Private Lender Vol. 3, Issue 5 by American Association of Private Lenders

P r i va t e L e n d e r O f f i c i a l

E z i n e

o f

A . A . P. L .

The Journal of the American Association of Private Lenders Volume 3 - Issue 5

W h a ts A h e a d for

2013 Private Lenders Beware! - Bob Cox Are Private Lenders Managing their Risk? - Steve Clark

Is it Time to Close Your Fund? - Robin Aldridge & Mike Driscoll

C on te n ts : In This Issue: Viewpoint Whatever Happened to 2012?

Industry

- Larry Muck (pg.3)

Private Lenders Beware!

I n t e r vi e w

- Bob Cox (pg.26)

Economy & Private Lending

Intro to CFPB

- Larry Muck interviewâ&#x20AC;&#x2122;s Peter Ricchiuti (pg.6)

- James C. Warmbrodt (pg.30)

Are Private Lenders Managing their Risk?

Business

- Steve Clark (pg.36)

Lessons From the U.S. Elections - Paul Harmon (pg.15)

Membership

Is it Time to Close Your Fund?

Member Directory

- Robin Aldridge & Mike Driscoll (pg.20)

-2013 membership directory -Board of Advisors and Founders -Active Lender Directory -Member Service Provider Directory

Tips to Stop Theft & Property Damage - Mike Wrenn (pg.24)

(pg.39-44)

AAPL V ie wp o in t : Whatever Happened to 2012? A Year

R e vi e w

and

Looking Forward

2013

- Larry Muck

Yes, it is that time of year for us to engage in

a review of the past year as we look forward to the new. This exercise can either be a hackneyed ritual, or it can be a moment to truly pause and reflect on the accomplishments of the past year while committing to undertake bold steps to press forward. One year ago, the Private Lending industry was resurging and finding its way out of the firestorm that occurred with the housing crisis. Ample evidence supports this conclusion, the most compelling of which is that multiple sources of funding for portfolio leveraging emerged. So, having positioned itself as the “voice of the industry,” AAPL found itself in transition and in need of a fresh burst of energy to keep up with the rapidly changing landscape.

•

A plan was laid out and here is a short list of accomplishments:

A Board of Advisors was formed that helped set the course of the Association. The Board is

comprised of industry veterans geographically dispersed with a great deal of experience and wisdom to impart.

•

Full time staff was hired and engaged to accelerate the build-out of the organization.

•

Membership in the association was increased.

•

Due in no small part to the efforts of the Advisors, we held our most successful annual conference ever.

•

And finally, we rebuilt our web platform, creating a true membership engagement area and a place to continue to grow our educational assets. This new site will serve as the center of engagement for our members and, as it grows, will become that central resource desired by all.

We ended 2012 with positive momentum and a clear indication of our constituents’ expectations. Those expectations were clearly established through a survey of the conference attendees. You can read the survey results in detail in an article in this edition of PL, but to summarize,

we found the following:

following:

1. Education of lenders 2. Creating additional networking opportunities 3. Influencing national legislation 4. Facilitating discussion groups 5. Attracting investors to its members

In terms of reasons why people joined us at our conference, the top five most important factors were:

1.Develop a network of industry associates 2.Receive education on lending 3.Brainstorm new ideas 4.Learn about high quality industry solutions 5.Receive education on fund management

Additionally, we received a high degree of support for facilitating regional meetings and subgroups.

Based on many comments received, we can safely say that each of these objectives was met at the conference.

We have our sights set on some ambitious goals for 2013…all revolving around meeting your expectations and building an association that truly represents the industry.

We also asked for feedback on the preferred areas of focus for the association. We received strong indications of support for many initiatives, but found the strongest support in each of the

We will be working this year to expand our educational and networking opportunities. Although we expect to offer online courses later in the year, the focus will be on live events hosted on the web

to allow for interaction and audience participation. To start, we will re-conduct the educational offerings from our last conference. These will be offered free of charge to those who previously paid to attend. In so doing, we will be able to record these presentations for future review and to allow you an opportunity to ask questions that remained unanswered. As previously noted our new membership site is “complete” and ready for use. Your engagement in posting questions and comments will build momentum and add to the knowledge base that is being aggregated. We will be encouraging use by monitoring posts and assisting in finding answers to your questions. In order to expand our “in-person” networking opportunities, we are planning regional “meet and greets” in a variety of areas of the country. Our Board of Advisors has committed to hosting these events and scheduling and planning are underway. Your association will be represented at numerous events this year as we work to provide a link between investors, financial advisors, and you, our members. The schedule is being filled now, but I want to draw your attention to a couple of events in particular. First, we will be making a presentation at an investor conference in San Jose in late February. In addition, we will be appearing as a vendor at a conference in Washington DC in early May. Helping us raise brand awareness is an integral part of our strategy to build this industry and your participation will be of great significance. We are also committed to returning to Caesar’s Palace in November for our annual conference and have signed our contract for space and

rooms. We’ve had a lot of positive feedback in support of returning there and will look forward to building an even bigger and better event in 2013. Your support of our efforts is crucial to successfully building this association. We need your help to identify and encourage new members to join. Your assistance will be greatly appreciated…more to follow. On behalf of our founders: Tim Bricker, Anthony Geraci, Wallace Groves and Jack Rollins And our Board of Advisors: Josh Fischer, David Owen, David Williams, Bill Worsley, Mike Wrenn, and Robert Wallace We say thank you for your continued support. I look forward to building this association with you and for you. P.S. As an aside, there were some truly notable things that did not happen in 2012. The top one is that my 24 year old daughter did not fly off into space in a cataclysmic end to the world as we know it on December 21st. Although extraordinarily bright, she fixated on the Mayan calendar debacle ever since she became aware of it in her sophomore year of college. No amount of coaching or preaching or comforting kept her from a sleepless night waiting for the world to end. Go figure.

We’ll talk soon. Larry Muck Executive Director Larry Muck Executive Director

If you are interested in becoming an AAPL Partner please contact Larry Muck at

913-888-1250 or lmuck@aaplonline.com or visit www.aaplonline.com

I n te r v ie w : Economy & Private Lending Peter Ricchiuti (Ri-Shooty) is the school professor you wish you had had back in college. He teaches courses on the financial markets at Tulane University’s A.B. Freeman School of Business and has twice been named the school’s top professor. In 1983 he founded Tulane’s highly acclaimed BURKENROAD REPORTS stock research program. He has been featured on CNN and CNBC, as well as the New York Times. Mr. Ricchiuti is a featured speaker throughout the United States. He recently spoke with AAPL Executive Director Larry Muck about the economy and private lending.

Larry: I noticed on your website that you don’t share the view of many who are fearful of the future. Peter: Yes, I’ve been pretty optimistic for the last three or four years in terms of the economy and stock market. It’s been a phenomenal run. Since March of ’09, this is the best rally since World War II. We’re up 130% in the S&P 500, yet everybody’s still walking around thinking the world’s coming to an end. Yet corporate earnings are at record levels. Corporate balance sheets are better than they’ve ever been in history. There’s three trillion dollars sitting in the coffers of companies. There’s another six trillion sitting in money market funds. I know that we think the housing market has bottomed, and I don’t know what the recovery is going to look like, but I think the big thing is

that it’s going to stop taking a chunk out of GDP, which is what it’s done for several years. They are projected to come in around two, but I think they’ll come in higher than that -- probably around three. I think the stock market is pretty cheap. You know, historically the market in the last fifty years has sold 16.5 times earnings, and we’re selling at about 14 times earnings right now. I just think it’s a tremendous amount of fear. You know you can still see all of the mutual fund money flowing into the bond market, and a lot of it still out of equities. You know, what we always say is, “If the majority of the people are right, the majority of the people would be rich -- and they’re not.” I think the stock market has, even though it has been the best rally since World War II, it still has a lot of oomph to it.

