Revisions to loan documents for private mortgage transactions are a continuous task for attorneys, loan document service providers, and lenders. They continuously need to revise loan documents to comply with anything from changes in federal or state laws, administrative needs, or clarifications in phrases and words used in the documents. Private Lender Link’s CEO, Rocky Butani visited Lightning Docs’ office in July 2023 to interview Nema Daghbandan, Esq. about the extensive analysis and procedures companies undertake when there is a need to revise such loan documents. Watch the video or read the provided transcript below.
ROCKY BUTANI:
How often do you have to update your docs? Does it vary, based on whenever there’s something that comes up in a certain state and there’s a new law and you have to update the docs? How often does that happen?
NEMA DAGHBANDAN:
Yeah, it’s a question that I think people are oftentimes surprised to find out the answer is we typically update our documents every week or every other week in reality. And it’s not typically for the reasons I think people assume that’s going to be the case. Some of it is kind of obvious on its face. I’ll give you an example of this. I think Georgia recently modified their notary requirements where they wanted different notary acknowledgement or modifications to the current existing notary acknowledgement. That sort of stuff happens. We track that. Any sort of state-specific stuff. Oftentimes, it ends up being administrative in nature. For example, a state will come out and say, “You can’t use size 10 font on your cover page. We’re now requiring size 12 font.” So oftentimes it’s administrative in nature and dealing with that.
But more often than not, I think what makes Lightning Docs particularly unique as a product type and most of our changes is we think of them as living, breathing, evolving documents. And what that means is that we should constantly be looking at them. And the nice thing is they’re being sold all the time, so we’re getting a lot of feedback. When you’re dealing with these very large investment banks, you’re getting a lot of different eyes, a lot of different lawyers looking at these things and they’re saying, “Hey, I like this concept. What do you think about tweaking this word, because I don’t like the word ‘advance’ here, it sounds like it’s a reserve. Is it an advance or is it a reserve?” So you start getting this concept of there’s a better way to write this.
And so, we definitely don’t take a pride of, “Oh, our documents are the best. They’re infallible.” When in reality, that wasn’t our approach before a system like Lightning Docs. So we intentionally think of this as a progressive system where we’re constantly making sure that it is always becoming better.And then the next thing that we deal with is “what haven’t we really automated yet?” So there’s new functionality of that. Sometimes that’s market driven. For example, we’ll see a proliferation of a change in the documents. The most recent example I can think of is LIBOR was the primary index that adjustable rate lending consisted of. SOFR became the new one. Well, guess what? SOFR has about eight different indices that people use. So what does SOFR mean? Is it the one month, is it six months? Well, what’s the term? Because what was happening particularly is lenders have their own lines of credit, as you know with investment banks. So they are typically borrowing money from their investment banks on an adjustable rate basis. And so, they’re trying to pass that adjustable rate lending risk back onto their borrowers. But you better make sure that there’s a parallel, one-to-one match of what you are borrowing at and what you were giving to your borrowers. So oftentimes, we are adapting to the marketplace to make sure that we’re at the cutting edge of what the market demands.
You’ll see that in prepayment penalties, and you’ll just see what I would call best practice incorporation. They’re constantly evolving. We version our documents. I think we’re currently on version 179 as an example. I mean, they really dramatically change that often.
ROCKY BUTANI:
If you’re dealing with multiple states, I’m assuming that when you say, I’m doing a loan in Texas and Texas has these certain things that need to be in the loan docs, you already have these different sections of the docs that just need to be replaced or popped into the template. Is that how it works?
NEMA DAGHBANDAN:
Yeah, so the way that you can think about the loan documents is that, if you were actually to peel back the layers and say, “What is Lightning Docs? What am I looking at? What is the final product?” it’s about a 1,300-page set of Word documents, in total. And a ton of code written within them saying, “If these conditions are true…” I’ll give you an example. If you have a guarantor and the property state is Arizona, then include a spousal consent for that guarantor. If you’re in California and there is a guarantor, do not include a spousal consent.
That fact matters of what state you’re in, because California has community property laws that let you bind your spouse, even though they never signed anything. That’s how the law is written in the state of California. In Arizona, that doesn’t exist. If you want to bind the community property of the spouse, which presumably you do as a letter, it says, ” I want to make sure that I’m not just getting 50% of the interest here.” Then the spouse has to consent to that personal guarantee that the other spouse gave to bind their community property.
That’s why loan documents can be so intense. That’s just one fact amongst many, many facts being put together. So what we have to do when we’re coming up with modifying the documents and staying up to date is not only do I need to know about the fact, but I need to know about the exception of the fact, and I need to know about what happens when those facts collide with other facts. Does it change the fact pattern? I’ll give you another example that I see oftentimes come up. You’re in a state like Pennsylvania. Well, Pennsylvania uses what’s known as a confession of judgment. It’s a really powerful tool, meaning that if your borrower defaults, you could go into a Pennsylvania court and you can get a judgment against the borrower then and there without a trial. They’ve effectively confessed to the judgment at the outset of the loan. Extremely powerful tool. But if you want to use a confession of judgment, the transaction has to be signed in the state of Pennsylvania and it has to be signed and you have to enforce it in the same county in which it was signed. Two important facts. And the transaction has to be governed by the state of Pennsylvania, so you can’t be an out-of-state lender saying, “Oh, I want to use my state laws for all of these issues.” The entire transaction has to be governed by that state. So all of those facts are colliding with each other, and those laws are changing at the same time.
So, you’ve got to sit here and you’ve got to do a lot of legal analysis in the background when you’re writing a piece of code and saying, “Okay, when does this language apply? When should I include this sentence? When should I exclude this? When should I take one word out of this sentence because the facts have changed a little bit?” So a lot of Lightning Docs and a lot of, I would say my day-to-day is really coming to legal conclusions and fighting with other attorneys on this, saying, “Well guys, we could probably fork the road here a little bit, if you think about it. There’s differing legal results. Do I just notify our clients in the situation of saying, ‘Hey, you’ve got two options and let me try to teach you about both of those options, and you can take the legal risk’?”
There’s a lot of new laws and best practices being thrown at you at any given time. And you’ve got to make the right determination from a software perspective to write the logic in the way that’s going to protect the lender the most.