PACE and HERO Loans. by Phillip M. Adleson, Esq. Fall 2016

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1 PACE and HERO Loans by Phillip M. Adleson, Esq. Fall 2016

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3 Points of Interest is published by the California Mortgage Association, a voluntary trade association serving California mortgage and trust deed brokers and lenders BOARD OF DIRECTORS Mark Forbes President F.E. Forbes Company, Inc. David Herzer Vice President Herzer Financial Services, Inc. Elizabeth Knight Secretary PLM Lender Services Pam Sosa Treasurer Standard Mortgage Financial Services, Inc. Stephen Pollack Immediate Past President Anchor Loans, Inc. Steve Belleville Real Estate Lending Group, Inc. Robert Box Equity Funding Resources, Inc. George Eckert The Money Brokers Noah Furie Budget Mortgage Corporation Glenn Goldan ReProp Investments, Inc. Charles Hershson Fidelity Mortgage Lenders, Inc. Joffrey Long Southwestern Mortgage Odell Murry MAI Financial Services, Inc. Lori Randich Redwood Mortgage Corporation Michelle Rodriguez Woodland Hills Mortgage Corp. Richard Selzer Selzer Home Loans Richard Temme R.C. Temme Corporation Richard Wachter Wachter Investments, Inc Venture Oaks Way, Suite 150 Sacramento, CA (916) phone (916) fax cma@camgmt.com CMA HEADQUARTERS STAFF Jennifer Blevins, CMP Director of Management Services Teresa Excinia Executive Director John Berkowitz Publications Director Jen Gross, CMP Meeting Planner Michael Arnold & Michael Belote, Esq. Legislative Advocates Phillip M. Adleson, Esq. Legal Counsel Michael Cochran Webmaster / IT Manager Lexi Howard Special Projects Stephanie Schoen Special Projects Tricia Schrum, CPA Accounting K. Bradley Rogerson, Esq. Securities Counsel Inside This Issue From the President...2 From the Editor... 3 Sacramento Summary...5 PACE and HERO Loans: Hero or Villain?...7 Local Points of Interest: Las Vegas Fall Seminar Summer Seminar Photos Summer Seminar Sponsors Summer Seminar Exhibitors PAC Contributors Receivership: A Valuable Tool for Maximizing Recovery and Limiting Liability.. 35 Fair Market Value vs. Insurable Value Statutory Referral Fee Exemption for CFL Lenders Comes With a Catch...37 Stricktly Strickland Welcome New Members...41 Points of Interest Fall 2016 Page 1

4 From the President By Mark E. Forbes CMA President Looking Ahead am honored to serve as President of CMA, the oldest private money mortgage trade association in the nation. Together, we will continue CMA s mission of membership education and the preservation of the private lending industry through legislative review and industry advocacy. Thanks to our Immediate Past President Stephen Pollack s strong leadership and guidance, our membership has increased over 16 percent this past year, and we have been able to continue to build our association s critically important financial reserves. I would like to thank California Real Estate Commissioner Wayne Bell for his continued support of our organization and for presiding over the installation of new board members and officers during our 2016 Summer Seminar installation luncheon held at the San Diego Hilton Resort and Spa. Over the past few years, we have seen an influx of new mortgage companies entering the industry in California and Nationwide. This creates a great opportunity for CMA and for these newer companies, and we will set our sights on welcoming any new mortgage companies into our folds to share our experiences and provide access to lending industry best practices and education. Our goal is to introduce CMA to as many of these new companies as possible in order to provide the critical education, networking and industry support offered by membership in CMA. We have formed an eight-member transition team this year, led by past president Odell Murry. The purpose of this task force is to establish both a direction and a set of goals that we believe will most benefit the CMA membership in the coming years with regards to legislation, regulation, and continuing education of our individual members. To this end, the board has established several goals for the coming year. First, our esteemed colleagues, Legislative Chair George Eckert and Legislative advocates Mike Arnold and Mike Belote, will be organizing a CMA Sacramento legislative event in the spring of The event will feature personal meetings with several state legislators and a luncheon with the legislators and staff. This provides legislators the opportunity to meet and speak directly with members of CMA, and to further understand CMA s goals and objectives, including the services we provide in the communities we serve. CMA is recognized as one of the leading training organizations in the state for lending, title insurance, real estate and a number of other industry-related topics. All members of CMA will be encouraged to participate in this important one-day event. Additional details and an agenda will be announced at the upcoming fall and winter conferences, and will be available on the new CMA website. The second goal led by the Membership & Marketing Chair, Steve Belleville, is to increase membership by 20 percent this year. The committee has developed several new programs designed to increase membership, and at the same time benefit the referring CMA member. CMA members may offer a new member free seminar registration if they join as a regular member and commit to pay dues for a minimum of three months; education members need to commit to five months. The referring CMA member will receive a $100 CMA coupon that may be applied toward a seminar registration or membership dues. In order to reach our membership goals, we are continued on page 40 Page 2 Fall 2016 Points of Interest

5 From the Editor By Steve Leidner Editor, Points of Interest See You In Vegas San Diego was terrific for many reasons. First, Pam and her committee is to be congratulated for putting on one of the most enjoyable programs in recent memory. I m not sure if any of you know that the very popular Speed Networking session was Pam s idea. And, the hotel! We have had hit or miss locations recently but the Hilton seemed to please everyone. I was even impressed with the restaurant. Phil Adleson, once again, put on an intelligent and very funny introduction of our new Board members and Officers. Phil s class, PACE and HERO LOANS was worth the cost of admission. For those of you who did not attend or want additional information, a copy of his article is copied in this edition. By the way, for the first time in CMA history, an award has been named for an outstanding contributor. The Phil Adleson Education Award will be given to someone who has made significant contributions to advance our knowledge. Big Congratulations to Phil! Let s all give a round of applause to Rich Wachter, our PAC chair. His auction was hysterical. Make no mistake though, it takes dedication, hard work and chutzpa to do what he does and Rich does it better than anyone. Next up is Las Vegas. But this time we are at Aria. Further along in this edition is Elliot Shirow s piece on dining and culture. He is the master of food, wine and culture but I can tell you from experience, the restaurants at Aria are top-notch and you can stumble back to your room. See you in Vegas, baby! Steve Save the Dates: CMA Fall 16 Seminar CMA Winter 17 Seminar October 27-28, 2016 January 19-20, 2017 ARIA Resort & Casino Hilton Costa Mesa Las Vegas, NV Costa Mesa, CA CMA Spring 17 Seminar CMA Summer 17 Seminar April 6-7, 2017 July 13-14, 2017 Westin St. Francis Hilton San Diego Resort & Spa San Francisco, CA San Diego, CA Points of Interest Fall 2016 Page 3

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7 SACRAMENTO SUMMARY By Michael J. Arnold & Michael Belote, Esq. Legislative Advocates Two-Year Session Concludes Making the citizenry and their wallets safe for the next four months, the California Legislature concluded business for the legislative session in the early hours of Thursday, September 1. The state constitution requires that regular bills be enacted by midnight, August 31, but the members can continue business on urgency bills and other matters not designed to take effect on January 1. Anyway, they are gone, and will not return until the new legislature is sworn into office on Monday, December 5, and until they return in earnest on Monday, January 2, The significance of adjourning in the second year of the two-year session, or even years, is that all bills which did not pass are completely dead and cannot be carried over into Thus, the slate is wiped entirely clean, and any idea not enacted must be reintroduced as a new bill in the next session. All told, some 789 bills were forwarded to Governor Brown for his signature or veto. The Governor has until September 30 to sign or veto the bills sent to him, or they become law automatically without his signature. As of this writing, hundreds of bills still await action by the Governor, and because he receives an individualized presentation on each bill, there is much work to be done before the end of the month. In recent years, Governor Brown has been signing approximately 85% of the bills sent to him, vetoing the remaining 15%. This means around 700 new laws will be entered into the California Codes. We are a highly codified state, to say the least! CMA members and friends will certainly want to attend the Fall Seminar in Las Vegas, because there will definitely be bills of interest signed by Governor Brown. What there will not be are bills of the stop the presses, we are going out of business! variety. Many of the bills relate to regulation of real estate licensees generally. Additionally, the following bills remain on the Governor s desk, subject to the September 30 deadline: AB 1974 (Gallagher): Recordings. Specifies the bases upon which recorded documents may be re-recorded without new executions and notarizations. Unless specified, any other documents re-recorded to address errors would expressly require new executions and notarizations. AB 2143 (Irwin): Electronic Recording. Expands the categories of authorized submitters of documents for electronic recording. AB 2217 (Hadley): Notary Fees. Increases permissible notary fees in the Government Code. This bill has already been signed by the Governor..learn more in Las Vegas! AB 2251 (Stone): Student Loan Servicers. Created new regulation of student loan servicers. Fortunately, late amendments excluded loans secured by real property from the definition of student loans. AB 2291 (Achadjian): Property Taxes: Partial Payments. Allows local governments to impose a reasonable fee to accept partial payments of property tax obligations. AB 2566 (Nazarian): Notaries: Identification. Expands the categories of identification documents which must be accepted by notaries. AB 2691 (Holden): Property Taxes. Authorizes counties to implement a program to accept monthly payments for property tax obligations. SB 1150 (Leno): Successors in Interest. Requires certain heirs of borrowers in default to be treated as borrowers for purposes of procedures under the Homeowner s Bill of Rights. Amendments excluded lenders who conduct 175 or fewer foreclosures in a calendar year. Many more bills will be discussed in Las Vegas. With few exceptions, bills signed prior to September 30 will take effect on January 1, The new legislature will be sworn into office on Monday, December 5, 2016, and will return in earnest to Sacramento on Monday, January 2, Then, another bills will be introduced, as certainly as death and taxes! Points of Interest Fall 2016 Page 5