I think in the bond market, where you hear these people all the time saying, “I’m too scared to be in the stock market. My husband and I are putting all our money in long-term bonds”—these are the people that are going to call their advisors in a year and ask them what these parentheses in their accounts are. If you get a little bit of pick-up in the economy, a little bit of inflation, and interest rates come up ...they’ll be destroyed. I think the next bubble for us is the bond market. You know, people have forgotten. I got in the business 34 years ago, in ’79, so I was there for the Carter administration. That was pretty dramatic. But it so happens that when interest rates go up, bonds get destroyed. It’s been so long since it happened I don’t think anybody remembers that. That’s pretty much where I’m coming from. What I do at the university is I run a program I started 19 years ago called Burkenroad Reports. I have 200 students and I break them into teams of five. I assign each team to one of 40 small cap companies

headquartered from Texas over to Florida. They go out and visit with the CEOs and sites, and they develop these models. They put together these 20-page investment research reports on these companies. They are companies that even Wall Street doesn’t really know about yet and are kind of obscure. We call them “Stocks under Rocks.” That’s what the students do. About 11 years ago a local bank created the Burkenroad Mutual Fund using the students’ research. It has outperformed 99% of the 7,000 equity mutual funds in the United States over the last 11 years. We really think that there are still huge opportunities out there. In the stock market we think the real opportunities are in the companies that just aren’t followed so much. You know, academics usually believe that the markets are totally efficient. I think they’re very efficient with big companies -- the Microsoft’s of the world—but when you get down to the smaller companies, I think there is value in doing primary research. I know when I go to places, Larry … When I go to Continue on pg. 9

barbeques, or wherever I go … Nobody in the last three, four, five years has come up to me and said, “I’m putting my money in equities … good quality equities.” Everybody’s buying gold and burying it under the swing set in the backyard somewhere. We just kind of see it always go the other way.

In my opinion the private lenders and the private lending industry have facilitated the absorption of a lot of these loans and are much more helpful in re-building America than those that financed the bubble economy.

I think what you guys are doing is making a lot of sense, because as much as the underpinnings seem to be getting a lot better, the banks have still been very reluctant to loan. If you look at the weekly lending numbers, they’re getting better, but only at a glacial pace. Private Lenders have supplemented the credit markets in a terrific way.

thing that’s really weird is I sit on the board of a publicly traded company—a home healthcare company. What I’m getting at is that on the corporate side, once you get to be a big corporation, the banks throw money at you. They’re in there with pitchforks every week trying to get you to borrow a great deal of money to buy another organization. On the other end of the spectrum, the guy who is trying to finance the purchase, rehab, and re-use of investment properties is being shut out. I’m not sure how this system has been created.

Larry: Yes, it’s interesting relative to the bankers. I

wonder if it’s the regulatory environment that they live under, or if it’s just the memories that they have of having loaned into investment properties and they having gotten hammered.

Peter: Isn’t that interesting? That’s the same thing

I wonder. Which is which? And how do you divide it out? Because the bankers themselves will tell you that we’re just so hamstrung. Yet the government— and I don’t think they do this on purpose—but the government is trying to promote more lending but is putting new restrictions on traditional financing that’s really hampering it.

Larry: I referred a guy that is trying to build a Real

Estate Investors Association in mid-Missouri, to an old friend of mine that’s at a bank in Columbia, Missouri. When my friend called this banker and said, “Hey, we’re going to form this investors association and Larry thought you might be able to help me,” he responded by saying, “I don’t know what you and Larry are up to, but I don’t want a single thing to do with it. You said ‘investment property’. Thanks for calling; I appreciate it. Talk to you later.” That was the end of the conversation. I’ve got to tell you, that is typical of the response to investment property lending opportunities by the majority of traditional lending sources.

Peter: Oh, yes. I think you’re right. The other

Larry: We’ve seen a great decline in what we like to

call community lending. The way we characterize what private lenders do is peer-to-peer lending. In general terms, our industry is represented by individuals generally that have created a fund and they’re lending to individuals that really have nowhere else to go. They have a legitimate borrowing need, but either the banks don’t feel like they can charge enough to carry the risk, or they have totally written-off that part of the business. It’s up to all of us to help rebuild our communities, and I just think the banks have taken a backseat to participating in those markets.

Peter: I think you’re absolutely right. The other

thing I’m hearing that’s funny is when I talk to small companies, their complaint is the same thing. What they’ve moved to is an old, old financing option, but they’ve been shut out of the banks. I’m hearing more about factoring and selling off accounts receivable, because they feel like the banks have dropped them.

Larry: I don’t have any facts to back that up, but I

do know that while the banks will say that they’re interested in helping small business, I think as you noted they have so much liquidity now that they’re Continue on pg. 11

B ec o me A M em ber T oda y ! Formed in 2009, the American Association of Private Lenders (AAPL) is the national organization represent-

ing the private real estate and peer to peer lending industry. Our membership includes private money lenders, hard money lenders, mortgage fund managers, brokers, and service providers from around the United States. We believe our principles â&#x20AC;&#x201C; excellence, ethics, and education â&#x20AC;&#x201C; are the cornerstone for success in the industry. AAPL members are leaders in the industry and embody the character, dedication, and experience critical for success. Our vision is a national industry of private lenders that is clearly defined and well organized around the shared principles of cooperation, education, ethics, and accountability. AAPL operates as a codifying force and an unbiased knowledge custodian for lenders, investors, borrowers, media, and general public.

J oin

th e

AAPL C o mmun ity T o d a y :

Explore our Membership Options for Private Lenders Here Explore our Membership Options for Service Providers Here

More info at aaplonline.com

Larry Muck | 913-599-2020 | David Lang | 913-599-2020

trying to place it in large blocks. It’s expensive to make small business loans, and a lot of them, I think, have cut-back operationally in their ability to actually meet what they were originally envisioned as— meeting the needs of their local communities.

Peter: Yes, I think you’re absolutely right. All I can

keep thinking of is that private lending is really in a perfect position. You’ve got the banks not wanting to lend, and then you’ve got all kinds of investors that need to find yield. You couldn’t write this book any better.

Peter: People disagree on the numbers, but we’re

basically about 15 trillion in debt, and have about a 16 trillion dollar economy, so we’re at about 90, 95%--which is too high. We’ve been worse than this before. If you go back to World War II, it was at about 120%. Of course that makes sense because we were borrowing money to fund the war, and there wasn’t a lot of private manufacturing. But once the war ended, it dropped and dropped and dropped. Then we started rising and we have been trickling up.

Larry: You know Donald Trump six or seven

months ago said, “Everybody needs to buy a piece of real estate. They need to get out of the markets and go buy real estate.”

The two points I always like to bring up is that just getting rid of the debt itself isn’t necessarily a panacea. If you look back since World War II, the lowest period of national debt divided by GDP was at the end of the Carter administration, and that was a horrendous economy.

Peter: Warren Buffett was asked about a year ago

Larry: Yes, that was a disaster.

what he would do, and he said, “It’s logistically difficult, but if you gave me a choice, I’d go out and buy millions of single-family homes.”

Larry: Yes. The private lenders in our industry

offer a broad scope of services, but many of them are involved in the single-family homes, and helping to facilitate the rehab and repurposing of a lot of those foreclosures. I’m interested in the stock market analysis. Where do you see us going with the federal debt bubble, and what do your tealeaves say that we’re going to do to get out from under the mess that we’re in?

Peter: I tend to not view our national debt as an

absolute number. My goal is to determine how leveraged we are. I usually use the equation that a lot of economists use, which is total debt divided by GDP, to give you an idea of just how leveraged you are.

Larry: Right.

Peter: Oh, yes. Another mistake people make is

hearing, “You know, when President Carter left office there was a surplus” and thinking that was a positive. There was a budget surplus, and that was pretty amazing, but it wasn’t what most people think it was. It was a revenue surplus. The Treasury brought in more money than they had anticipated—which was pretty terrific—but it didn’t mean we didn’t have debt. We had a ton of debt. More recently under President Bush and President Obama our national debt has soared. I think if you look at it, we can get the number down. I think what they should have done was pass Simpson-Bowles. If you look at it, people just kept arguing. But you’re going to have to see some higher taxes, you’re going to have to see more budget cuts, and you’re going to have to see some sort of—at a minimum—some tweaking to entitlement programs. Whether it’s moving Social Security to 70, or whatever it is. We’ve got to take all those steps and stop fighting about them. If you could get leverage number back into the 70% range, I think you’d get past the fear factor. You could get the stock market to

sell its usual multiple. You could get some normalcy in the economy, and the way that people view the nation. But when you can’t get anything passed, then you’re going to run into this debt limit again—this circus in Congress.

Larry: Do you think we’ll pass a budget ever again or not?

