Risk Analysis of Using Software Instead of a Law Firm to Prepare Loan Docs

Learn about the risk analysis of using software instead of a law firm to prepare loan docs for private mortgage transactions (aka hard money loans). 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 types of transactions can you run through Lightning Docs?

NEMA DAGHBANDAN:

Lightning Docs is the exact same software that is used by Geraci Law Firm to prepare loan documents. It is a proprietary solution that was built internally at Geraci Law Firm for the purposes of writing loan documents nationwide. So if you think about it from that framework, it can do anything that a law firm could do from a theoretical perspective.

That said, you really have to think about the risk analysis in the transaction. So the biggest thing here is particularly for larger loan transactions, from my perspective being a lawyer, and obviously a little biased about this answer, is that for larger loan transactions, I would oftentimes recommend that you should still retain a law firm. And there’s two reasons.

One is it’s risk shifting. As in its most basic form is when you hire a law firm, if they make a mistake in any kind of way, they have an ethical obligation to provide you with a thorough analysis of your transaction, And to catch any potential defects. And if they don’t, well, you have recourse. So that’s just the first big step there. And you lose that when you’re using a piece of software, for example.

And the second aspect of why you should use lawyers is that lawyers should be adding value to the transaction. So as an example of this is, Lightning Docs is a piece of software, and the software is only as good as the inputs in the system. If you put the wrong loan number in, if you put the wrong loan amount in, if you put the wrong property address in, and you’d make basic typos as an example. Go back to what we just discussed. Well, a law firm, if they did that, you’ve got recourse. If those things end up harming you in anyway, You can go right back to that law firm and make them fix the problem. But if you did it, it’s your problem. So when you analyze that from a big picture, I think it’s always better if you use a law firm for those reasons.

That said, there are competing reasons to use a piece of software. The biggest being time and expense. So in those scenarios is A, I can’t pass on a law firm’s fees, B is I need this now, I can’t wait. As a law firm, there’s typically a couple days turnaround, maybe a couple weeks turnaround, depending on what the level of complexity is of the transaction. If you don’t have the luxury of that in a scenario, You just need the best solution available to be able to solve that problem right then and there. And a piece of software, Lighting Docs as an example, in 10 to 15 minutes, you got a set of loan documents that’s compliant in any state. It’s a very valuable tool to have in that situation.

The last thing that I would say is when there’s a lot of complexity in the transaction or you’re doing something you’ve never done before. So an example of this is oftentimes our Lightning Docs’ users will want to enter into a new state. Well, the system can generate documents in any state, that’s not a problem. That’s not the issue. But really is you as a lender, have you thought through all the issues? Have you consulted with an expert who’s actually done this nationwide? ‘Cause if not, you probably should.

You should have a better lay of the land. And just as much as when you’re starting a business, you should consult with your CPAs and your lawyers, and all these different parties saying, “Hey, like, I want someone to kind of think about my business holistically for a second and make sure I’ve, there’s nothing that I haven’t thought about or thought through.”

The same would apply when you’re changing your business practices. So it could be geography, it could be, “Oh, we’re gonna change the states we’re gonna lend in.” It also could be product matter or product type. So, you know, I’ve never done a DSCR loan. We see the opposite. I’ve never done a bridge loan. I’ve only done DSCR, I’ve only done consumer. I’ve only done this sort of product.

Well, sure you can use a system like Lightning Docs or any other piece of software for that matter to do that. But what are you missing, Or what should you be thinking about that you may not be taking into consideration with that product type? And that’s another good reason why I would recommend using a law firm, instead of a piece of software. And maybe you can switch over, and I always talk to our users this way and I say, “Look, my goal is to get you to use Lightning Docs.” Big picture, but oftentimes, I think that you should protect yourself and make sure that you feel comfortable, so that when you’re using Lightning Docs, you don’t feel like you are exposed.