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9 by Phillip M. Adleson, Esq. Legal Counsel for the California Mortgage Association PACE and HERO Loans: HERO or Villain? I THE CREATION AND HISTORY OF THE PACE LOAN AND HERO LOAN PROGRAMS A PACE and HERO Programs 1 The PACE (Property Assessed Clean Energy) Program provides financing for energyefficient and renewable energy products. The PACE Program is authorized by state statute and implemented on the local level. 2 Generally, these programs fund improvements such as: solar photovoltaic (PV) systems; energy efficient space heating, air cooling and ventilation (HVAC); cool roof systems; windows, skylights, and doors; solar thermal water heating; air sealing and weatherization; insulation; water heating; indoor energy efficient light fixtures; and water efficiency measures ( Environmental Improvements ). 3 Environmental Improvements subject to PACE loans are also increasingly being used to update appliances such as the purchase of a new, energy-efficient dishwasher; washer/dryer; tankless water heater, etc. Some of these improvements may become fixtures that add to the value of the property (at least temporarily, during their effective economic life, such as solar panels) but others such as appliances may not (i.e., they are not fixtures and they may be removed by the owner). HERO (Home Energy Renovation Opportunity) financing is just one type of PACE Program. While there are other PACE Programs, approximately 95% of all residential PACE projects are HERO Loans. 4 The HERO Program is a statewide residential and commercial PACE program that allegedly encourages an open-market approach. 5 This means that cities and counties may make multiple programs available to their constituents including California HERO Loans. 6 These loans can be funded by private or public funds, but most are funded through government bonds. These programs are administered by private companies (e.g., Renovate America for residential HERO Loans and Samas Capital for commercial HERO Loans). 7 continued on page 8 Points of Interest Fall 2016 Page 7

10 PACE and HERO Loans continued from page 7 B Legislative Intent As stated in one of the authorizing statutes, the legislative intent underlying PACE financing is as follows: The Legislature finds and declares that global warming poses a serious threat to the economic well-being, public health, natural resources, and the environment of the state, and that action taken by the state to reduce emissions of greenhouse gases will have far-reaching effects by encouraging other states, the federal government, and other countries to act. California has a tradition of environmental leadership and wishes to be at the forefront of national and international efforts to reduce emissions of greenhouse gases. In furtherance of these efforts to reduce emissions of greenhouse gases, the Legislature declares that a public purpose will be served by providing the legislative body of a local agency with the authority to use special taxes pursuant to the Mello-Roos Community Facilities Act of 1982 to finance the installation of energy efficiency and renewable energy improvements that are affixed, as specified in Section 660 of the Civil Code, to residential, commercial, industrial, or other property. 8 C Philosophical Conflict Regardless of one s view of the merits of the legislative intent (i.e., to reduce global warming), it is the foundation for PACE Programs. Most of the opponents of PACE programs do not disagree with the advantages of encouraging Environmental Improvements on residential or commercial properties. 9 The real dispute is over the mechanism used to finance and secure PACE financings as well as the administration of PACE Programs. PACE financing has super-priority status over the lender s deed of trust even if the PACE financing is placed on the property after the lender s deed of trust is recorded. PACE Programs, being local in nature, have little uniformity and many, but not all, are administered by third parties that do not follow the same consumer protection requirements applicable to residential mortgage lenders. 10 Both institutional lenders as well as Government Sponsored Entities ( GSEs ) and other secondary purchasers (e.g., holders of mortgages or mortgage securities) have historically underwritten loans with the understanding that their security will be a first deed of trust subject to ordinary property taxes and special assessments. 11 Lenders assessment of risk and underwriting standards are substantially based upon the security they receive in the real property (i.e., equity protection). Even more so than lenders holding first deeds of trust, lenders making loans secured by junior liens often assess their risk and underwriting standards substantially on the equity in the property (after considering any pre- existing senior loans). It is difficult, if not impossible, to assess risk and underwriting standards when PACE financing can be added after the lender s deed of trust is recorded and the PACE loan is elevated to super-priority status. The real philosophical issue is: should the government be in the financial business as opposed to merely providing tax incentives or other incentives to encourage Environmental Improvements? Is this just the camel s nose under the tent for any project that the government wants to promote? As to the PACE Program in California, that ship has sailed, with many local government agencies adopting residential and commercial PACE programs. You often get what you vote for. D Background California s first commercial and residential PACE programs were established in The basis for PACE programs in California are established under several existing laws allowing property assessments (i.e., Mello- Roos Act and the Improvement Act of 1911.) The concept was to allow property owners to finance energy efficiency, water efficiency and renewable energy projects on existing and, in some cases, new residential and commercial structures through a voluntary special assessment on the improved property. PACE financing is neither a traditional mortgage nor is it a typical involuntary special assessment. Instead, the PACE Program is a hybrid. PACE financing is not secured by a deed of trust or mortgage but rather by a voluntary assessment. For all relevant purposes, these voluntary assessments are treated like involuntary special assessments on the borrower s tax bill (e.g., Mello-Roos assessment or an assessment under the Improvement Act of 1911). These voluntary assessments are treated as tax liens with super-priority over mortgages and other liens secured by the real property even where the PACE financing is secured after the lender s deed of trust was recorded. It is this super-priority that causes lenders great concern. The PACE program was authorized by the State of California by AB 811 (2008) and required local implementation; meaning they would vary from one city or county to another. The PACE program was primarily for rooftop solar, the voluntary special tax may be used to finance the installation of distributed generation renewable energy sources, electric vehicle charging infrastructure, or energy or water efficiency improvements." 12 PACE loans may be funded publically or privately, although most PACE and HERO Programs are funded by government bonds and are secured by a voluntary special tax assessment. In essence, the government borrows the money to loan in the form of a bond. The first bonds sold had a hefty 4.75% coupon and an 11-year duration. 13 The government bonds are repaid through collection of the special voluntary assessments added to the borrower s tax bill. 14 When the initial legislation was enacted for PACE Programs, it was done with the idea that PACE Programs would be administered continued on page 9 Page 8 Fall 2016 Points of Interest

11 PACE and HERO Loans continued from page 8 by local government (e.g., counties) rather than by third party, for-profit organizations such as those that now administer these programs. Currently, Placer County is the only county that administers 100% of its PACE Program. Sonoma County still does some of its own administration but it also allows third parties to provide administration of its PACE Program. Most other counties rely on third party, for-profit, administrators for their PACE Programs. 15 Resistance from lenders including the Federal Housing Finance Agency (FHFA) receiver for Fannie Mae and Freddie Mac, the Office of the Comptroller of the Currency (OCC), and the Federal Housing Administration (FHA) slowed the full implementation of PACE and HERO Loan programs. (Discussed later.) 16 Since 2010, a number of developments have facilitated a resurgence of residential PACE programs in California including the passage of state legislation (SB 555). 17 In 2011, the California legislature passed SB 555 (effective ) which amended prior law regarding PACE Programs. Much like involuntary special assessments, it was intended that PACE financing stay with the land (not with the borrower). Theoretically, Environmental Improvements to residential or commercial buildings will result in offsetting energy costs and the Environmental Improvements will increase the value of the Property. 18 Many cities and counties now have PACE or HERO Loan programs for residential, commercial and municipal properties. Shortly after the enactment of AB 811 (2008), the residential programs soon encountered a significant hurdle. The Federal Housing Finance Agency (FHFA) as receiver for Fannie Mae and Freddie Mac, was concerned that residential PACE assessments would have super-priority lien status over existing mortgages purchased by Fannie Mae and Freddie Mac and underwritten based upon the mortgages being first deeds of trust. This meant that, in the event of a default, any outstanding PACE assessments (payments) due (although not the entire amount financed) would be paid off before other liens, such as the existing first deeds of trust. Elevating the PACE financing to super-priority status changes the risks originally agreed to when the loan was originated. While private funded loans make up a small amount of the marketplace, private lenders and brokers shared many of the concerns of the large GSEs and institutional lenders. These concerns were magnified by the fact that brokers making or arranging private lender loans secured by real property are subject to statutory loan-to-value ratios continued on page 10 Points of Interest Fall 2016 Page 9

12 PACE and HERO Loans continued from page 9 that do not apply to the GSEs or institutional lenders. 19 Because private loans often involve greater risk than institutional loans, the addition of subsequent PACE financing creates an even greater risk to the private lender because the PACE financing consumes some of the statutorily- required protective equity that was required when the private loan was underwritten. As a result of the FHFA directive, in 2010 Fannie Mae and Freddie Mac stated that they would no longer purchase mortgage loans secured by properties with outstanding PACE loans. This effectively stopped residential PACE programs, with the exception of a few pilot programs. 20 On July 6, 2010, the Office of the Comptroller of the Currency (OCC) issued Supervisory Guidance echoing the FHFA safety and soundness concerns and calling national banks to mitigate exposure and protect collateral positions. 21 Initially, FHA also joined the opponents of PACE Programs. The County of Sonoma sued the FHFA, on technical grounds, asserting that FHFA lacked authority to order Fannie Mae and Freddie Mac to stop purchasing loans subject to PACE financing. 22 The federal 9th Circuit Court of Appeal in its opinion in County of Sonoma v. Federal Housing Finance Agency, 710 F.3d 987 (2013) ruled in favor of FHFA, dismissed the litigation and vacated a lower court injunction requiring the FHFA to create rules regarding purchasing loans secured by properties encumbered by residential PACE financing. This court opinion created additional uncertainty in California regarding residential PACE Programs. 23 FHFA claims to have won similar cases in a number of states. 24 Initially, buyers and lenders were reluctant to purchase or finance properties where the PACE financing was not paid off or subordinated, where possible. In an attempt to resolve institutional lender concerns, the California legislature passed Senate Bill 96 (2013), authorizing the California Alternative Energy and Advanced Transportation Financing Authority ( CAEATFA or Authority ) 25 to create a residential PACE Loss Reserve Program. This program was intended to address the FHFA s and lenders concerns about the systemic risked posed to first mortgage lien holders and their underwriters by PACE Programs during foreclosure or forced sales (e.g., tax lien sales). The legislature designed the loss reserve program to increase the availability of PACE financing and to mitigate risk to PACE lien holders in California. 26 The CAEATFA issued revised proposed regulations for PACE Loans on February 4, 2014, after considering stakeholder feedback. 27 One of the problems for private lenders is that the PACE Loss Reserve Program only applies to first deeds of trust. Of greater concern is the fact that PACE liens are assessed annually on secured property tax rolls. The PACE Loss Reserve Program only covers losses for the residential (not commercial) PACE assessment on the tax roll (the payments due) and not the outstanding (but not due) amount of the PACE financing. The PACE Loss Reserve Program compensates lenders for losses caused by defaulted PACE Loan payments both before and after foreclosure (i.e., until the property is sold by the foreclosing lender). The procedure for making a loss reserve claim are complex and are beyond the scope of this article. 28 (However, see further discussion below). It is noteworthy that although CAETFA indicates no claims have been made and that the fund stands at its current statutory appropriation of $10,000,000, in a down market these funds would be woefully insufficient. For the sake of illustration, CAETFA could fund only 500 claims of $20,000 each without additional funding. continued on page 11 Page 10 Fall 2016 Points of Interest

