p rivatelenderlink.com (650) 226-4277 S ervices // Private lender directory for companies offering short-term financing secured by residential and commercial real estate

SCOTSMAN GUIDE

s cotsmanguide.com (800) 297-6061 S ervices // Ranked Mortgage Originators and Lenders for Residential Lending (Prime Mortgage, FHA, USDA, & VA; Non-QM; Hard Money; Construction), Commercial Lending (Prime Commercial, Multifamily Property, Hard Money, Construction), Mortgage Banking (Correspondent Line, Warehouse Line)

REI NETWORK LP

myhousedeals.com (713) 701-5144

SPRING 2020

95

RESOURCE GUIDE

NOTE BUYER /SELLER ALPHAFLOW

a lphaflow.com (212) 381-0902 S ervices // Asset manager focused on real estate loans purchased from private lenders

MONTVALE LLC

m ontvale.co (302) 526-0200 S econdary Specialty // Raising Money

R AISING MONEY INVESTOR FUNDING NETWORK

investorfunding.org (630) 640-9060

VISTA CAPITAL

v ista-capital.net (760) 779-8900

96

PRIVATE LENDER

real state investors

nationwide financing .

We’ve got your back

...AND your funds small-balance commercial

fix & flip / bridge

%

%

%

% %

ground-up construction

30 year rental

%

% /

%

% %

BUILD ©

evolve

succeed

#

# SPRING 2020

97

L AST CALL WITH BEN FERTIG

THE MOST IMPORTANT PART OF THE RESUME b y Ben Fertig

L

ast September I celebrated 23 years in the mortgage

banking industry. It’s not a coincidence that the

best years have been the past eight, which have been exclusively in the residential investor loan market.

Although I was fortunate to have well-capitalized ownership and partners with accomplished institutional mortgage banking track records—and a good tail wind from market forces—success was by no means guaranteed. The biggest challenge was there was no real existing template or precedent for how to operate this kind of lending business on an institutional scale.

There were local hard money operators and there were consumer residential mortgage banking models. But, neither of them would work for our cause. Traditional mortgage banking models were too rigid and weren’t agile enough to accommodate the requirements of the residential investor market, which included funding short-sale acquisitions, seven-day closing timelines, repeated rescheduling of closings and the fact that investors typically hated to provide credit documents.

The post-crisis regulatory environment forced consumer mortgage bankers into

98

PRIVATE LENDER

a fairly narrow operating channel. As a result, most of these platforms are overmanaged and underled, in my opinion.

Much of the time is spent on planning, organizing, capacity models and budgeting.

We tried that approach eight years ago and realized we had to change quickly.

One of my strongest held executive beliefs is that leadership and management are two distinct systems of action.

We changed our processes so that we had very broad stages. It empowered our staff by default because they could no longer rely on the regimented process flows they had at previous jobs. Since our management all had traditional mortgage banking experience, we originally hired people with similar backgrounds. I spent a good deal of time and energy outlining a vision that gave them autonomy, empowerment and a much greater influence on outcomes. I pounded that message to salespeople, processors, underwriters and anyone else who would listen.

At the time, we had two processors who had joined us from PNC Bank’s Mortgage unit, where they had similar tenure. Prior to that, one was at Chase and the other Bank of America. Despite the very similar backgrounds, one is the

most productive and efficient I have ever worked with and the other didn’t last.

I put a lot of consideration into whether potential team members will embrace the opportunity and responsibility of having more influence. I have learned that while it may seem obvious that people should want to make a bigger impact, many don’t. I believe there is a place for everyone, but the fluency of the investor loan market requires the right profile.

Past professional experience isn’t necessarily the main driver of success.

I have hired a lot of people in my career.

For years, I focused solely on professional experience and maybe education (depending on what I was hiring for). I have come to realize the few lines at the top of the resume are by far the most important.

You know where they tell you they are flexible, independent, hard-working, critical thinking and solution driven?

Sounds like a good private lender, right? Probably not a coincidence. ∞

IT’S NOT JUST ABOUT IDEAS. IT’S ABOUT THE EXECUTION. WE PROVIDE PEACE OF MIND

Geraci LLP is a law firm, media, and consulting company that caters to the non-conventional lending space.

We are the “go-to” provider for all lending-related matters and are your resource to help you grow your business.

CORPORATE AND SECURITIES

LITIGATION AND BANKRUPTCY

BANKING AND FINANCE

MEDIA SERVICES

Securities Offerings & Compliance*

Creditor Representation

Loan Documents*

Branding Consultation

Corporate Governance*

Loss Mitigation

Foreclosure/Loss Mitigation

Logo Design

Entity Formattion* Licensing*

Title Claims

Lending Compliance*

Pitch Decks

Web Development Graphic Design

CONNECT WITH US! 90 Discovery Irvine, CA 92618 | Phone: 949.379.2600 | Fax: 949.379.2610 www.geracillp.com | www.geracicon.com | www.geracimediagroup.com

*All 50 States SPRING 2020

99

Become a Certified Fund Manager from the comfort of anywhere.

Our highly sought after course is now online. CFM bridges industry practices, investment theory, ethical issues and professional standards to provide investment analysis and portfolio management skills. Topics include: • Pros, Cons & Considerations • Fund Structure • Creation & Launch

A APL CFM

• Ongoing Administration

• Using Your CFM Designation • AAPL Code of Ethics

Register for $349 at AAPLonline.com/CFM.* *CFM and other AAPL designation courses are available to AAPL Members Only.

100

PRIVATE LENDER