Peter: (Laughs) I don’t know, but if they can really

take a chunk out of each time. Right after 9/11 when Bush did those tax cuts, they cost us a lot in revenues. We now get less in tax receipts as a percentage of GDP than we did in the mid-1950s. That’s too low, the spending’s too high, and the entitlements are too rich. Somebody’s got to start chipping away at all three, and stop the fighting. I think there’s a chance to get through it. There are another couple of things that I’m very optimistic about. One is that you’ve got to put a bottom on housing, regardless of what the recovery looks like. The other thing we see down here in Louisiana is that we had this amazing thing happen in the United States. There is a huge proliferation of natural gas, and it’s really changing the whole landscape for manufacturing and competitiveness. You know, oil is a worldwide commodity. If it sells at $91.00 in West Texas, it sells at $92.00 in Norway. It’s just a global commodity. But gas tends to sell at the local price. It’s difficult to move it outside of a continent. Like right now you’re seeing $3.50 per MCF natural gas here. It’s $10.00 in Europe, and it’s $17.00 in Asia. It’s given us this huge competitive advantage. I know of at least a half-dozen plants that were scheduled to be built abroad that have been scrapped and are going to be built in the U.S. Even some little labor advantage you might have putting it in China is dwarfed by the feedstock cost advantage here. So there are some real positives underneath all this.

Larry: Are you a big believer in fracking? Peter: I went to see the movie, Promised Land

yesterday. I thought it was pretty objective actually. I don’t know, when I talk to people, it’s so extreme. You get one group showing that you can light your water on fire. Then you’ve got the oil industry saying that it’s no problem at all. But it seems like something they can address, because the shale they’re getting is down around 15,000 feet, and the aquifer if like at six feet, so I think they can get there. It would be a huge boost. It’s clean-burning, and it’s domestically-produced. The only people that are really against it, not the fracking but natural gas, is the coal industry. I said at a conference—the guys from Kentucky got mad at me—but I said, “The last place you’ll see coal is in the stockings of bad children.” (Laughs) So we’ve got a couple of big game-changers that could really help the whole thing out. I think two things are happening. This build-up of cash in the economy can’t last forever. On the private side, if you’re an individual and you’re afraid of the future, you can surround yourself with cash and all. If you’re a private company, you can fill sandbags full of cash and all that. But if you’re a public company, you can’t do it forever. And this is what I think is the next big thing to happen with the economy—is there’s so much cash on these balance sheets that these companies are just going to all get LBO’d. I have 600 former students working on Wall Street from my program, and that’s what they tell me all the time. Even if they’re not pulling the trigger, they’re all young guys that are having to work all weekend-long doing merger numbers to see what would happen if you bought. And of course you’re going to buy the other company with their own cash, so I think this is kind of a natural. Then I think the other thing is you have a company and you’ve got most of your assets in money market funds, eventually some shareholders say, “Well, I can’t believe we’re paying the CEO a million dollars a year to put the company on a money market fund. I could do that at home.” So something’s got to break, and I don’t know when.

The banks were just saying the same thing. I don’t know what’s going to make it break for the banks. I don’t know if at some point they open up their lending, or if you just try to create the growth through consolidation—just buy-up other banks.

Larry: Yes. And nobody wants to pay the money

Larry: Well, I think you’re going to see a consolida-

Peter: I got a call two weeks ago. A guy calls me,

tion of banks, and I don’t think that’s very good for the country necessarily.

Peter: No, I don’t think so either. Larry: I mean, we’ve seen what the larger banks

did with the mortgage servicing business, and much of the default that we have now is due in part to the mortgage servicing mess. There’s no money in servicing, but there are profits in foreclosure.

Peter: Yes. It’s true. That’s a great sidebar.

to have a high-touch servicing platform to really work with borrowers. But that’s where we’ve lost our national way a little bit in, because they’ve taken the “community” out of that aspect of banking. one of the newspapers, saying that there was a new bank opening in Baton Rouge, and what do I think? I said, “Well, I guess there’s room for another bank.” Then they said, “Well, this is an odd bank. The model is it’s all drive-through, and there’s no office to go into.” I said, “Well, I guess that’s kind of odd.” I said, “So they just do the accounts or whatever?” He goes, “No, they said they’ll be doing mortgages.” I said, “They’re going to do a mortgage in a drive-up?” (Laughs) I don’t know if that’s what they’re going to do, but this is what we’re coming to. Nobody wants to touch you, or see you.

Larry: No, because if something happens in your life that causes you to skip a beat, then they don’t really want to have anything to do with you.

Here’s The Key To Your Real Estate Insurance Needs . . .

Peter: Yes, it’s true. I think what you and really, the

business you guys are in, on both sides—the investors that would want it, and the people that need this cash to get it going—I think it’s really great. I can see why you guys formed in ’09. I know in the beginning it always takes a while to get past the naysayers. I’ll tell you, if you look at investors. Investors seem to be doing things that I think are pretty dumb, like going out and buying 30-year bonds, and things like that. Like they’ll say, “I’m going to buy a 30-year government, or something”, and they’ll say, “Well there’s no risk in that.” Well there’s no default risk, but there’s a ton of interest rate. I think I’d rather be in your fund.

Larry: And we see a lot of people that would like

to get in on it and invest in communities and in real estate. We have a new member from New York that was on Wall Street. He was with one of the largest fund managers there. He managed a group that invested in funds…a fund for funds. He’s interesting to talk to. He is totally disenchanted with Wall Street and the money game. He came to us because he was interested in making a number of diversified investments. He wanted to find quality fund managers through which he could invest his funds, and he wanted them to be geographically dispersed. Since we’re a national organization, he came to us to try and find those local lenders with a community base.

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Peter: I think you’re in the right place after all those years of banking. I think you’ve got a pretty exciting tenure ahead of you. I wish the AAPL all the best.

Larry Muck Executive Director

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If you are interested in becoming an AAPL Partner please contact Larry Muck at

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B us in e s s : Lessons From the US Elections - Paul Harmon In the recent Presidential election, President Obama was reelected by an impressive majority, even in those states that were most contested. The results came as a surprise to many—most particularly the opposition. Here’s a comment from David Axelrod, President Obama’s chief strategist, in response to a question from POLITICO regarding what it takes to win:

technology is going and what the potential will be by 2016 for communications, for targeting, for mining data, to make precision possible in terms of both persuasion and mobilization.”

POLITICO: “What’s the biggest lesson someone running in 2016 should learn from your campaign?

Broadly, I take the message to be as follows: -Technology is evolving so rapidly that you need to stay abreast of where it is, where it is going, and how to use it, and the best way to do that is to hire the young and listen to them.

AXELROD: “You need to understand where the technology is. In 2008, this campaign kind of reinvented campaigns by using the [best] available technology. But, we’re light years ahead of where we were in 2008. We had to reinvent ourselves and think about all the tools that were available to us—tools that provided much richer data and much more surgical means of talking to voters. I would invest in people—they’re almost invariably young—who understand where the

When I first read this, I thought that it probably applies to any business just as much as it applies to presidential campaigns.

Ultimately, this isn’t an IT issue—it’s an innovation or a process improvement issue! You are trying to think about how you ought to be handling sales, or marketing or customer service four years from now. You should assume that in four years the technology will let you do things “light years ahead” of what you do now. And you want to be prepared to compete, or better yet, Continue on pg. 17

N ew

e m b e r s h i p

w ebs ite

We are pleased to announce that the re-design of the Association’s website, aaplonline.com, is complete. We are very excited about the website and there will be many new items available in the coming months. Among the highlights to you as a member of the AAPL are: • Members Only Section • Forums • Ability to send private messages between members • Presentations from previous AAPL Conferences