13 PACE and HERO Loans continued from page 10 In September of 2013, after the enactment of the PACE Loss Reserve Program, Governor Brown wrote the FHFA encouraging them to change their position based upon California s adoption of the PACE Loss Reserve Program. In May of 2014, FHFA notified the Governor that, notwithstanding the PACE Loss Reserve Program, FHFA would not change it position. 29 FHFA continued its opposition to PACE financing. In its Statement of the Federal Housing Finance Agency on Certain Super-Priority Liens, 12/22/2014, FHFA stated: The existence of these super-priority liens increases the risk of losses to taxpayers. Fannie Mae and Freddie Mac, while operating in conservatorship, currently support the housing finance market by purchasing, guaranteeing, and securitizing singlefamily mortgages. One of the bedrock principles in this process is that the mortgages supported by Fannie Mae and Freddie Mac must remain in firstlien position, meaning that they have first priority in receiving the proceeds from selling a house in foreclosure. As a result, any lien from a loan added after origination should not be able to jump in line ahead of a Fannie Mae or Freddie Mac mortgage to collect the proceeds of the sale of a foreclosed property... In issuing this statement, FHFA wants to make clear to homeowners, lenders, other financial institutions, state officials, and the public that Fannie Mae and Freddie Mac s policies prohibit the purchase of a mortgage where the property has a first-lien PACE loan attached to it. This restriction has two potential implications for borrowers. First, a homeowner with a first-lien PACE loan cannot refinance their existing mortgage with a Fannie Mae or Freddie Mac mortgage. Second, anyone wanting to buy a home that already has a first-lien PACE loan cannot use a Fannie Mae or Freddie Mac loan for the purchase. These restrictions may reduce the marketability of the house or require the homeowner to pay off the PACE loan before selling the house. 30 In FHFA s June 9, 2016, Statement before the California Legislature Assembly Banking and Finance Committee and Assembly Local Government Committee, it affirmed its prior position (stated above) and it further articulated its concerns. 31 While initially opposed to PACE financing, in August of 2014 the FHA, issued a letter regarding a proposed Guidance for FHA financing on single family residences with existing PACE financing. 32 The proposed guidance includes the following: Lien Position: Only PACE liens that preserve payment priority for first lien mortgages through subordination; PACE payment, structure, and term: PACE financing must be a fixed- rate, fully amortizing loan; Eligible Properties: PACE assessments must be attached to single family properties, as defined by FHA, which are 1 to 4-unit dwellings, including detached, semi-detached and townhome properties; Equity Requirement: PACE liens that preserve payment priority for first lien mortgages will be eligible for financing that does not exceed FHA s maximum combined loan-to-value (CLTV) ratio; Record Keeping: PACE liens must be formally recorded and be identifiable to a mortgage lender through a title search; Additional Consumer Protections: PACE programs must comply with applicable federal and state consumer laws and should include disclosures to and training for homeowners participating in the program. 33 continued on page 12 Points of Interest Fall 2016 Page 11

14 PACE and HERO Loans continued from page 11 On July 19, 2016, the U.S. Department of Housing and Urban Development (HUD) issued its Mortgagee Letter (FHA Loans) adopting most of its proposed 2014 guidelines. However, the July 9, 2016, HUD Mortgage Letter, places substantial restrictions on FHA loans on properties with existing PACE financing. On January 29, 2015, HUD issued a memo on Administrative Guidance for Multifamily Property Assessed Clean Energy (PACE) in California." 34 The Guidance applies to a number of FHA Programs (referenced in the Guidance) including Section 8 housing. The conclusion of the U.S. Department of Housing and Urban Development (HUD) Guidance is that PACE financing may be permitted subject to a long list of requirements. The list is too long to review in this article, but it can be found in the Guidance. II PACE AND HERO SELLING POINTS The general benefits espoused by the advocates of the HERO Program are: 35 Property Tax Assessment HERO payments are made through a line item on the borrower s property tax bill. Terms Up to 20 Years HERO offers flexible repayment terms of 5-20 years. Based on Equity HERO is an assessment on the borrower s property, with no impact on personal credit score. 36 No Upfront Costs HERO finances the total cost of the Borrower s project, including all fees and labor costs. Potential Tax Benefits The interest on HERO payments may be tax deductible. 37 Transferability If the borrower sells the property, the remaining balance may be able to transfer to the new owner. 38 Potential increase in the value of the home. Monthly energy savings that can be applied to PACE financing payments or to anything else the borrower so chooses. 39 III PACE PROGRAM REQUIREMENTS A PACE Program Approval PACE financing may vary based upon the program adopted by the local government entity. PACE Programs must be approved by CAEATFA to be eligible under the Public Resources Code. In evaluating eligibility, CAEATFA shall consider whether the applicant s PACE program includes the following conditions: 40 (1) Financing recipients are legal owners of underlying property. (2) Financing recipients are current on mortgage and property tax payments. (3) Financing recipients are not in default or in bankruptcy proceedings (the time period varies between different PACE Programs). (4) Financing is for less than 15 percent of the value of the property, up to the first seven hundred thousand dollars ($700,000) of the value of the property, and is for less than 10 percent of the remaining value of the property above seven hundred thousand dollars ($700,000). (5) The property is within the geographical boundaries of the PACE program. (6) The program offers financing for energy or water efficiency improvements, electric vehicle charging infrastructure, or clean energy improvements. (7) Improvements financed by the program follow applicable standards of energy efficiency retrofit work, including any guidelines adopted by the State Energy Resources Conservation and Development Commission. (8) The total mortgage-related debt and PACE financing on the underlying property does not exceed the value of the property. CAEATFA regulations approving PACE Programs subject to the PACE Loss Research Program further require that the property be 3 or fewer units and that the total mortgage-related debt and PACE Financing on the underlying property does not exceed the value of the property (i.e., 100% LTV). CAEATFA considers a number of other factors in approving a PACE Program including the Program s use of best practices, adopted by the CAEATFA. 41 Critics of PACE Programs argue that individual PACE Programs, as adopted by local governments, lack uniformity. They further question whether the private, forprofit, administrators will adequately verify PACE Program underwriting standards. continued on page 13 Page 12 Fall 2016 Points of Interest

15 PACE and HERO Loans continued from page 12 IV LENDER AND BORROWER CONCERNS Both large institutional lenders and private lenders have a number of concerns regarding PACE Loans. Like most large government programs, PACE Programs attempt to address some of the concerns of institutional lenders, GSEs and secondary purchasers. However, most PACE Programs do not consider the impact PACE Programs have on mortgage brokers making or arranging private funded loans. There are an array of issues that may be important to brokers making or arranging private funded loans. A sampling of those issues are set forth below. A Interest Rates; other Charges and Tax Benefits PACE Programs boast that PACE financing is at competitive interest rates ranging from % annually. 42 While these interest rates may be reasonable when compared to many home improvement loans secured by a HELOC or junior mortgages, they are often higher than the borrower would be able to obtain through a refinance with an institutional lender. Even private loans on properties with low LTVs may be competitive with the PACE financing interest rates. Certainly a borrower could finance the Environmental Improvement with a private second deed of trust or HELOC and then consolidate them by refinancing both the first and second deed of trust (in the current market) at a lower interest rate. Partial payments are not accepted in PACE financing. 43 As such, partial payments are returned and the payment is subject to a 10% late charge plus interest at 1.5% per month (18% per year). 44 If not paid, these late charges and interest are added to the voluntary special assessment. This places the existing lender in a position of accepting these rather high interest rates and charges or advancing the payments on the PACE financing. In FHFA s June 9, 2016, Statement before the California Legislature Assembly Banking and Finance Committee and Assembly Local Government Committee, the FHFA commented on PACE Program administrative fees, stating: In addition to undertaking assetbased lending [not based upon the borrower s ability to pay], the counties or municipalities may charge up to 10 percent for administrative fees and other charges are imposed by administrators; these numbers are generally well beyond what a secondlien mortgage loan would contemplate. Total authorized amounts for loans vary by state from 10 percent or more of assessed home values. There is no acceleration clause in PACE financing; therefore, after the lender forecloses, the PACE payments must still be made. (See, PACE Loss Reverse Discussion for possible mitigation of qualifying first lender losses.) While tax benefits to the borrower are claimed as a benefit of PACE financing, many borrowers can deduct mortgage interest, obtaining a comparable tax benefit. B Impounds Possible Mitigation to PACE Risk Proponents of PACE Programs argue that the energy savings will reduce the borrower s out of pocket costs making it easier for the borrower to pay other obligations including the mortgage debt. However, nothing compels the borrower to use the cost savings for any particular purpose. As such, lenders may want to consider modifying their impound agreements to clearly cover payments on PACE financing regardless of whether the PACE financing is placed on the property before or after the lender s deed of trust. There seems to be little discussion in the literature regarding lender impound accounts established to include borrower payments on PACE financing. Where the PACE financing exists at the time the lender places its deed of trust on the property (and assuming the lender does not require the PACE financing to be paid off), the lender may want to modify its impound agreement to require the impounding of PACE payments. Where PACE financing is obtained after the lender s deed of trust, the lender may not even know about the PACE financing. With advice of counsel, and after considering applicable statutes and regulations regulating impound accounts, lenders may want to modify their loan documents and impound agreements to cover PACE financing obtained after the lender s deed of trust is recorded. Most standard deeds of trust contain a clause prohibiting the borrower from placing senior encumbrances or liens against the property. In cases where the lender s deed of trust or impound agreement does not cover subsequently obtained PACE financing, the lender may be able to get the borrower s consent by exercising its right under the deed of trust to declare a default when the borrower allows a senior loan to be placed on the property without the existing lender s consent. To avoid complications under the RESPA loss mitigation and servicing rules, the lender should also exercise its acceleration clause to declare the entire loan due and payable (i.e., in default ). 45 The first time a lender/ servicer exercises this type of default, they should do so with advice of counsel and establish procedures. The risk of existing lenders declaring a default based upon the borrower obtaining PACE financing with senior priority is recognized by the PACE literature. While some PACE Programs warn the borrower that they should obtain existing lender consent (which may not be given), it is unclear the extent to which PACE borrowers are warned that the existing lender may declare a default, accelerate its loan and foreclose. continued on page 14 Points of Interest Fall 2016 Page 13

