Learn about how various private lenders approach loan docs for funding private mortgage transactions (aka hard money loans). Private Lender Link’s CEO, Rocky Butani visited Lightning Docs’ office in July 2023 to interview Nema Daghbandan, Esq. Watch the video or read the transcript below.
ROCKY BUTANI:
What do private lenders typically do to generate loan docs?
NEMA DAGHBANDAN:
Private lenders in the market are oftentimes kind of approaching loan documents from a variety of different backgrounds and it kind of depends on where the principles came from. So if they came from, for example, a conventional mortgage shop, they’re probably used to using a piece of software to generate documents. But if they came from more of a mortgage brokering background, they often think of loan documents as a set of forms. And when you think about it as a set of forms, they can say “let me just take some Word documents and I’ll put maybe merge fields on there and then I can send out docs and create them really easily.” But that’s really dangerous to do in our space, particularly because one, there really aren’t anything as form documents. It doesn’t really exist because each state is very specific in nature and it’s really fact intensive. And so I always tell people is no matter what you do, you need to make sure that the documents correspond to the fact of your loan.
And so typically the way to do that is one of two things. Hire a law firm because they have a malpractice problem if they don’t make sure that they write a loan exactly to the parameters of your facts. Or alternatively, you need a piece of software that is constantly being updated in the background to adapt to the facts. And also a piece of software that understands a logic basis that is fact specific because it matters, is your borrower an entity? Is it an individual? Those little nuances and facts really should change your loan documents extensively. And if they’re not, something’s wrong. And so you really want to make sure that when you are creating loan documents and if you’re a lender, they really have to be thoughtful about how well written are these documents to the actual underlying transaction.
ROCKY BUTANI:
But what if I’m a lender and I pretty much do the same loans over and over again in only in one state and I don’t have a variety of different loan types I’m doing?
NEMA DAGHBANDAN:
A hundred percent. And I think that’s a really good example is that facts are so nuanced. So I just gave you one previously about what if your borrower is an individual or an entity, right? Well let’s just take that out for a second and say, well, it’s just borrowers. Well how many signers are there to the transaction? Are those signers now also your guarantors? And should they have joint and several liability in the guarantee? What about their spouses? Should they be parties to the guarantee? All of these little facts matter.
It reminds me so much of my legal training initially as a lawyer where you’re really digging in and you’re asking a lot of questions of your client and saying, well, tell me about this. And you gave me a new piece of information and I have to go down a decision tree and say am I protecting you adequately now because of these new facts being inserted in your scenario? So even though it may feel like the transactions look a lot alike, in reality they’re really different if you’re doing your job correctly.
ROCKY BUTANI:
Are there some lenders out there that have a set of docs that they got a long time ago from let’s say some attorney and they’re just using that over and over again. Do you find that they’re doing that in-house or do they hire a loan docs company to prepare them?
NEMA DAGHBANDAN:
Yeah, and we see kind of both approaches, right? On the law firm side of the business, we’ll see clients that oftentimes they’ll go to a law firm and say “Hey, I’m going to be in the state of Nevada. Can you get me a set of documents for the state of Nevada?” And they’ll take that and oftentimes templatize it in their own system. They can oftentimes populate the documents directly in their own system by taking the content, you know, the borrower name, loan amount, all that kind of stuff. And then populating the documents, which is fine, right? I mean it’s an okay way to run a business. But it’s the same reason why people hire law firms in the first place when they’re entering into big transactions.
And it’s always a funny fact to me’ cause I’m thinking about this from a money perspective. Where else in life do you enter into multiple hundred thousand dollar contracts as a minimum amount, right? And don’t consult an attorney. Just imagine doing this in your personal life, right? You would of course hire an attorney. It’s a big decision. But because we are in the business of loans, we are oftentimes desensitized to what we’re really doing in the background, which is writing huge, enormously valuable contracts. That’s what we’re really in the business of. And you would definitely protect yourself in a normal business context. But now that it’s a loan, people say, “oh, well just give me a note and deed of trust.” And it’s like, whoa, Let’s just recognize for a second this is a $500,000 transaction. Do you really know you’re protected in this $500,000 transaction? Or do you just think you are because you hired a law firm at some point in time to do this.
ROCKY BUTANI:
Don’t you see some California DRE licensed lenders that say “I’m licensed by the DRE, I can do this stuff on my own. I’m going to do my own docs, I don’t need an attorney.”
NEMA DAGHBANDAN:
Yeah, absolutely. And so what you’ll find is people who I think, you know, and it kind of goes back into what are you good at? I’m in the doc business, right? My entire profession has been in the preparation of loan documents. I am not useful in any context outside of that. I cannot patch drywall, I cannot do anything of utility. But my legal training is in understanding weird nuances related to loan documents.
You know, I can give you a deep analysis about governing law and should you govern the promissory note by California law when you’re in California? Or should you choose Delaware law’ cause that’s where you are based out of? And I can give you the pros and cons. I can give you cases behind that about why that is structured. So apply that, that’s one section of a note, right? You know, you’ll get a question of what should my default interest rate is. I could write an essay on this and I could give you a one hour class on default interest alone and all the considerations behind it, right? So when you think about a set of loan documents, it’s a giant complex contract that every single section should be analyzed methodically in this way.
And there should be a strategy behind why did we choose this? Because there’s alternative paths you could have entered into. And so to think of loan documents as stone tablets that are set in place, that do not change is really a weird way to think about it because each loan is inherently a little bit different. And so it’s kind of an odd way to think about the legal side of what you’re doing.