This is your community, and the more that you as an AAPL Member engage in it, the more valuable it will become to all members. The Association is actively seeking news, white papers, and other information to post both online and here in Private Lender. If you would like to contribute to the knowledge base, we’d love to have you participate. For more information on the benefits of membership in the American Association of Private Lenders, please

visit aaplonline.com or contact David Lang at dlang@aaplonline.com

dominate your market four years from now. Perhaps we should qualify the point. It isn’t so important that YOU understand the technology and where it is going, however, it is is critical that someone in your organizations does and that your organization pays attention to that someone. What is critical is that YOU understand that the technology is changing at a very rapid rate and that you need to be prepared to apply that technology to achieve your organization’s goals and objectives. The world population is 7 billion people today. In four years that number will be increased by 100s of millions and all those people will be demanding goods and services. At the same time, there will be many more scientists and entrepreneurs developing new products and services and hundreds of millions of additional smart phone and iPad owners will be using all the current social media apps as well as the next big thing not yet invented. All this guarantees that social media will continue to proliferate and analytic tools will continue to be developed to track and define all kinds of new market niches. Let’s be specific. In the 2012 election, the Obama campaign created a huge database that identified those individuals who said they were for, or tending to be for, Obama. They broke that information down by state, district and then by city block. Campaign field workers tell how they identified individuals, block by block—two people in one block, one in the next, and four in the following block. This wasn’t the campaign of four years ago when campaign workers attempted to contact everybody within their district. This year’s campaign workers knew which houses to approach, what messages to deliver and who needed rides to the polls. The Obama campaign

was an example of just how good the massive correlation of information derived from social media has become and how much more effective campaign workers have become at implementing targeted marketing campaigns. Ask yourself just how close your sales organization is to offering this kind of specific information to your field sales people. Or, ask how your marketing people are targeting the people they mail those costly promotional pieces to. Or, ask how quickly you could put together a team, with just the right members, to address the new challenges your organization will face in the future. And another point—it’s mostly the young who best understand the new opportunities. Most of the Obama field people were college undergraduates. Most of those in the offices running the software systems weren’t much older. New employees may need help and discipline, but your organization needs them on process redesign teams and brainstorming groups as you try to figure out what new capabilities you will have in the future. In most cases, the young are already connecting with their friends in ways your more seasoned marketing and sales people only wish they could duplicate. Get the younger staff working with you, teaching you how to do it. The most important thing to take away from from this is that technology is NOT a technological issue—it is a human issue and it’s all about business performance. The goal is not to acquire new technology because it is “hot” or “new” or “more powerful.” The goal is to acquire technology because it will allow you to target and satisfy your customers more cost effectively than you would otherwise be able to do. And, the people best positioned to help you determine this are not pure technologists. They are the people who

are already exploring the uses and application of the new technologies. These people will keep changing and this year’s innovators will step aside making way for the younger generation to move in and explain the next step. Technologists will help you implement your solution, but deciding on the new approach—deciding how to innovate—is the key first step, and that’s done by having bright, young people who think about how you could better satisfy your customer. So, yes, you can learn from the US elections. They offer insight into the state of the art uses of social media, analytic software systems, and targeted marketing for communication and interpersonal action. But hurry. In four years it will all be light years from where it is today. Till next time, Paul Harmon This article was first published by BPTrends (www.BPTrends. com) on December 11, 2012 by Paul Harmon.

Paul is a Co-Founder, Executive Editor, and Market Analyst at BPTrends (Business Process Trends), the most trusted source of information and analysis on trends, directions, and best practices in business process management, (www.bptrends.com). He is also a Co-Founder, Chief Methodologist, and Principal Consultant of BPTrends Associates, a professional services company providing executive education, training, and consulting services for organizations interested in understanding and implementing business process management.

Calendar of Upcoming AAPL Events:

January 29, 2013; 11:00 AM Central; Webinar; Marketing

to Increase Deal Flow; David Owen & James Rincon; Pride of Austin Capital Partners.

February 19, 2013; 1:00 PM Central; Webinar; Raising

Private Capital – Building Your Investor Base – Base Practices & Strategies; Josh Fischer; Sterling Pacific.

May 5-7, 2013; AAPL Spring Conference; Crystal Gateway Marriott; Arlington, VA

November 10-12, 2013; Annual AAPL Fall Conference; Caesars Palace; Las Vegas, NV

Is it Time to Close Your Fund? - Robin Aldridge &

- Mike Driscoll

It is quite an understatement to say that real es-

tate and lending markets have been volatile over the past decade. The continued onslaught of legislation pouring out of Washington D.C. and state governments has added to these difficulties. As a Fund Manager, are you prepared for the implementation of changes necessary to comply, or is it time to close your fund? There could be several different reasons why you would consider closing your fund, including:

• Requirements of your operating agreement or bylaws • Market conditions • Timing of the closing relative to un folding events • Future expectations Fund Managers must decide if it costs more to manage their fund than the cash flow or added liability allows. In researching whether this is a viable option for your fund, start by consulting with your legal team as it relates to your operating agreement.

What are the voting, meeting, and fund-closing requirements? Most likely, you have not reviewed this portion of your operating agreement in years, so a good understanding of the legal documents and requirements will help substantially. For instance, does your agreement call for a majority vote of all investors, investors’ weighted share in the fund, or both? If it is both, in all likelihood it will take longer and require more resources to receive enough ballots back in order to determine investor support. Voter apathy can create a significant delay; therefore, planning ahead can help mitigate investors’ failure to respond. Friendly reminders sent through the use of email or a recorded message via an auto dialer can be an inexpensive and unobtrusive way to remind your investors of the pending initiative and deadline. An equally important call is to the fund’s financial and tax accountants. The tax consequences to your investors can be significant. This can be especially true if the Fund has booked large loan loss reserves in prior years. Generally Accepted Accounting Principles (GAAP) mandate that anticipated losses must be recognized when it is determined that they are probable; but tax laws, in general, don’t allow the Fund to deduct these estimated loss reserves until the loss is actually realized (e.g. short sale, trustee sale, etc.). Upon the sale of the assets and dissolution of the Fund, these losses will be realized and be able to be

taken by the Membersâ&#x20AC;&#x2122; on their tax returns. Another important tax effect of dissolution is that if the Fund incurred losses during its prior operating years, the IRS typically considers those to be passive losses. That means the Members can only use those to offset other passive gains they may have had. Usually those passive losses have gone unused and were carried forward to subsequent years. In the year the Fund files its final tax return, these losses are re-characterized as ordinary losses, and Members can finally

use them to offset other ordinary income. Itâ&#x20AC;&#x2122;s important to note that in order for a fund to be considered terminated by the IRS and the losses to be recognized, a few critical requirements must be met: 1) the fund needs to make final distribution to Members on or before the last day of the tax year, and 2) no significant fund business can be transacted in subsequent years. If itâ&#x20AC;&#x2122;s determined that closing the Fund is in the best interest of the fund and its investors, figuring out the communication plan is the next

step. Depending on the size of your fund and the location of its investors, an in-person meeting may be possible but difficult. For the first major communication, a hybrid meeting works well. This will mean hosting an in-person meeting for those investors that are able to make it and also simulcast live as a Webinar. This format allows you to focus on a couple of key points: all investors have an open invitation to join in person and if they are not able to, they can still participate in the meeting remotely. It is also valuable that they know that other investors who share their same concerns are there in person. Be cognizant that your communication style is not overly complicated: limit use of industry acronyms, use examples and analogies to illustrate a point, and keep it simple. The most critical point in your presentation is to summarize the financial data in an easy-to-understand format. It may be helpful to contact a few of the more engaged and vested investors beforehand to gain feedback on strategy and presentation. This pre-contact with engaged investors can be beneficial in many ways. Additionally, create a flowchart and define the timing of events: asset sales, future meetings/webinars, mailings, distributions, and tax returns. There is a significant amount of work to close a fund, so setting investor expectations appropriately can reduce additional response time to their inquiries. Typically, workload and inquiries double, if not triple, during this stage; therefore, you may consider letting your investors know that all of their questions will be addressed during the next webinar or communication. If all goes as planned, the investors approve to dissolve the fund and the asset sales are

completed by year-end, there is still more time needed to close the fund in an orderly fashion. As with most funds, the operating agreement requires a CPA Review or Audit. That can only happen after the books are closed for the prior year. Part of your planning should involve cash set aside for a legal reserve as well as to pay for employees or contractors to close the books, conduct the audit, issue tax returns, handle inquiries, and attend to any remaining fund business. Also, let vendors know of the situation so they can submit all invoices and you can accrue all costs before the close. A common way to structure a shutdown is to set up a liquidating entity to which you can transfer cash thatâ&#x20AC;&#x2122;s needed for costs to close the fund, plus a legal reserve. The original fund distributes the remaining cash and liquidating corporation stock to its investors as a final distribution. In so doing, the original fund meets the requirement of a final distribution for tax purposes and can also hold back some cash in case of lawsuits. Typically the liquidation entity is kept open for up to two years. It is also important to check with your insurance provider for D&O tail coverage should any litigation arise for claims during the fundâ&#x20AC;&#x2122;s operating years. Hopefully, the tail coverage can be renewed, but the transferred legal reserve will serve as a back up. Check with your state to see when the original Fund needs to formally file dissolution documents. In California you have 12 months after the final tax return, but other states may be different. If your fund is currently structured as an LLC, it may seem logical to create the liquidating entity in the same manner. Consider setting it up as

a C-Corp primarily for the reduced cost in tax preparation. Investors will receive a 1099 vs. K-1 which takes significantly less time and cost to prepare. Double taxation should not be an issue because no income is anticipated. The information in this article is designed to be used as a framework on what to consider when closing your fund. There are unique situations with each fund and its investors; therefore, the preparation and mapping out of the requirements is the most critical piece in the execution process. Approaching and implementing the decision to close in an effective and organized manner should create a successful closure with appropriate protections in place for the fund

management and its investors. Remember, good investor communication is just as important during the Fund’s dissolution as it was during its operating years.