16 PACE and HERO Loans continued from page 13 Existing lenders have three options to deal with PACE financing obtained after the lender s deed of trust was recorded. First, the lender can make its consent subject to an impound agreement that clearly includes PACE financing payments. Second, the existing lender can refuse to consent and point out that they will declare a default if PACE financing with a senior lien is placed on the property. This may create an opportunity for the private lender to refinance its loan to provide the borrower with enough additional funding to pay for the environmental improvements. Third, the existing lender (like FHA does) may insist on a subordination agreement subordinating the PACE financing. There is not enough experience with the PACE program to know how receptive the PACE lender will be to a request for subordination. While impound accounts are common (and often required) in residential loans, they are rarely used in loan secured by commercial properties where the PACE financing may be much larger than PACE financing on a residential property. The solutions discussed above will be particularly important for existing lenders on commercial properties. C Private Lender LTV Issue a Surprise to Brokers and Borrowers Loans made by mortgage brokers are subject to maximum loan-to-value ratios ( LTV ) under Bus. & Profs. Code (a)(1) and 10238(h)(1).) Generally, the aggregate principal amount of the note or interest sold, together with the unpaid principal amount of any encumbrances upon the real property senior thereto, shall not exceed the [maximum LTVs] of the current market value of each parcel of the real property, as determined in writing by the broker or appraiser pursuant to Section The LTV must be stated on the Bureau of Real Estate (CalBRE) mandated Lender Purchaser Disclosure Statement ( LPDS ). 46 For LTV purposes, the statute does not distinguish between an encumbrance that is an involuntary special assessment and one for a voluntary special assessment securing PACE financing. 1 Where the PACE Financing is obtained after the lender s deed of trust is recorded. Lenders, whether institutional or private, can only apply underwriting standards at the time the loan is being made. They are not prescient and cannot be expected to know the borrower may later obtain PACE financing that will have super-priority over the lender s deed of trust. All the lender can do is to underwrite the borrower s loan in compliance with the maximum LTV s required by law. continued on page 15 Page 14 Fall 2016 Points of Interest

17 PACE and HERO Loans continued from page 14 To a limited extent, since PACE financing, when combined with existing financing, cannot exceed 100% of the value of the property, there would appear to be some minimal protection. However, this protection is really non-existent to the existing lender because the new PACE financing has super-priority over the existing deed of trust reducing the lender s equity protection. In such cases, the existing lender should consider the solutions discussed above. 2 Where PACE financing is obtained before the lender s deed of trust is recorded. Normally, brokers only require taxes and assessments that are due or delinquent to be paid when the loan is made and they do not count the balance of the special assessment (i.e., amount not yet due) as an encumbrance senior to the loan being made. However, unlike the usual involuntary special assessment on a borrower s tax bill, PACE financing is secured by a voluntary special assessment. This raises the question of whether the balance of the PACE financing not yet due should be considered a senior encumbrance for the purpose of determining maximum LTVs for brokermade or arranged loans. As yet, there appears to be no California Bureau of Real Estate ( CalBRE ) guidance on this point. However, the ambiguity of the applicable Business & Professions Code sections, may require that the LTV in the LPDS consider the unpaid balance of PACE financing as it is a senior encumbrance. 47 If existing PACE financing must be considered as a senior encumbrance, it will necessarily reduce the amount the broker may loan. For example, assume that the secured property is a single family, owner- occupied residence with an appraised fair market value of $400,000. Such a loan would be subject to a maximum 80% LTV. Normally, the broker would require taxes and assessments due (or delinquent) to be paid, but they would not count the balance (not due) on a Mello-Roos assessment (involuntary assessment). As such, the maximum loan that could be made would be $320, However, if the PACE financing must be considered as a senior encumbrance, this would result in the LTV being greater than the permitted 80% LTV. Assume the same facts but add the fact that there is a $60, special assessment securing existing PACE financing (i.e., 15% of the FMV, maximum permitted for PACE financing on property valued up to $700,000). If the broker can ignore the PACE special assessment, the lender could make a $320,000 loan (80% LTV). However, if the broker must consider the PACE financing as a senior encumbrance, the calculation of the maximum loan amount would be $400,000 x 80% = $320,000.00, less the $60, PACE senior financing, leaving continued on page 16 Points of Interest Fall 2016 Page 15

18 PACE and HERO Loans continued from page 15 $260, as the maximum loan a broker can make. Not only is this not good for private lenders, but borrowers can be surprised when they cannot use their perceived equity as collateral for a larger loan. The lender s primary tool here is to refuse to make the loan unless the PACE financing is paid off. (Discussed below). The lender then may be able to increase the principal balance of the loan to include the payoff of the senior PACE financing. D Lenders May Require the PACE Financing be Paid off upon Refinancing or Sale As noted above, borrowers may be unaware that after they obtain PACE financing (with a super-priority special assessment), lenders may be reluctant to lend on the property; particularly if the new loan is not a first deed of trust. Only first deeds of trust are subject to the PACE Loss Reserve Program. As such, under the above example, the borrower may be forced to pay off the PACE financing in order to refinance or to sell the property to a buyer seeking new financing. Particularly with large PACE Loans (with a term of up to 20 years), borrowers are highly likely to refinance before the PACE financing would be paid off. To mitigate borrowers obtaining PACE financing without understanding this problem, promoters of PACE programs have attempted to create disclosures warning borrowers of this risk. However, it is questionable that borrowers really understand the consequences PACE financing may have on their ability to refinance; to obtain junior financing for other purposes or to sell their property. Currently, legislation is pending to improve borrower disclosures and protections relating to residential PACE financing. 48 E Due on Encumbrance issues As previously discussed, when PACE financing is obtained after the lender s deed of trust is recorded, most deeds of trust provide that the lender may declare a default and accelerate the loan balance. In addition to this tool, in some instances the lender may be able to exercise the due-on-encumbrance claim in the deed of trust. 49 When the secured property is a singlefamily, owner-occupied dwelling where the trustor will occupy the dwelling within 90 days of the execution of the deed of trust, the beneficiary cannot declare the obligation in default solely by reason of the further encumbrance of the property by a junior trust deed or mortgage. 50 These borrower rights cannot be waived. Because Civil Code 2949 only refers to junior deeds of trust," it would appear that if the lender s deed of trust contains a due-on-encumbrance clause, it may be enforceable as to loans secured by an owner-occupied 1-4 residential properties where the lien is senior to the lender s deed of trust. However, the best practice may be to rely on the provision in the deed of trust prohibiting the borrower from allowing senior liens to be placed on the secured property without the lender s consent. Many residential deeds of trust on 1-4 residential properties do not include a due on encumbrance clause. Most commercial deeds of trust contain a due-on-encumbrance clause and, state law does not prohibit the enforcement of such clauses as to non-owner occupied residential properties. Where applicable, a due-on-encumbrance default can be used in conjunction with the clause in the deed of trust prohibiting the borrower from placing a senior lien against the property without the lender s consent. F Notice of PACE Financing and PACE Financing Defaults Where the PACE financing is already on the property when the lender makes its loan, the lender should be able to discover the PACE financing by pulling a copy of the borrower s tax bill. Because so many brokers and private lenders are unfamiliar with PACE financing, they may not observe the PACE financing. Lenders should consider making it part of their loan application and underwriting process to ask the borrower if they have PACE or HERO financing and to obtain a copy of the most recent tax bill to examine it for PACE financing voluntary assessments. Unfortunately, pulling the tax bill has its limitations. That is, it apparently takes some time, depending on the time of the fiscal year and tax year for property tax purposes, for the assessor/tax collector to be notified of the PACE lien. If a midyear reassessment occurs, the PACE financing may be reflected in one or more supplemental tax bills that are sent to the owner (but not to the lender) or it may be reflected in the tax bill for the next fiscal year. If the lender is making a loan after a PACE loan has been made, but before the tax bill reflects it, unless the borrower discloses the existing PACE financing, the new lender may not know of the existence of the PACE financing. The critics of PACE financing have long sought to have all PACE financing evidenced by a recorded document. In fact, FHA requires that the PACE financing be recorded. 51 Some PACE Programs have addressed this problem by recording evidence of PACE financing. However, over the range of PACE Programs, this does not appear to be happening consistently. Where the PACE financing is placed on the property after the lender s deed of trust, the existing lender may not know of the existence of the PACE financing. This is a known problem and some PACE Programs require that the borrower obtain existing lender consent. Where there was no PACE financing when the lender recorded its deed of trust, it would be wise for lenders/ loan servicers to pull the borrower s tax bills annually to see if any PACE financing has been added the property. Defaults on PACE financing may be more problematic. While the PACE financing is senior to the lender s deed of trust (regardless of whether the PACE financing was placed of the property before or after continued on page 17 Page 16 Fall 2016 Points of Interest

