When Should Private Lenders Hire an Attorney to Help With Loan Documents?

When it comes to drafting loan documents, private lenders have two options. They could either hire an attorney or purchase a loan document software that can automate the process for them. Private Lender Link’s CEO, Rocky Butani sat down with Nema Daghbandan, Esq. of Lightning Docs in July 2023 to discuss the most common scenarios of when private lenders are safe to use software to generate loan documents and when they should consider hiring an attorney.

ROCKY BUTANI:

If I’m a national lender, I’m doing fix and flip, DSCR, residential investment property bridge loans, just your standard loan types. Lightning Docs could be a good solution for that because there’s not a ton of complexity in a lot of those. Or let’s say I’m going to a new state, I can hire you as an attorney to help me get acclimated with that particular state and then I’m off and running after that.

NEMA DAGHBANDAN:

Yes, that’s a really good example.  Typically what we see, for most of our Lightning Docs users, what they have is quasi-legal built into their system. That could be a paralegal, it could be a really strong closing manager, it could be a general council. They have some legal familiarity baked in the cake. Particularly people who have drawn documents in other organizations, that’s a really helpful personnel to have because there are inherently legal questions that are going to be asked as part of any software interview.

So, an example of this is, “Who signs the loan documents?”, as you know, most of the borrowers in this industry are companies, they’re not individuals. There’s a legal question right at the beginning of this. If you and I are in a company together, do one of us have the authority? Do we both have the authority? These are the sorts of things that you typically would have a lawyer analyze or have someone who’s had that sort of training in your organization who can do that. Another example of this is in Title. So, for example, I can read through the summation provided by Title and [ask myself] “am I okay with getting a Title policy that has this exception on them”. Because oftentimes they can be really vague. They can say “an agreement entered into on January 7th, 1993…” Do you feel comfortable reading through that agreement?  Or should you hand that off to a law firm?  Those are the sorts of things where I think most transactions with a qualified person sitting behind it, [will be] fine. Most of the time, people [who] have the expertise, they can do some basic legal due diligence in-house. And then there are outliers in which you’ll run into that say, “I read through the agreement on that date, but, it makes no sense to me. I don’t understand what this thing says”. And so in those situations, we usually recommend you supplement this with some outside counsel.

ROCKY BUTANI:

What are some of the other complexities that you see in loan docs that have more of a need for an attorney to look at versus using the automated system?

NEMA DAGHBANDAN:

Typically it’s about a Title issue. Title is a very complex legal structure. We basically say, “Hey, there’s this asset that exists in the world. It’s had a lot of things record against it over a period of time, sometimes hundreds of years even”. And each one of those things trickles down to the next owner, And so you have a lot, you have a novel written about this property at the end of the day and you have to read chapter by chapter to make sure that there’s nothing sitting within one of those chapters that could harm you as a lender in foreclosure and maybe a potential owner of this asset, after the foreclosure. You wanna make sure that there’s nothing that was sitting in there that you weren’t aware of. And oftentimes that results in a risk analysis.

Let me give you a real example of how this plays out. So sometimes they’ll say there’s an encroachment. An encroachment means that you and I have properties next to each other and there’s something that is sitting on my property that your property is either encroaching on mine, there’s something of yours that’s on my property, or there’s something on my property that’s on yours. So a fence, for example. My fence is a couple feet over on your fence. What you have to understand is, “so what? What does that mean? Right? Do I care? What is the risk inheritance?” Can you monetize that risk. What is the amount of money I need to spend to solve that problem if I end up owning this asset?” So oftentimes, you want someone who has experience reading through these over and over again and hopefully litigating them and understanding what happens and what if. And once you can understand the what if, and you can monetize the risk, and then you can say, “Okay, I got it.” Or “I don’t, I don’t wanna touch this thing.” Because oftentimes that’s what I usually tell people, if you can’t come up to a number of what the damages are in a situation like this, well then, I can’t either, and no one else can. So do you want to litigate over this unknown, potentially massive risk? And oftentimes we’ll have to pull out of that transaction. So it is really making sure that you’ve taken a bit of a deeper dive into the story of Title, [to see if hiring an attorney will be valuable.