By Robbin Aldridge & Mike Driscoll

Real Estate Investor and

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Featured Topics: • • • • • • • •

Different Investment Models Where & How to Source Notes Due Diligence Legal; Escrow; Important Documents Loan Servicing – Performing Loan Default Servicing – Non-Performing Exit Strategy Execution IRA – How to/Benefits of Buying within an IRA

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Tips to Stop Theft & Property Damage T h e ft

is a

PROBLEM,

a n d it may r o b y o u

o f y o u r a b ilit y t o i n s u r e y o u r i n v e s tm e n t s

- Mike Wrenn

Theft claims are affecting almost every real

estate investor nationwide. Your help is vital, because this consistent thievery is threatening the insurance industryâ&#x20AC;&#x2122;s ability to provide theft coverage. Every other day we receive a theft claim large enough to cause headaches for you and the insurance industry at large. If we do not act to protect this program, its coverage and rate stability, then we will all suffer a big headache. No one is immune from this problem. We highly recommend you take the following precautions to protect your properties immediately. The following security items can all be purchased at Home Depot.

Secure your doors and windows

1. Safe Door Systems Home Security Door &

4. Honeywell Econo Switch 7 Day Programma-

- Use 4â&#x20AC;? screws in all screw holes, both on the hinge side and the door side. - Very important for screws to be securely set into the stud on both sides of door.

- Appearance of occupancy deters thieves.

Frame Reinforcement Kit

ble Timer Switch (Lights & Radio)

5. Board up Windows and doors on Vacant Properties

2. Schlage Extra Long Dead Bold Lock

- Use Star screws, or Torx bit screws to secure plywood to exterior doors and windows.

3. Grisham Pp-Spag Window Guard

-An open garage door is a glaring invitation to burglars. Close and lock your garage door.

- Extra long dead bolt lock helps prevent doors from being kicked or pried open. -Use Window Guard on ground level windows not visible to neighbors and passers by.

6. Keep Garage Doors closed and locked

7. Lock up ladders and tools that could give burglars easy entry to your property. -Master Lock 3 ft Steel Chain and Lock

8. Check on your properties at least once each week. Show people you are there.

-Pick up mail and newspapers. Keep your property neat and clean.

9. Make sure you have the right insurance coverage.

-Consult with your insurance agent. The wrong insurance coverage may cause you a big headache.

The only way to provide a stable insurance program over the long run is to be proactive in protecting your properties from thieves. While this shameful spike in theft is galling and imposes itself on your investment goals, insurance coverage of your future investment opportunities may be at stake. Continued widespread theft claims are unsustainable to any insurance carrier and agent. Without your active participation in protecting your property from theft, your options are limited:

1. Increase your costs to offset the increased exposure, or limit coverage for these occurrences.

2. The BEST solution—Immediately follow the

tips listed above, and do what is needed to protect your properties from theft and avoid claims in the first place. There is a payoff to those who help bring property theft under control. By helping to control insurance claims, overall costs can be brought under control, and lower insurance costs will accrue to you. By outperforming other property owners in the marketplace, your insurance

carrier can provide you with lower costs than can be found elsewhere. You help yourself, and you gain long-term coverage that others will not have. No one can offer theft coverage without the same investments in loss reduction. Candidly, those who understand loss control will see profitable results for their premium contributions. Insurance was designed to protect against tornadoes, such as the one that hit Joplin, Missouri, and it should respond without delay. But this issue of constant theft is not what insurance was designed to protect. The trend is unmistakable. If your property is not well protected, you should expect to be victimized by theft. Forewarned is forearmed, as they say. Please help stop these losses.

“ ” emem er to

When

our

Water erty is Va ant!

urn

Pro

My best to you,

Mike Wrenn: CEO National Real Estate Insurance Group Affinity Group Management 7509 NW Tiffany Springs Parkway, Suite 200 Kansas City, Missouri 64153

www.nreinsurance.com www.affinitygm.com 888-741-8454

"The right coverage at the right time"

I n dus tr y : Private Lenders Beware! N e w L a w s T h at W ill H av e Y o u S c r am b li n g . . .

LATE NEWS UPDATE The CFPB has deferred implementation of the Dodd Frank Bill. The new implementation date is Jan. 10, 2014. The information contained in the following article is applicable and relevant. However, you now have time to prepare for it. More articles on this important topic will be published in subsequent issues of Private Lender.

- Bob Cox

THERE is a new sheriff in town, and they are deadly serious. The newly formed Consumer Financial Protection Bureau will now be overseeing the Private Lending business, but more on that a bit later. As most of you know, the Dodd Frank Financial Reform Act, (hereafter referred to as the “Act”) was signed into law in July of 2010, and part of that legislation is Title XIV, Mortgage Reform & Anti-Predatory Lending Act. Many of us private lenders, whether individuals or brokers, have been making these types of loans for quite some time and are pretty much set in our ways. The loans we tend to make are now referred to as “High Cost Mortgages”; and although these loans are covered under the “Act,” so are all Residential Mortgage Loans to some extent or another. Most of us know that the rules changed a couple years back that affect how we make loans on a refinance of a borrower’s primary residence. The new rules will apply to ALL RESIDENTIAL PROPERTIES, sale or refinance, 1-4 units, depending on the type of loan taking place.

Here is a summary of these new rules, which as of now are set to go into effect January 21, 2013.

1. Balloon loans on “High Cost Mortgages” will

Real Estate Investor and

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be illegal! In the case of adjustable rate mortgages, borrowers must be qualified on “Ability to Repay” based on the highest indexed rate. (More on that below.)

2. Although, since the Home Owner Equity

Protection Act or “HOEPA” Laws went into effect, we have not been allowed to make loans based strictly on collateral (you do know that, right?!) without taking into consideration the borrower’s ability to repay…in regards to “High Cost Mortgages,” those rules have been really amped up!

3. On “High Cost Mortgages” you, the lender,

will now be responsible to verify and document (from reliable 3rd party information) the borrower’s ability to repay the loan and make the payments, including taxes and insurance.

Determination must include consideration of: Consumer’s Credit History Current Income Expected Income Current Obligations Debt-to-Income Ratio or Residual Income after non-mortgage related debt and mortgage related debt. Employment Status And other financial resources other than the consumers equity in the dwelling

In cooperation with LoanMLS and the American Association of Private Lenders May 5-7, 2013; Crystal Gateway Marriott; Arlington, VA Featured Topics: • • • • • • • •

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You, the lender/creditor, will be responsible for this documentation. Reliable 3rd party information includes actual tax returns, pay stubs, credit reports. You must document the borrower’s debt to income ratio and residual income. (Good luck with that, unless you do this for a living). Because of Turbo Tax and other such programs where people can make up a tax return, you must have a 4506T form signed (What?) and pull a copy of their tax return transcript straight from the IRS. I can hear you now saying, there is no way that you are going to do this, and who would catch you if you did, and who is the government anyway to tell me how I can loan my own money?! BUT, remember the New Sherriff in Town we talked about? These guys are deadly serious, and here are a few of the consequences for failure to comply:

1. Any actual damage sustained by such person (read borrower) as a result of the failure, plus;

2. Twice the amount of any finance charge in

connection with the transaction (Twice the amount of interest they paid you so far, plus loan fees if any) and…

3. If you did not properly qualify as the borrower, you face a 3 YEAR RIGHT OF RECISSION, and this goes with the note should you sell it!