19 PACE and HERO Loans continued from page 16 the lender s deed of trust), the usual mechanisms for obtaining notice of default may not apply. When a normal senior deed of trust exists when a new lender makes a junior loan, the junior lienholder invariably records a request for notice default. 52 Civil Code 2924b(a) dealing with notices of default and notices of sale only apply to deeds of trust or mortgages with a power of sale. There is no provision for obtaining notices for voluntary special assessments. It is likely, however, that the lender s tax lien service may report defaults on PACE financing once the PACE financing is finally listed on the borrower s tax bill. It is important for the lender to obtain prompt notice of PACE financing defaults to avoid the penalties and high interest imposed on payment defaults of PACE financing. In addition, due to the substantial delays now required before starting a foreclosure on owner-occupied 1-4 residences, it behooves the lender to declare its default (for failure to pay a senior lien and taxes) as soon as possible, to accelerate the loan and to give any prenotices required by the deed of trust or by state or federal law. G Document Review and Modification As noted, FHA and other institution lenders and GSEs have considered modifications to their loan documents to deal with PACE Financing. Document modifications are far more difficult for brokers making or arranging private loans as the industry lacks document standardization. Many private lenders use the same loan documents for residential and commercial lending. However, for many of the reasons discussed in this article, it is important that brokers review their loan documents including impound agreements, the loan application, notes, and deeds of trust to make sure that they provide the lender with the maximum protection with respect to PACE financing. At this point, most lenders do not need to substantially rewrite their loan documents. However, selective changes may be required to make sure that the lenders maximize their options in dealing with PACE financing. Brokers making business purpose and commercial loans in particular should review and revise their loan documents to maximize their options relating to PACE financing. Too often, brokers use residential deeds of trust or inadequate deeds of trust for commercial loans. Since residential, consumer loans are subject to far greater regulation, residential deeds of trust often lack provisions that would customarily be found in a good commercial deed of trust or loan package. The commercial, business purpose lender would be well advised to have a robust and up-to-date, business purpose loan deed of trust and loan documents. For example, the commercial deed of trust can include an enforceable due-on-encumbrance clause. Many commercial loans require that the borrower provide annual financial information. There is no reason why these loan documents cannot be modified to require consent of the lender before PACE financing can be placed on the secured property. Further, the lender may want to require the borrower to report to the lender if PACE financing is placed on the secured property. Lenders should make sure that the senior lien clause and acceleration clause adequately cover PACE financing. V CONCLUSION While PACE financing provides benefits to the borrower and to the cause of financing Environmental Improvements, the superpriority feature creates extensive issues for lenders who customarily enjoy having first priority loans. In addition, PACE financing makes underwriting traditional loans more difficult. Mitigation offered by PACE Programs are primarily directed to large institutional lenders, government lenders (e.g., FHA) and GSE s and they offer little to brokers making and arranging private loans, particularly if those loans are secured by junior deeds of trust. Brokers making or arranging private loans have no voice on the federal level and only a small voice at the state level. Whether PACE financing is placed on the secured property before or after the lender s deed of trust is recorded, the Lender should consider the remedies discussed in this article. Only if lenders, and particularly private lenders, in large numbers exercise the remedies suggested in this article will their voice be heard by the state and federal legislatures and by the regulators. ENDNOTES 1 The author wishes to recognize contributions of materials and input to this article from Lexi Howard, Esq., California Advocates, Inc.; Elizabeth Knight, President of PLM Lender Services; and, Lisa Parrella, Esq., Adleson, Hess & Kelly, a P.C. 2 California Public Resources Code et seq.; and see, 4 California Code of Regulations et seq. continued on page 18 Points of Interest Fall 2016 Page 17

20 PACE and HERO Loans continued from page 17 3 WRCOG and California HERO Programs, Q & As. 4 Joe Kaatz and Scott J. Anders, Residential and Commercial Property Assessed Clean Energy (PACE) Financing in California Rooftop Solar Challenge Areas (2014). This is a lengthy white paper on the background, purpose and history or PACE Loans in California. (hereafter Kaatz Report ; See, renovateamerica.com/hero-program. 5 Kaatz Report, p Id. 7 Kaatz Report, p. 21; and see, renovateamerica.com/hero-program. 8 SB 555 (2010) 8; 2010 Stats. Ch For example, see FHFA, Statement of the Federal Housing Finance Agency on Certain Super-Priority Liens, 12/22/2014; U.S. Department of Housing and Urban Development, Mortgagee Letter , July 19, 2016 (FHA Loans); and FHFA June 9, 2016, Statement before the California Legislature Assembly Banking and Finance Committee and Assembly Local Government Committee (Fannie Mae and Freddie Mac Loans). 10 FHFA June 9, 2016, Statement before the California Legislature Assembly Banking and Finance Committee and Assembly Local Government Committee (Fannie Mae and Freddie Mac Loans). 11 It should be noted that in California, proposition 13 limits the amount that property taxes may be increased as well as the imposition of new special assessments. 12 Cal. Pub. Res. Code This article references bonds sold in Id. 15 FHFA June 9, 2016, Statement before the California Legislature Assembly Banking and Finance Committee and Assembly Local Government Committee (Fannie Mae and Freddie Mac Loans). 16 Pub. Resources Code, (a) states: Actions by federally chartered home loan entities have frustrated efforts to accelerate the implementation of the PACE financing program, creating a need to establish effective alternative approaches that can be rapidly deployed to advance the purposes of this division Stats. Ch Laurie S. Goodman and Jun Zhu, JSF the Journal of Structured Financing, Winter 2016, Vol. 21, No Bus. & Profs. Code (a)(1) and 10238(h)(1).) It should be noted that institutional lenders making FHFA loans, Bank loans regulated by the OTC or loans purchased by Fannie Mae or Freddie Mac all have their own underwriting rules which were created based upon the assumption that these loans would be secured by a first deed of trust. 20 Kaatz Report, pp Office of the Comptroller of the Currency, Department of the Treasury, Supervisory Guidance: Property Assessed Clean Energy (PACE) Programs, July 6, 2010, occ.gov/news-issuances/bulletins/2010/ bulletin html. 22 County of Sonoma v. Federal Housing Finance Agency, 710 F.3d 987 (2013). 23 See, Kaatz Report, p FHFA June 9, 2016, Statement before the California Legislature Assembly Banking and Finance Committee and Assembly Local Government Committee (Fannie Mae and Freddie Mac Loans). 25 The Authority as used in the applicable provisions of the Cal. Public Resources Code relating to PACE Programs means the California Alternative Energy and Advanced Transportation Financing Authority ( CAEATFA ). Cal. Pub. Resources Code 26003(a)(4) and Kaatz Report, pp Cal. Code of Regulations, et seq.; Kaatz Report, p See, Kaatz Report, pp for a general discussion of the details of the loss reserve program. 29 May 2, 2014, letter to Governor Brown from Melvin L. Watt, Office of the Director, FHFA. 30 FHFA, Statement of the Federal Housing Finance Agency on Certain Super-Priority Liens, 12/22/2014 (Italics added). 31 FHFA June 9, 2016, Statement before the California Legislature Assembly Banking and Finance Committee and Assembly Local Government Committee (Fannie Mae and Freddie Mac Loans). 32 August , Proposed Guidance from Ed Golding, Principal Deputy Assistant Secretary for Housing and Head of the FHA. 33 A number of PACE Programs have incorporated consumer disclosures under the federal Truth in Lending Act (TILA) and under the Real Property Settlement Procedures Act (RESPA). 34 HUD memo re: Administrative Guidance for Multifamily Property Assessed Clean Energy (PACE) in California dated Borrowers may not be aware that if the first lender commences a foreclosure for failure of the borrower to make PACE (HERO) loan payments, their credit scores may be affected. 37 In many cases, the interest on a loan on the taxpayer s personal residence may also be deductible. 38 This assumes that the new lender does not require that the PACE financing be paid off as a condition of the new loan. 39 There is no requirement that the cost savings be applied to the PACE financing payments. 40 California Public Resources Code 26063(a). 41 Pub. Resources Code, 26063(a). 42 WRCOG and California HERO Programs, Q & As. 43 Laurie S. Goodman and Jun Zhu, JSF the Journal of Structured Financing, Winter 2016, Vol. 21, No Id. 45 The greatest concern for lenders may be how to handle a default based upon the borrower failing to make PACE financing payments or based upon the borrower obtaining a senior lien without the lender s consent are found in the loss mitigation procedures of Reg. X. ( ). Reg. X (f)(1)(i) prohibits filing a notice of default until the loan is 120 days delinquent. Therefore, for PACE financing defaults (as noted above), the lender/loan servicer may be best advised to declare a default (i.e., one of the above) and give the borrower a notice of acceleration based upon the default. This will define the default. After taking these actions, the lender or loan servicer will have to wait 120-days before filing its notice of default. 46 Bus. & Profs. Code ; (a)(6) and RE 851A, Part 4 and Parts 9 & No doubt, it is difficult to distinguish normal special assessments that are not generally considered in determining the maximum LTV s from the voluntary special assessments under the PACE program. 48 AB 2693 (Dababneh) The use of a due-on-encumbrance clause in these circumstances will be determined by the specific wording of the due-onencumbrance clause in the deed of trust. 50 Civil Code (a)(5) and U.S. Department of Housing and Urban Development, Mortgagee Letter , July 19, 2016 (FHA Loans). 52 Civil Code 2924b(a). Page 18 Fall 2016 Points of Interest

21 Points of Interest Fall 2016 Page 19

22 CMA Las Vegas Over the last few years, I have come to realize that Las Vegas is more than just the high falutten entertainment and celebrity-studded restaurants on the Strip. In fact, Las Vegas has an entirely unique, cultural universe off the Strip that typically only the locals know about and it is time for that secret to be unveiled to you. This secret is Las Vegas Chinatown. Chinatown represents a thriving food and drink scene that has no equal. The food is daring, delicious and wholly unexpected. It is not uncommon for these restaurants to stay open until 3 a.m. to meet the needs of the food and beverage staff on the Strip that want to dine out well after servicing their businesses. These locals have flocked to Chinatown because of the quality ingredients, reasonable prices and creative innovations. One of the long-standing forerunners of the best food in Chinatown is Raku and Raku Sweets. Raku continues to stand in a league by itself in its traditional charcoal grill and other Japanese creations whether raw, grilled, or fried. Chef Mitsuo Endo has elevated Japanese cuisine to a level of divine intervention. His effect has been felt so strong that Chef Endo has opened a location in West Hollywood this year with his right hand Chef, Matt, who is preserving Chef Endo s culinary integrity. If you love everything sweet, you will flourish at Raku s dessert counterpart, Raku Sweets, which is located in the same strip center as Raku. Chef Mio at Raku Sweets produces elegant, artistic and exquisitely tasteful desserts that incorporate seasonal ingredients and inventive presentations that will bedazzle all of your senses. Although there are compellingly great sushi bars in Chinatown such as Kabuto and Sen of Japan, Yui sets the highest bar as a truly authentic Edomae Sushi omakase style dining destination in Las Vegas. Master Chef Gen Mizoguchi possesses the purity of soul and heritage in his unadulterated version of Edomae Sushi. Chef Mizoguchi sources directly from Japan. As part of your tasting experience, Chef Mizoguchi will edify you on how his sushi rice is refined down to a defining essence. On my last visit, Chef Mizoguchi took me to the back of the sushi bar to show me a 160 pound blue fin tuna shipped overnight from Nagasaki, Japan. Chef encouraged me to dine a few weeks later after the fish has been properly cured to enjoy the most precious portions of the fish, the head and cheek. Other than Shunji in LA and the best sushi bars in Japan, I have not found any other place as beautifully restrained and harmoniously delicious as Yui. It is an unforgettable experience. The former Master Sommelier at Lotus of Siam in Las Vegas opened his own precedent setting thai restaurant called Chada Thai and Wine in the heart of Chinatown. In addition to the traditional and compelling food choices, you will melt by the sight of Chada s wine list that includes DRC wines from Burgundy, cult continued on page 21 Page 20 Fall 2016 Points of Interest

