When delving into the realm of trust deed investments, it’s crucial to grasp the distinctions between “whole” and “fractionalized” deeds of trust. A “whole” deed involves a single lender or note holder, while a “fractionalized” deed entails multiple lenders or note holders. This differentiation is not merely a matter of semantics; rather, it fundamentally influences the regulatory landscape and investor protections surrounding such investments.
Fractionalized promissory notes and deeds of trust, particularly those orchestrated through Mortgage Loan Brokers (MLBs), fall under the purview of regulatory bodies such as the Department of Real Estate (DRE) and the Department of Corporations (DOC). These entities enforce compliance with both Real Estate Law and Securities Law, respectively, ensuring transparency, fairness, and legality in investment dealings.
Within the framework of Real Estate Law, a cornerstone provision is the so-called “multi-lender law.” This statute imposes a myriad of safeguards and restrictions aimed at mitigating risks for investors. For instance, it dictates limitations on the number of lenders or note holders involved in a single investment, typically capping it at ten entities. Moreover, it mandates the involvement of licensed servicing agents to oversee loan management and necessitates written agreements, known as loan servicing agreements, to formalize these arrangements.
Furthermore, the law establishes stringent criteria regarding loan-to-value ratios, stipulating thresholds that must not be exceeded based on the type of property serving as collateral. Additionally, it imposes constraints on the proportion of an investor’s net worth or annual income that can be allocated to such investments, typically capping it at 10%. These provisions aim to prevent overexposure and maintain a balanced investment portfolio.
Moreover, the law prohibits certain practices deemed risky or unethical, such as indirect collateralization through secondary promissory notes and deeds of trust. It also bars MLBs from engaging in “self-dealing,” except under limited circumstances, and prohibits the inclusion of subordination clauses in deeds of trust. These measures collectively foster transparency, accountability, and investor confidence within the trust deed investment landscape.
In terms of documentation, investors engaging in trust deed investments can expect to receive a comprehensive array of paperwork, including promissory notes, deeds of trust, assignment documents, preliminary reports, appraisal reports, and loan applications, among others. These documents serve not only as legal instruments but also as crucial tools for due diligence and risk assessment.
Furthermore, the involvement of MLBs triggers additional disclosure requirements, as mandated by California law. Investors should receive a lender/purchaser disclosure statement (LPDS), meticulously detailing the terms of the loan, servicing arrangements, borrower information, property specifics, and the MLB’s role in the transaction. This statement serves as a crucial source of information for investors, enabling them to make informed decisions and assess the viability of the investment opportunity.
In the realm of fractionalized loans, the LPDS expands to encompass a broader spectrum of information, including details on escrow procedures, closing costs, sale price dynamics, and statutory compliance explanations. These disclosures aim to provide investors with a comprehensive understanding of the investment opportunity, empowering them to evaluate its potential risks and rewards effectively.
Moreover, borrowers are entitled to receive a Mortgage Loan Disclosure Statement (MLDS), elucidating the fees, costs, and loan origination expenses associated with the transaction. Additionally, borrowers may receive federal Truth-in-Lending disclosure statements, especially in cases involving loans secured by their principal dwellings, further enhancing transparency and consumer protection measures.
Regulations surrounding the Truth-in-Lending Act (TILA) introduce an added layer of complexity, particularly concerning “high rate/high fee” loans. These loans are subject to stringent disclosure requirements and consumer protection measures, aimed at safeguarding borrowers’ interests and promoting fair lending practices. The enforcement of TILA regulations falls under the jurisdiction of the Federal Trade Commission (FTC), ensuring compliance and accountability within the lending landscape.