So, if you have to go to court for a foreclosure action and the borrower’s attorney is not an idiot, you could find yourself in a tough and very expensive spot. (Please remember, this is a relatively short article on a very large subject and there is not enough room to list all of the changes to the laws…..but there are others as well)

SO WHY are they doing all of this to us??? Was it Private Lending that collapsed the real estate market? Well, the Federal Government is sick and tired of foreclosures and its effects on the marketplace. They don’t want anyone buying a home or borrowing money against their equity that is not in a position to make the payments. (That is a sound idea, and had it been in place earlier, this real estate mess might not have been nearly this bad!) But why pick on us, the private lender? Our loans were not what brought the market down! Well, I think that like the mighty dolphin, we’re just getting caught in the tuna nets. We were not necessarily the target, BUT the government at this point does not care! That might change down the road, but for now we must beware. SO FOR THOSE OF US WHO DEPEND ON THE INTEREST WE EARN ON THESE LOANS, WHAT ARE WE GOING TO DO? Well, for one thing, the things we have been talking about DO NOT apply to bare land, construction loans, commercial property, or temporary bridge loans for a term of 12 months or less. (That being said, if it is found that you made a “bridge loan just to get around the terms of these laws, lord, help you!) So, we can change the types of properties we make loans on. Or you can also avoid this by making loans that are not “High Cost Mortgages,” but that would mean interest rates around 4% and no or very low fees. (Might as well buy a municipal bond). There is some encouraging news on some fronts. The law is clear that if the loan is not for

personal, family, or household purposes, it is not subject to TILA, and therefore not subject to the changes affected by the Dodd Frank Act. We continue to investigate other potential exclusions. We have faced adversity before and made it through. Knowledge is power, and right now the best weapon we have is to keep up with the rapid changes. There are some in Congress who are seeing the unintended consequences in this legislation and starting to ask questions. Could some of this soften the line, very likely? Could it happen before January 21st? Come on! These guys couldn’t even agree on what to order for lunch right now…….but there is always hope. And there is power in letting your elected officials know your views. (Remember it seems as if their number one priority is getting re-elected, which is tough to do if they anger enough of their constituents!)

P r i va t e L e n d e r O f f i c i a l

E z i n e

o f

A . A . P. L .

PRIVATE LENDER is the official publication of the American Association of Private Lenders. It is published six times a year. SUBSCRIPTIONS: You can get a free sub-

scription to Private Lender at www. aaplonline.com ARTICLE SUBMISSIONS, CONTACT:

dlang@aaplonline.com ADVERTISING INFORMATION, CONTACT:

By Bob Cox Bob Cox, MLO# 254993 Senior Mortgage Banker/Private Lending Specialist Pacific Residential Mortgage – Medford Branch 502 W. Main Street, Suite 103 Medford, OR 97501 (541) 773-3131 x: 222 (541) 773-4981 Fax

bob.cox@pacresmortgage.com “Bob Cox has specialized in Private Money Lending for over 21 years. He is a recognized expert in Private Lending Law and the Dodd Frank Financial Reform Act, lecturing and teaching through-out the State of Oregon. In his time in the business he has facilitated over 800 private transactions and placed nearly 80 million dollars in private loans.”

lmuck@aaplonline.com

This publication is created to provide information to the private lending industry. The American Association of Private Lenders is not engaged in rendering legal, financial, accounting, tax or other professional service. The views expressed herein may not be those of AAPL. No part of this publication may be duplicated in any way without the explicit written authorization of AAPL. COPYRIGHT © 2012 American Association of Private Lenders.

Intro to Consumer Financial Protection Bureau A P r ivat e L e n d e r P e r s p e c tiv e

- James Warmbrodt

Among the issues facing private lenders as a

new year begins is the increasing presence of the Federal Bureau of Consumer Financial Protection, better known by the acronym “CFPB.” The CFPB, created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”), is now well into its second year of existence as the Federal agency with primary authority to implement and enforce Federal consumer financial law. Nevertheless, the impact that the CFPB’s emergence will have on financial markets is just beginning to be seen. This article will summarize the scope of the CFPB’s authority and highlight some recent developments that reflect the agency’s regulatory priorities that may impact private lenders. Are you “covered”? Any initial discussion of this topic logically begins with an understanding of the extent to which a private lender is subject to the CFPB’s authority. Those who fall within the CFPB’s authority are referred to as “covered persons” in the vernacular of the Act. A covered person is any entity that offers or provides a “consumer product or service” or is a service provider to such a person. “Financial product or service” is defined broadly under the Act, and includes transactions such as extending credit and servicing loans, extending or brokering leases of personal or real property that constitute the functional equivalent of purchase finance ar-

rangements, providing real estate settlement services, and consumer banking-type activities, including deposit-taking activities, transmitting or exchanging funds, or otherwise acting as a custodian of funds or any financial instrument used by or on behalf of a consumer. As its name implies, the CFPB’s reach extends only to consumer transactions, those products or services intended primarily for personal, family, or household purposes.i Thus, loans designed for commercial purposes fall outside the ambit of the CFPB. Likewise, a commercial loan guaranteed by an individual who would otherwise be considered a consumer would not be subject to CFPB authority. It is the nature of the activity rather than the status of the participants that triggers CFPB oversight. The scope of CFPB authority As stated at the outset, the CFPB is charged with making and enforcing Federal consumer financial law. “Federal consumer financial law” includes a variety of statutes, authority over which was transferred to the CFPB after it was created. There are eighteen such statutes, examples of which include the Consumer Leasing Act of 1976, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Home Owners Protection Act of 1998, the Fair Debt Collections Practices Act, portions of the Federal Deposit Insurance Act, portions of the Gramm-Leach-Bliley Act, the Home Mortgage Disclosure Act of 1975, and the Truth in

Lending Act. In addition to these existing statutes, and their respective implementing regulations, Federal consumer financial law also includes any rule or order subsequently prescribed by the CFPB. ii The primary functions of the CFPB are to conduct financial education programs; to collect, investigate, and respond to consumer complaints; to monitor the functioning of markets for consumer financial products and services to identify risks to consumers; to supervise certain enumerated covered persons for compliance with Federal consumer financial law; and to issue rules and orders that implement Federal consumer financial law.iii In connection with the

CFPBâ&#x20AC;&#x2122;s rule making function, covered persons may be required to provide information to the CFPB either intermittently or at regular intervals. The CFPB may make its reports available to prudential regulators, state regulators, or other Federal agencies, and is required to report possible tax law violations to the IRS.iv Similarly, the CFPB may partner with other governmental entities to enforce Federal consumer financial lawv , as it has done with increasing regularity, most recently along with the state attorneys general in Hawaii, New Mexico, North Carolina, North Dakota, and Wisconsin to stop illegal practices associated with payday loans.vi The CFPB may restrict mandatory pre-dispute arbitration.vii It may prescribe rules to prevent unfair,

deceptive, or abusive acts or practices.viii In its enforcement capacity, relief available to the CFPB includes rescission or reformation of contracts, refund of moneys or return of real property, restitution, disgorgement or compensation for unjust enrichment, payment of damages, public notification of violation, injunctive relief, and civil penalties.ix Certain specified nondepository-covered persons fall under the CFPB’s supervisory authority.x These consist of those offering or providing origination, brokerage, or servicing of consumer mortgage loans; larger participants of certain markets of consumer financial products or services, as defined by rulexi ; covered persons engaging in conduct that poses risks to consumers; providers of private education loans; and providers of consumer payday loans.xii “Supervision” of these persons consists of the CFPB requiring reports and conducting examinations. The CFPB has produced a manual describing its examination process which is available on its website.xiv Compliance Management System As it ramps up its supervisory and enforcement efforts, the CFPB has identified several areas of concern that provide guidance to private lenders of CFPB priorities in 2013 and beyond. An area that is consistently emphasized by the CFPB in its reports is the necessity that all those under its supervision and enforcement authority maintain an effective compliance management system to manage their compliance responsibilities. Examinations of supervised entities will test the components of compliance management systems to ensure that the institution has the ability to detect, prevent, and correct practices that violate Federal consumer financial law and that risk harm to consumers.xv In its recently

published report highlighting its supervisory activity through September 2012, the CFPB noted comprehensive deficiencies in compliance management systems. Examples of these deficiencies were compliance management systems lacking across the institution’s entire consumer portfolio or the institution failing to adopt and follow comprehensive internal policies and procedures. xvi The CFPB describes an effective compliance management system as one that includes the following components: internal management and oversight, which includes clear policy statements; policies and procedures, complementary training programs, and internal monitoring and corrective action; consumer complaint response; independent testing and audit; and third-party service provider oversight.xvii Fair Lending Practices A frequent area of concern expressed by the CFPB relates to fair lending practices. As mandated under the Act, the Office of Fair Lending and Equal Opportunity has been created under the CFPB to provide oversight and enforcement of Federal laws intended to ensure fair, equitable, and nondiscriminatory access to credit, such as the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act. Supervision has been undertaken to review the lending practices of various bank and nonbank institutions. One particular area of focus involves private student loans. The CFPB, in conjunction with the Department of Education, has examined how lenders utilize cohort default rates and the percentage of borrowers who default within two years of entering into repayment status in order to determine if schools are eligible to participate in Federal student loan programs.xviii Service members have received particular attention as a group that is often times subjected to unfair lending practices, particularly in reference to Continue on pg. 35

Real Estate Investor and

Fund Manager Summit Sponsored by the Professional Real Estate Investors and Managers Association In cooperation with LoanMLS and The American Association of Private Lenders

This event will be the Premier Educational Conference on Buying & Selling Notes. It will bring together Investors, Private Lenders, Hard Money Lenders, Fund Managers, Brokers, Attorneys, CPAs and Leading Service Providers to learn and share where the opportunities are and how potential growth and current yields can help deliver returns to you and your clients.