23 Local POI continued from page 20 wines from California, and rare vintages from other sought after regions of the globe. Chada expresses the current culinary and viticultural movement in Chinatown of high octane food and wine in an emerging neighborhood that will sooner rather than later reshape the make up of Las Vegas and where we spend most of our recreational time. Ownership has recently changed at Inyo Asian Restaurant in Chinatown but the Chef has not. For that reason alone, you must eat at Inyo, a refined version of an Asian gastropub. Some of the dishes that I hope still exist on the menu are the uni and scrambled eggs with Japanese toasted milk bread, bone marrow with bonito flakes, spicy variations of fried chicken wings, and grilled calamari. Another must eat is Other Mama on the distant peripheral of Chinatown, but well worth the trek. I suggest starting at Other Mama as part of your food tour because of the Chef s focus on raw bar and bespoke cocktails. Order the oysters (as many as you can manage) with the blood orange and mint, one of the ceviches, the scallop carpaccio, amberjack crudo with a side of sweet potato chips. For cocktails, try the Bessie with Cazadores Reposado, Watermelon, Habanero Honey and Dog Fish IPA or the Billie Joe with Hendrick s Gin, Luxardo Maraschino, Cucumber and Basil Soda. Monta Ramen in Chinatown is considered to be the best ramen spot in Las Vegas. The alkaline noodles, the umami broth with whatever toppings you choose set Monta apart from any other. Finally, for the most supreme Chinese BBQ, you have to check out Asian BBQ and Noodles. As you might have gathered, there is a diversity of food choices in Chinatown that one could not have imagined considering this oasis exists in a city that appears from the outside to be so homogeneous. Chinatown in Las Vegas will turn your head and turn your taste to the West side of Las Vegas which I pronounce to be the most coveted strip of Las Vegas s food and drink experience for both the knowing local and, now, the enlightened tourist or business traveler. Culturally yours, Elliot M. Shirwo, Bolour Associates, The Entrepeneur's Bridge Lender of Choice ( For more information on FOODWINEART, see Points of Interest Fall 2016 Page 21

24 California Mortgage Association Making Multiple Loans to the Same Borrower Keys to a Successful Marketing Program Construction Lending Part 2 of 2 Documentation, Closing, and Loan Administration Legal and Regulatory Review Loan Disclosures a 2016 Update Business Purpose AND Consumer Loans California Legislative Updates PLUS Pool Manager s Focus Group Annual Summit NEW! Construction Focus Group Sponsored Cocktail Hour! And... NETWORKING Join Us In Las Vegas October 27-28, 2016 California Mortgage Association Fall Seminar CMA Las Vegas

25 General Information LOCATION: The CMA Fall Seminar will be held October 27 and 28, 2016 at the Aria Resort and Casino, located at 3730 Las Vegas Boulevard South, Las Vegas, NV For room reservations, call the hotel at (866) or (702) Use code CMA Fall Room rate is $189 per night Single/Double (plus a $30 resort fee) through September 26, 2016 or until sold out. SEMINAR FEES: Full registration includes all seminar events, materials, cocktail/networking reception and Friday lunch, but does not include Pool Manager s Focus Group and Luncheon, which require separate registration. Registration received on or before October 13, 2016 Registration received from October 14, 2016 to date of seminar CMA Regular Member $370 $470 Additional Attendee Same Company $320 $420 Educational Member $370 $470 Non-Member $570 $670 Pool Manager s Focus Group* + Lunch $ 65 N/A *Must register by 10/13/16. Limited to regular CMA members who pre-register and who are Pool Manager s Focus Group Members. REFUND POLICY: Cancellations received in writing on or before October 13, 2016 will receive a credit toward a future seminar. Cancellations not received in writing by October 13, 2016 will not receive any credit or refund. CMA DISCLAIMER STATEMENT: Views, statements, information, and materials provided at CMA seminars do not necessarily reflect the views of the California Mortgage Association, its Officers, Directors, or Members. When considering any document, opinion, publication, or other material obtained from CMA or from any CMA event, attendees and recipients of the information are advised to seek qualified counsel as to the suitability of that material or information for their own business operation or use. MISCELLANEOUS: Please wear name badges to all functions. Tickets are required for various events. Please be courteous of others and place cell phones on silent mode. Program and speakers are subject to change without notice. Great educational content and valuable networking both are critical to my business. This activity is approved for Minimum Continuing Legal Education Credit by the State Bar of California in the amount of hours. The CMA certifi es that this activity conforms to the standards for approved education activities prescribed by the MCLE Rules of the State Bar of California.

26 Thursday, October 27, :30 am - 8:30 am Hot Breakfast 7:30 am - 5:00 pm Seminar Registration 8:00 am - 10:00 am Exhibitor Set-Up 10:00 am - 6:00 pm Exhibitor Fair Open Special Members-Only Focus Group Sessions: CMA Focus Group Sessions are open to CMA Members only. 8:15 am - NEW! Construction Lending Focus Group 9:45 am Brad Rogerson, CMA Securities Counsel Are you funding Fix-and-Flip or ground-up construction loans? If so, this new focus group is for you! Join Brad Rogerson for an informative session on construction lending. Focus groups are meant to foster a rich dialog among their members, a sharing of ideas, problems and solutions in an exclusive, members only environment. This fi rst session will include educational content, plus discussion among the group to identify ideas for future topics and programs. 9:45 am - 10:00 am Networking Break 10:00 am - Pool Managers Focus Group Annual Summit 12:45 pm Glenn Goldan, President, ReProp Financial; Stephen Pollack, CEO, Anchor Loans; and Brad Rogerson, CMA Securities Counsel (Doors lock at 10:15 am. Separate registration required) Lunch is included NOTE: Meeting only open to qualifi ed Pool Managers Focus Group members who pre-register by October 13, A special, super-charged extended session based upon member input received in the Spring program. Topics will include Qualifying Accredited Investors; Lending Outside of California With Pools; Lender Participations & Intercreditor Agreements; Marketing for Deal Flow; CFL Licensing; E&O Insurance and much more! Not your usual talking heads meeting; bring your ideas and talents to share with the group. Lunch will be included. 1:00 pm - 6:00 pm Thursday and All Day Friday are Open to All Attendees. 1:00 pm - Making Multiple Loans to the Same Borrower 2:30 pm Shafiq Taymuree, Executive Vice President, Stonecrest Managers, Inc. and Selected Panelists Repeat borrowers they re great, aren t they? The best thing is, they keep coming back to you! But... If a repeat offender goes under, a large portion of your business may be sunk. Bankruptcy, divorce (from spouse or business partner) or simply overextending themselves can cause compounding problems. Do you put the same investor in multiple loans to the same borrower? What additional problems can that entail? Action plan: You ll get cradle to grave strategies on policies, applications, and underwriting for the second and subsequent loans to the same borrower. Additional disclosures for borrowers and investors will be discussed, as well as borrower documentation, employee, and loan servicing instructions. A valuable checklist will be handed out to attendees at the event. 2:30 pm - 3:00 pm Networking Break 3:00 pm - Get More From Your CMA Website! 3:30 pm David Herzer, Bob Spier and Kevin Hubbard, CMA Technology Committee Join us for a review of the the ebinder, Seminar App, and improvements to the CMA Website, including Find a Lender, better navigation across all devices, and an enhanced ebinder search function. Make sure you benefi t from these new enhancements we re launching and take advantage of your key Membership Benefi ts! 3:30 pm - The Marketing Ecosystem 5:00 pm Karen Gunther, Stay Visible Marketing; Moderated by Sandy MacDougall, President, Mortgage Vintage Create a successful Marketing Ecosystem with the fuel that makes it thrive. Get specifi c, actionable steps of how to build your own marketing program. Learn to use direct One-on-one Marketing, Marketing, and how to Capitalize on Industry Events, Social Media, Blogs, and Video Marketing. You have to nurture your marketing program to yield the best results. Receive the knowledge, tools and methods to take your marketing to the next level! 5:00 pm - 6:00 pm Cocktail and Networking Hour

27 Friday, October 28, 2016 Open to All Attendees 7:30 am - 8:30 am Hot Breakfast in Exhibitor Area 7:30 am - 4:00 pm Registration 7:30 am - 4:00 pm Exhibitor Fair Open 8:30 am Legal and Regulatory Review 10:00 am Phil Adleson, CMA General Counsel, Adleson, Hess and Kelly, a P.C.; and Patric Kelly, Shareholder, Adleson, Hess and Kelly, a P.C. Stay on top of the latest legal developments in the private money lending industry with Phil and Patric s thoroughly researched legal and regulatory review. This bi-annual program offers expert commentary on the pressing issues in bankruptcy, foreclosure, loan origination, servicing and investor compliance. As an added bonus, attendees receive a detailed written analysis of the topics covered, which alone is worth the entire seminar cost! You won t want to miss this session. 10:00 am - 10:30 am Networking Break 10:30 am - Legislative Updates and California s November Ballot 11:30 am Michael Belote and Michael Arnold, CMA Legislative Advocates; George Eckert, CMA Legislative Chair What bills have passed in this year s state legislative calendar that affect your business and the private lending industry overall? CMA s legislative team focuses its considerable skills in culling through the many bills that are introduced each year to keep us abreast of which ones are the most important to our industry, and our bottom lines. Included in this session will be a discussion of the multitude of propositions on the November ballot, and the impact they can have on the election. 11:30 am - 1:00 pm Luncheon and General Business Meeting 1:00 pm - Construction Lending Part 2 of 2: Documentation, Closing, and Loan Administration 2:45 pm Glenn Goldan, President, ReProp Financial; John Bohannon, Partner, BuildZig; and David Herzer, President, Herzer Financial Services, Inc. Part 1 was given in San Francisco this past May and was a big hit. This program will quickly review Part 1 and then work through loan documentation, loan closing and the administration of construction loans. Topics covered will be various disbursement schedules, title insurance requirements, how to qualify a funds control company, and much more. Glenn, Dave and John have years of experience in construction lending and they ll share with you their practical tips for making construction and rehab loans. 2:45 pm - 3:15 pm Networking Break 3:15 pm - Loan Disclosures: A 2016 Update 4:30 pm Michelle Rodriguez, General Counsel, Woodland Hills Mortgage Corp.; and Lori Randich, CMA Education Chair Think you have it all fi gured out? think again! Even nonconsumer, business purpose commercial loans have disclosure requirements. Back by popular demand, and updated for 2016, Michelle and Lori will go over the various loan disclosure forms you need to stay compliant and on top of ever-changing regulations. Added Bonus: Receive a disclosure checklist and copies of disclosure forms. 4:30 pm Seminar Concludes 3730 Las Vegas Boulevard South Las Vegas, NV (866) or (702)

28 Pictures From the Summer Seminar July San Diego, CA To view this member-only content, becom me a member of CMA Page 26 Fall 2016 Points of Interest

29 Pictures From the Summer Seminar July San Diego, CA To view this member-only content, becom me a member of CMA DONATE TO THE CMA PAC TODAY! CMA s positive influence is crucial for our survival. Send your contribution today! It s easy to donate: Online at or Send the additional amount with your monthly CMA dues or Write a check to CMA PAC and send it today to: 2520 Venture Oaks Way, Suite 150 Sacramento, CA PROTECT YOUR INDUSTRY CONTRIBUTE TE TODAY! For more information contact: Richard Wachter, Chairperson, CMA PAC Fundraising Committee Our PAC and our advocates in Sacramento always operate in full compliance with all laws and regulations relating to efforts to influence the public policy process. We would never engage in any type of quid-pro-quo on public policy issues or entertain contributions in return for access. We support legislators who are philosophically aligned with the interests of our membership and who work to ensure a business environment which allows our members to flourish. $75,000 Goal $13,780 raised so far since July 1, Points of Interest Fall 2016 Page 27

30 Thank You to Our Summer Seminar Sponsors Thursday & Friday Breakfast Thursday Snack Break Friday Snack Break To view this member-only content, become a member of CMA Thursday Cocktail & Networking Event Tote Bags Media Sponsor Name Badge Holders Wi Fi Page 28 Fall 2016 Points of Interest

31 Thank You to Our Summer Exhibitors Applied Business Software, Inc Gundry Avenue Long Beach, CA p / f Contact: Kelli Christensen kc@absnetwork.com Website: Product/Service: Loan Servicing Software Armanino LLP Alcosta Boulevard, #500 San Ramon, CA p / f Contact: Jason Gilbert jason.gilbert@amllp.com Website: Product/Service: Audit, Tax, Consulting and Business Management Black Square Real Estate, Inc. 515 South 400 East, 2 nd Floor Salt Lake City, UT p Contact: Steve Astin sastin@blksq.com Website: Product/Service: Fix and Flip Lender To view thi is member-only content, become a member of CMA Bolour Associates 8383 Wilshire Boulevard, Suite 920 Beverly Hills, CA p / f Contact: Elliott Shirwo elliot@bolourassociates.com Website: Product/Service: Private Lending BuildZig 1211 Embarcadero Way, Suite D Oakland, CA p / f Contact: John Bohannon jbohannon@buildzig.com Website: Product/Service: Funds Control Civic Financial Services 2015 Manhattan Beach Boulevard, Suite 106 Redondo Beach, CA p / f Contact: Kendra Rommel kendra.rommel@civicfs.com Website: Product/Service: Private Money Lending Del Toro Loan Servicing P.O. Box Chula Vista, CA p Contact: Drew Louis drew@deltoromail.com Website: Product/Service: Loan Servicing, Docs, and Foreclosure IRA Services Trust Company 1160 Industrial Road, Suite 1 San Carlos, CA p / f Contact: Michael McNair michael@iraservices.com Website: Product/Service: IRA Custodial Services La Mesa Fund Control & Escrow, Inc La Mesa Boulevard, #C La Mesa, CA p / f Contact: Farley Fontecha farley@lmfce.com Website: Product/Service: Fund Control & Escrow Points of Interest Fall 2016 Page 29

32 Thank You to Our Summer Exhibitors Liquid Logics East Jackson Drive, Suite B Independence, MO p Contact: Sam Kaddah sam@liquidlogics.com Website: Product/Service: Lending Software FITECH Mortgage+Care Loan Servicing Rancho Viejo Road, Suite 209 San Juan Capistrano, CA p Contact: Bob Spier bob@mortcare.com Website: Product/Service: Loan Servicing Software Mortgage Lender Services 81 Blue Ravine Road, Suite 100 Folsom, CA p / f Contact: Lori Bradford lbradford@mtglenderservices.com Website: Product/Service: Trustee and Foreclosures To view thi is member-on nly y content, become a member of CMA Partners Capital Finance, Inc San Vicente Boulevard, Suite 609 Los Angeles, CA p / f Contact: Bobby Khorshidi bobby@partcap.com Website: Product/Service: Bridge Lender Peak Corporate Network 5900 Canoga Avenue, Suite 400 Woodland Hills, CA p / f Contact: John Butler johnb@peakcorp.com Website: Product/Service: Loan Servicing and Foreclosure Services PeerStreet 300 Manhattan Beach, Suite 206 Manhattan Beach, CA p Contact: Jason Harris jharris@peerstreet.com Website: Product/Service: Marketplace PLM Lender Services, Inc. 46 North Second Street Campbell, CA p / f Contact: Kevin Hubbard kevin@plmweb.com Website: Product/Service: Loan Servicing, Foreclosure Services, and Loan Doc Drawing Receivers, Inc Winchester Boulevard Los Gatos, CA p / f Contact: James Baron jbaron@receiversinc.com Website: Product/Service: Hard Money Lender Ross Diversified Insurance Services 2922 East Chapman Avenue, Suite 203 Orange, CA p / f Contact: Mel Babtkis mbabtkis@ross2.com Website: Product/Service: Insurance Products Page 30 Fall 2016 Points of Interest

33 Thank You to Our Summer Exhibitors SBS Trust Deed Network La Baya Drive, Suite 106 Westlake Village, CA p / f Contact: Rory Cambra rcambra@sbstrustdeed.com Website: Product/Service: Foreclosure Services and REO Spiegel Accountancy Corp Contra Costa Boulevard, Suite 425 Pleasant Hill, CA p / f Contact: Chad McArthur chad@spiegelcorp.com Website: Product/Service: Auditing and Accounting Services Total Lender Solutions, Inc Sorrento Valley Road, Suite 102 San Diego, CA p / f Contact: Randy Newman randy@tls s.com Website: Product/Service: Foreclosure, Doc Prep, and Loan Servicing To view this member-only content, become a member of CMA Points of Interest Fall 2016 Page 31

34 Thank You 2016 PAC Cont ontr ntribut ributo tors! $1,000 $1,999 Anchor Loans, Inc. Calabasas Fidelity Mortgage Lenders, Inc. Los Angeles $500 $999 BaySierra Financial, Inc. Santa Rosa Redwood Mortgage Corp. San Mateo To view th hi Total Lender San Diego Solutions, Inc. $200 $499 A-1 Loans & Investments Santa Rosa Abundance Realty Milpitas Adleson, Hess & Kelly, a P.C. Campbell Bolour Associates Beverly Hills Budget Mortgage Corp. Los Angeles Creative e Realty Marketing & Mortgage Bakersfield Kirby & McGuinn, A P.C. San Diego Lantern Financial Corp. Sherman Oaks LBC Capital Income Fund North Hollywood Mortgage Securities Inc. Encinitas $200 $499 continued PLM Lender Services, Inc. Campbell Ross Diversified Insurance Services, Inc. Orange The Helvetica Group Carlsbad Wachter Investments, Inc. Burlingame $20 $199 A.S.K. Investments, Inc. Stanton Action Inc. Funding, is member-on mbe Calabasas All California Funding Studio City Allstar Financial Services, Inc. Woodland Hills Applied Business Software Long Beach Blackburne Realty Capital Corporation & Sons Sacramento Buchalter Nemer, Professional Law Corporation A Los Angeles California Home Loans San Jose Church h Capital Corporation San Leando David A. Duner, CPA Irvine E.F. Foley & Co., Inc. "San Jose " Empire Trust Deed Woodland Hills Equity Funding Resource, Inc. Sherman Oaks escreenlogic Sacramento F.E. Forbes Company Inc. Berkeley Gasbarro ro Investments, Inc. Calabasas Hamilton Ridge Asset Management San Jose nly $20 $199 continued Hensel el Financial, Inc. Carlsbad Herzer Financial Services, Inc. Redwood City Intellecho LLC Fremont IRA Services Trust Company San Carlos James Baron Saratoga Jim Brown Real Estate Windsor JMJ Financial Group Garden Grove MAI Financial Services, Inc. Toluca Lake MCapital Funding, LLC Novato y content, McCormick Santa Rosa & Co Mortgage Lender Services, Inc. Folsom 499 becom me a member of CMA Mortgage+Care e LOAN SERVICING SOFT Inc. San Juan Capistrano National Equity Funding, Inc. Irvine Olympia Mortgage & Investment Co., Inc. Grass Valley Pacific Capital Loans, LLC Calabasas Park West Financial, Inc. Los Angeles Partners Capital Finance, Inc. Los Angeles PeerStreet Manhattan Beach PMB Capital, Inc. Calabasas PrideCo Capital Management, LLC Newport Beach Private Financial, Inc. Sherman Oaks Private Funding Solutions, Inc. Pleasanton Private Mortgage Fund, LLC Calabasas Realty Capital Lending Group Downey continued on page 33 Page 32 Fall 2016 Points of Interest