May 5-7, 2013; Crystal Gateway Marriott; Arlington, VA

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student loans and payday loans. Marketing A recent joint investigation between the CFPB and FTC has resulted in the issuance of warning letters being issued to a dozen mortgage lenders and mortgage brokers concerning potentially misleading advertisements, particularly as directed to the elderly and to veterans. This investigation of advertisements appearing in newspapers, on the Internet, and in direct mail solicitations revealed potential misrepresentations concerning government affiliation, interest rates, costs of reverse mortgages, and the amount of cash or credit available to consumers.xix

its nonbank supervision program, CFPB Blog, January 5, 2012. xi Presently, the CFPB has defined two such “larger participants”; larger participants of the credit reporting market, and larger participants of the debt collection market. xii 12 U.S.C. § 5514. xiii Id. xv CFPB Supervision and Examination Manual, October 2011 (hereinafter “Manual”).. xv Manual, Overview, Page 3. xvi CFPB, Supervisory Highlights: Fall 2012. xvii Id.; Manual, CMR Page 2 xviii Fair Lending Report of the Consumer Financial Protection Bureau, December 2012. xix Press release, Consumer Financial Protection Bureau Warns Companies Against Misleading Consumers With False Mortgage Advertisements, November 19, 2012.

By James C. Warmbrodt, Esquire Weltman, Weinberg & Reis Co., LPA

Conclusion

This article has discussed the statutory framework for CFPB oversight of nonbank entities, such as private lenders. It has also summarized what the CFPB considers to be some of the highlights of its regulatory activities of the past year, but is not an exhaustive discussion of those activities. The CFPB is an agency that is growing rapidly, and has become increasingly prolific in its issuance of rules and policy statements, consistent with its authority under the Dodd-Frank Act to further define what constitutes Federal consumer financial law. Accordingly, it would be wise to monitor the CFPB’s activities on an ongoing basis, as the CFPB continues to engage in its supervision of nonbank persons, among them private lenders.

James C. Warmbrodt, Esquire Weltman, Weinberg & Reis Co., LPA http://www.weltman.com/ 908-756-7073

jwarmbrodt@weltman.com

Jim Warmbrodt practices in the Compliance Unit of WWR and is based in the Pittsburgh office. Jim earned a B.S. with high honors in Criminal Justice from Eastern Kentucky University in 1979 and a J.D. from the University of Pittsburgh School of Law in 1984. A member of the Allegheny County Bar Association, Jim is licensed in Pennsylvania and admitted to practice before the U.S. District Court (Western District of Pennsylvania) and the Third Circuit Court of Appeals. Jim’s community involvement includes serving as a Board Member for Pet Connection, Inc.

i 12 U.S.C. § 5481. ii Id. iii 12 U.S.C. § 5511. iv 12 U.S.C. §§ 5512, 5514. v 12 U.S.C. § 5562. vi A joint enforcement action with states to stop illegal advance fees, CFPB Blog, January 5, 2012. vii 12 U.S.C. § 5518. viii 12 U.S.C. § 5531. ix 12 U.S.C. § 5565. x The CFPB defines a “nonbank” as a company that offers or provides consumer financial products or services but does not have a bank, thrift, or credit union charter. The CFPB launches

Are Private Lenders Managing their Risk? - Steve Clark

With signs of the economy rebounding and construction on the rise, itâ&#x20AC;&#x2122;s a good time to be involved in the private lending industry. Between new developments, remodels, and flipping properties, profits are to be found nationally.

Still, even in the best of times, there are risks; hence, the need for risk management. Even the most sound projects and the most stable business partners, developers, and contractors must be monitored and inspected in order to ensure an investmentâ&#x20AC;&#x2122;s safety. Too often, projects go upside down when comprehensive oversight would have saved the day. Over the years, Construction Inspection Specialists have personally worked with many knowledgeable, successful lenders. But even industry leaders are vulnerable to influences outside of their controlâ&#x20AC;&#x201D;unless they choose to control them. The smart ones search for help in curtailing unforeseen risks before they wreak havoc upon investments: seeking the help of services like those offered by CIS.

Lenders simply cannot blindly expect everyone on a project’s team to perform their tasks without fail. Their lending relationship with the developer must be clear and strong. And the developer’s contracts with contractors must be ironclad, safe, and protective of the lender as well. It sounds like common sense, but sometimes even the savviest lender can overlook the perils that lurk in the shadows of construction. This is where risk management plays a pivotal role. For instance, my firm has worked through a broad range of challenges that have happened to our clientele prior to our engagement, such as: • Contractor’s scope of work not defining the extent of work necessary to complete the project • Lack of contract language requiring a schedule indicating the intent to complete the project by a certain date…resulting in borrower and lender delays • Funds not set aside for contingencies that arise during construction • Lien waivers not being tracked and cleared can necessitate double payment by the owner, as well as delay or impede sales • Borrowers advancing project funds prior to work being completed • Loaned funds not going into a project at the level of appraised value, or not at all • Subcontractors being severely under insured—a significant financial threat

• No qualified parties on site during construction, a safety risk • Unpermitted work completed and discovered after the sale of a property, causing a red tag by city to the new owner Investing always has its risks, but applying comprehensive risk management oversight can protect a lender and help ensure a successful, profitable investment. Our firm has witnessed too many failures that should have been successes. That’s why we extol the virtues of risk management to the members of the American Association of Private Lenders and everyone in the construction and lending industries. By, Steve Clark BIO: H. Steve Clark, CEO, and his firm, Construction Inspection Specialists, have been involved in providing risk management services to both the commercial and private lending industry for the past fifteen years. CIS’s ability to provide their services to projects in any location across the country ensures that a lender’s investment in a project is being professionally monitored throughout the project’s lifecycle. CIS can be contacted at www.cisinspects.com.

Calendar of Upcoming AAPL Events:

January 29, 2013; 11:00 AM Central; Webinar; Marketing

to Increase Deal Flow; David Owen & James Rincon; Pride of Austin Capital Partners.

February 19, 2013; 1:00 PM Central; Webinar; Raising

Private Capital – Building Your Investor Base – Base Practices & Strategies; Josh Fischer; Sterling Pacific.

May 5-7, 2013; AAPL Spring Conference; Crystal Gateway Marriott; Arlington, VA

November 10-12, 2013; Annual AAPL Fall Conference; Caesars Palace; Las Vegas, NV

M emb e r s h ip : 2013 Member Directory AAPL Lenders are established, proven Private Lenders in the private lending industry. They are able to display the AAPL logo in their promotional materials as a symbol of their commitment to quality and

Does your lender belong to the AAPL and adhere to a code of ethics? Learn more about our membership requirements.

excellence.

NOT A MEMBER? JOIN NOW! Click here to go directly to the AAPL website directory.

Board of Advisors and Founders Company Name

Contact Name

City

State

Membership Level

Affinity Group Managment, Inc.

Mike Wrenn

Kansas City

Board of Advisors

BridgeSource Capital

Bill Worsley

Davidson

Board of Advisors

BridgeSource Capital

Wallace Groves

Raleigh

Founder/Board of Advisors

Geraci Law Firm

Anthony Geraci

Irvine

Founder

Investors Choice Funding

David Williams

Louisville CO

Board of Advisors

Pride of Austin Capital Partners, LLC

David Owen

Austin

Board of Advisors

Rollins Consulting Group, LLC

Jack Rollins

Ponce Inlet

Founder/Board of Advisors

Sterling Pacific Financial

Josh Fischer

Watsonville CA

Board of Advisors

Tim Bricker

Philadelphia PA

Founder

Wallace Capital

Robert Wallace

Boston

Board of Advisors

Corporate Active Lender Directory Company Name

Contact Name

City

State

Membership Level

Bay Mountain Capital

Phill Sanchez

Dallas

Lender

Blue Ocean Mortgage

Jim Sexton

Roanoke

Lender

Carolina Private Lending, LLC

Wallace Groves

Raleigh

Lender

Carolina Private Lending, LLC

Bill Worsley

Davidson

Lender

Dusek Network, Inc

Brenda Dusek

Orchard Lake

Lender

Northfield Capital LLC

Robert Kiley

Andover

Lender

Pride of Austin Capital Partners, LLC

Robert Buchanan

Austin

Lender

Sterling Pacific Financial

Josh Fischer

Watsonville CA

Lender

Trilion Capital

Charles Evans

San Diego

Lender

Wallace Capital

Robert Wallace

Boston

Lender

WDB Funding LLC

Jennifer Watkins

West Valley City UT

Lender

Zinc Financial, LLC

Todd Pigott

Clovis

Lender

Proud Member Benefits Provider to National REIA

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Individual Active Lender Directory Company Name

Contact Name

City

State

Membership Level

Accelerated Assets

Tom Balames

Birmingham

Lender

Advance America Property & Fin

Guy Cook

Baltimore

Lender

AJTM Financial

Anthony Tomasi

Delray Beach

Lender

Alpha Funding Solutions

David Hansel

Lakehurst NJ

Lender

Asset Based Lending, LLC

Daniel Leyden

Hoboken

Lender

Baypoint Management, Inc

Mark Latimer

Newport Beach CA

Lender

BG Real Estate

Jerry Bouchard

Fairfax

Lender

Buy Now, LLC

Ann Bellamy

Tyngsborough

Lender

CalCap Financial, LLC

Edward Aloe

Pasadena CA

Lender

California Private Investors Inc

Cina Sandoval

San Dimas

Lender

Celtic Funding Corp

Raymond Loughlin

Plainsville

Lender

Centennial Properties

Robert Dodge

Leeâ&#x20AC;&#x2122;s Summit

Lender

Charles Tralka

Santa Clara

Lender

Cirius Capital

John Citrigno

San Jose

Lender

Clear Creek Funding, LLC

Bill Worsley

Davidson

Lender

Clear Mortgage, LLC

Michael Coffman

Tempe

Lender

Conquest Funding, Inc

Jeff Cella

Allentown PA

Lender

Crowne Pointe Capital Partners

Robert Napolitano

Red Bank

Lender

Custom Capital Strategies

Patrick Truhlar

Orlando

Lender

Del Rio Investments, LLC

Mike Lain

Mesa

Lender

Del Toro Loan Servicing, Inc

Drew Louis

San Diego

Lender

Direct Commercial Capital

Steven Moore

Lakeland

Lender

Dusek Network, Inc

Brenda Dusek

Orchard Lake

Lender

Individual Active Lender Directory Cont. Company Name

Contact Name

City

State

Membership Level

Eagle Private Lending

Chuck Mohler

Las Vegas

Lender

Eastern Cap

Joseph (JT) Tommasso

Atlanta

Lender

ENR Financial Services

Greg Bernett

Scottsdale AZ

Lender

Fairway America, LLC

Darris Cassidy

Portland

Lender

Fidelity National Investment Group

David Javdan

McLean

Lender

First Capital Funding

Ray Walter

Austin

Lender

First Capital Real Estate Investments

Suneet Singal

Sacramento CA

Lender

First Financial Capital

Michael Seai

Los Angeles

Lender

First Republic Investment Corp

David Fenoglio

Montague

Lender

Firstline Mortgage, Inc

Kathleen Kramer

Newport Beach CA

Lender

Forrest Financial Group

Charles Townsend

Denver

Lender

GCA Equity Partners

Tom Braegelmann

Las Vegas

Lender

GMA Factor

Jacob Sacks

Pittsburgh PA

Lender

Granite Investment Group

Jeff Merrick

Irvine

Lender

Gronewoller & Associates

Paul Gronewoller

Fort Collins

Lender

Investors Choice Funding

David Williams

Louisville CO

Lender

Iron Bridge Lending

Gerard Stascausky

Portland

Lender

JG Invests LLC

Jonathan Gould

New York

Lender

Kearny Capital Partners

Joel Westle

San Francisco

Lender

LaMaison Properties

Charles Campagnet

Alameda CA

Lender

Legacy Group Capital, LLC

Brent Eley

Bellevue

Lender

Loan Drop Box, LLC

Mike Andera

San Marcos

Lender

MMG Capital

Chris Gleason

Simi Valley

Lender

Mortgage Investments Arizona, LLC

Mitchell Karren

Tempe

Lender

Individual Active Lender Directory Cont. Company Name

Contact Name

City

State

Membership Level

Oasis Loan Advisors

Candi Poole

Las Vegas

Lender

Pacific Private Money

Mark Hanf

Novato

Lender

Pacific Residential Mortgage, LLC

Bob Cox

Medford

Lender

Peak Management

Shane Sauer

Lenexa

Lender

Point Center Financial

Patti McLoon

Aliso Viejo

Lender

Premier Mortgage Lending

Rick Piette

Las Vegas

Lender

Prime Commercial Lending

Kris Roglieri

Albany

Lender

Private Money Bank

Scott Sherman

Coeur Dâ&#x20AC;&#x2122; Alene ID

Lender

Quixote Ventures, Inc

Gordon Moss

Solana Beach

Lender

Red Dirt Lending

Scott McLain

Oklahoma City OK

Lender

RevitaLending, LLC

William Lansing

Bethesda

Lender

Royal Crest Realty, Inc

Andre Bennett

Chicago

Lender

Sea Lane Investments

Sandy Peters

Encinitas CA

Lender

Silverado Funding, LLC

David Scott

Lake Oswego

Lender

Source Capital

Sacha Ferrandi

San Diego

Lender

Specialty Lending Group

Jeffrey Levin

Greenbelt

Lender

Stallion Funding

Vincent Balagia

Cedar Park

Lender

Tempo Funding LLC

Mike Zlotnik

San Francisco

Lender

The Grossman Companies

David Grossman

Quincy

Lender

Trilion Capital

David Weiner

San Diego

Lender

Trust Deed Capital, Inc

Ken Meyer

Laguna Niguel

Lender

Trustee Corps

Rande Johnsen

Irvine

Lender

United Security Investors

Evan Frank

Los Angeles

Lender

Vincent Spreuwenberg

New York

Lender

Active Service Provider Directory Company Name

Contact Name

City

State

Membership Level

Applied Business Software

A.J. Poulin

Long Beach

Service Provider

Armanino McKenna, LLP

Josh Nevarez

San Ramon

Service Provider

FCI Lender Services

Gordon Albrecht

Anaheim Hills

Service Provider

Feldman & Roback

Marc Feldman

Bradenton

Service Provider

Geraci Law Firm

Anthony Geraci

Irvine

Service Provider

Loan MLS

Robin Alridge

San Diego

Service Provider

Loan MLS / Residential Capital

Mike Driscoll

San Diego

Service Provider

LoanCare

Aron Thielen

Virginia Beach

Service Provider

NCO Financial Investigative Services

Paul Morrow

Metairie

Service Provider

NEXZUS Publishing Group

Andrew Waite

Phoenix

Service Provider

Premier Legal Assurance

Lorna Hicks

Irvine

Service Provider

Rollins Consulting Group, LLC

Jack Rollins

Ponce Inlet

Service Provider

Self Directed IRA Services

Ryan Schneider

Austin

Service Provider

Construction Inspection Specialists

Steve Clark

Windsor

Service Provider

DLM Family Investments, LP

David Fenoglio

Montague

Service Provider

Henderson Systems

Jason Hendersen

Las Vegas

Service Provider

North Bay Real Estate Services

Stephen Loomis

Santa Rosa

Service Provider

SBS Trust Deed Network

Rory Cambra

Westlake Village CA

Service Provider

Weltman, Weinberg & Reis

Robert Hanna

Warren

Service Provider

VerticalMail

John Nash

New York

Serice Provider

Insurance for

Real Estate Investors

Vacant

Renovation

Occupied For a Coverage Proposal, Visit or Call:

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888-741-8454 The Right Coverage At The Right Time

Private Lending â&#x20AC;&#x201C; Itâ&#x20AC;&#x2122;s about more than money. The American Association of Private Lenders is about the self-reliance and rugged individualism that built America. Our purpose is to advance the interests of the entire peer to peer community. We lend our experience, enterprise and energy to elevate the standards of our industry and give you a voice in your future. Build your future with us. Join AAPL today.

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