35 Thank You 2016 PAC Cont ontr ntribut ributo tors! $20 $199 continued Residential First Mortgage Irvine Salas Financial San Diego Sandstone Capital Inc. Los Angeles Selzer Home Loans Ukiah Sequoia Mortgage Capital, Inc. San Anselmo Spiegel el Accountancy Corp. Pleasant Hill Standard Mortgage Financial Services Inc. Riverside Sunset Mortgage Mission Viejo The Argus Group Woodland Hills To view th Unitrust San Mortgage, Diego Inc. $20 $199 continued Val-Chris Investments, Inc. Irvine Woodland Hills Mortgage Corp Woodland Hills Woody Financial Realty Corp. Long Beach PLEASE SEND PAC CONTRIBUTIONS TO... CMA PAC PAC Announcement n n cements e ts: THURSDAY WINNERS: ipad Pro: Chuck Hershson FRIDAY WINNERS: 2520 Venture Oaks Way, Suite 150 ipad Pro: Sacramento, CA Briana Chilson his member-only content, become a member of CMA Points of Interest Fall 2016 Page 33

36 Page 34 Fall 2016 Points of Interest

37 RECEIVERSHIP: A Valuable Tool for Maximizing Recovery and Limiting Liability by Kimberly Wilcox Receiver Associate at Receivers, Inc. When a loan secured by incomeproducing property goes into default, a lender s inaction can result in the loss of time, money, and worst of all, valued investor confidence. A borrower s failure to make his payments is almost always an indicator that income from the property that secures your loan is being diverted to pay obligations that have nothing to do with the loan or with the upkeep of the property that secures it. With each day that passes as you trudge your way through the onerous foreclosure process the notices, the mandatory waiting periods, the publications, the borrower s delay tactics the value of the underlying security for your loan is most likely diminishing. But what if there were a way to stop this continuous decline in value and ensure that your investors receive the return that was promised to them? Would you use such a tool if it were available to you? Well, such a tool does exist and it is at your ready disposal. That tool is a court-ordered receivership, and your authority to utilize it is embedded in California s Civil Code of Procedure and in your deed of trust. By filing a motion in Superior Court seeking the appointment of a receiver, you can turn the tide of negative events that rises in many cases of default. Moreover, having a receiver appointed can be especially beneficial when a loan is secured by income-producing property such as an apartment building, a condominium complex, a hospitality establishment, or a retail operation. If crafted with care, the court order signed by the Judge when a receiver is appointed gives the receiver the power to step into the shoes of the defaulting borrower/ property owner and take over operation of the property. The borrower is required by the order to turn over everything the receiver needs to operate the property historical books and records, vendor contact information, rent rolls, leases, and even tenant security deposits. If the borrower fails to turn over the materials and information demanded by the receiver, the consequences can range from monetary sanctions imposed by the court to jail time served for contempt. Armed with the authority conferred on him by the court, a receiver can put an immediate stop to the diversion of income and depletion of value that inevitably results when a cash-strapped borrower defers the maintenance needs of a property. But once a receiver has been appointed and he has taken control of the property securing your loan, how will you know for sure that he is fulfilling his duties? Several layers of protection exist to shield you from a receiver s potential breach of fiduciary duty. First, the person whom the court appoints to act as receiver is nominated by you and your attorney. Your first and best line of protection lies in your choice of receiver. It s always best to choose someone who has experience dealing with properties similar to the one that you want to preserve, be it an apartment building, a hotel, or a retail operation. A good receiver will have his curriculum vitae and a list of cases and properties he has handled readily available for your review to help you make this important decision. As an added level of protection, the court will require that the receiver file an oath of office and a surety bond before he is allowed to take any action as receiver. Such a bond is conditioned on the receiver s faithful performance of the duties and obligations of the receivership. Additionally, whomever you choose to fulfill the role of receiver will be required under California Rule of Court to circulate monthly reports to the parties (i.e., the lender and borrower) and to their attorneys. These reports must include a narrative description of the receiver s activities and decisions during the reporting period, comprehensive financial reports detailing all income received and expenses paid during the month, and a detailed billing of the receiver s own fees and expenses. This reporting requirement ensures that the receivership is being operated with complete transparency and integrity. And if the merits of receivership discussed thus far are not enough to sway you, consider this: In addition to preserving the collateral for your loan and in some cases, even ADDING value to it the appointment of a receiver can also protect you and your investors from exposure to the myriad liabilities that can arise in the case of a non-performing loan. Since a receiver is an agent of the court and has no affiliation with the lender, none of the acts he takes can be attributed to you as a lender. So the appointment of a receiver eliminates any mortgagee in possession or one form of action arguments that your borrower and his attorney might cook up in an attempt to render your security agreement unenforceable. Besides the circumstances discussed herein, there are many other cases in which receivership can be the most effective pathway to a favorable outcome. For example, receivers are frequently appointed to oversee the remediation of environmentally contaminated properties; to collect on judgments; to effectuate partitions of real and personal property; and to handle corporate dissolutions. You can find a complete recitation of situations in which California courts allow for the appointment of a receiver in California Code of Civil Procedure As a lender, your goals when a loan goes into default are to corral the cash flow, to preserve the value of the underlying security, and to protect yourself and your investors from liability. In many cases, a court-appointed receiver is the most prudent and effective tool you can utilize to ensure that these goals are realized. Points of Interest Fall 2016 Page 35

38 Fair Market Value vs. Insurable Value by Dan Harkey CalComm Capital, Inc. & National Financial Lending, Inc. ow do you determine the correct amount of property insurance when financing or refinancing a property? The amount may or may not depend on the value of the property. There are different definitions of value. Market Value refers to the value when a property is bought or sold in a competitive market place. The legal definition of market value is that price which a seller, willing but not compelled to sell, would accept from a buyer, willing but not compelled to buy. Market value is measured by comparing market prices of comparable properties, in comparable neighborhoods, with comparable amenities. Insurable Value refers to value that reflects the replacement cost of buildings and structures located on the property. This measurement reflects the destructibility of the buildings and structures by fire, storm, or vandalism, which can be protected by insurance. This form of value is based on the cost to rebuild like construction. It is not based on the depreciated condition of the structure. Insurable value does not include the value of the land. Part of the appraiser s job is to segregate the value of the improvements from the value of the land, and determine the replacement cost of all the buildings including out buildings and appurtenances. This value will determine how much insurance is needed. The appraiser may then apply a depreciation factor, and perhaps an economic obsolesce factor to come up with an overall value. In addition to reviewing the appraisal, the loan processor or underwriter may need to work with the insurance broker to segregate the value of the land from the replacement building cost in order to come up with an insurable value. This is important because the land value component varies widely with geographic location and desirability. A structure with an ocean view, lake view, or mountain view, or amenity based frontage may result in a higher value for the land component. This type of property is assumed to possess a more attractive quality which results in greater demand hence greater value. But, the building and structure replacement costs may be essentially the same regardless of land value. The amount of insurance may not necessarily cover the amount of your loan. If your loan is greater than the replacement cost of the building, then most likely the land is substantially greater as an allocated portion of the overall value. Although liability insurance is not required, we recommend that a borrower have coverage for at least some, perhaps between $300,000 and one million dollars. If the property is a commercial structure, such as a rental or leased fee retail this would be part of the policy. If the property is a residential structure, then in most cases the liability portion of the coverage is in the form of an insurance rider referred to as an umbrella policy. There are additional types of insurance coverage that may be required depending on the property type and usage. Various forms of coverage may be contained in the primary insurance policy, or by special endorsement. Questions will need to be answered such as: 1 Who is/are the primary insured parties? 2 Are there secondary or additional insured parties? 3 Are there third party insurance considerations? For example property owners may require tenants or lessees to cover them for various losses and liabilities which would not be the owner s responsibility. 4 Are additional types of insurance needed to cover furniture, fixtures and equipment, loss of rents, business interruption, employee theft, loss of intellectual property, use of employee or vendor vehicles not belonging to the insured party, workers compensation, and liability? The use of a lender loss payee endorsement and the understanding of the mortgage clauses contained within it are important. Remember that the insured party in a mortgage clause will be the lender rather than the borrower. Page 36 Fall 2016 Points of Interest

39 Statutory Referral Fee Exemption for CFL Lenders Comes with a Catch by K. Bradley Rogerson Hanson Bridgett LLP n January 1, 2016, private money lenders operating under a California finance lenders license ( CFL Lenders ) were granted a new statutory exemption through which they can compensate non-licensed individuals for referring borrowers on commercial loans (the Referral Fee Exemption ). The Referral Fee Exemption is the result of amendments to California Finance Lenders Law ( CFL Law ) enacted in October of last year which are now codified in Sections 22602, and of California s Financial Code. At first blush, the Referral Fee Exemption seems to be a statutory safe harbor that codifies existing common law principals applicable to paying non-licensed finders for borrower referrals. A closer look at the Referral Fee Exemption, however, reveals a host of additional requirements and limitations that may render the exemption unpopular with many private lenders. Finders and Borrower Referrals Neither CFL Lenders nor licensed real estate brokers are permitted to pay compensation to unlicensed persons for activities that require a license. For CFL Lenders this limitation is set forth in Regulation 1451(c), which provides in pertinent part that no finance company shall pay any compensation to an unlicensed person or company for soliciting or accepting applications for loans... While it is easy to know if someone has accepted an application for a loan, determining whether someone has solicited a borrower for a loan may be less clear. Nonetheless, case law and regulatory guidance over the years have generally recognized that an individual that does nothing more than introduce a potential borrower to a potential lender has not solicited that borrower. In these limited circumstances, the individual is said to be acting as a mere finder in the transaction and is not taking any action for which a lenders or broker s license is required. As a result, payment of compensation for the referral (i.e., a finder s fee ) does not violate CFL Law. To qualify as a finder, however, the individual must do nothing more than introduce the potential borrower to a lender, which has literally been understood to mean giving a borrower or lender the other party s contact information and stepping away from the transaction. This means that the referring party may not participate in any negotiations, engage in any discussions with the potential borrower regarding the loan terms or take any action beyond conveying the lender s name and contact information to the borrower. So, the problem with relying too heavily on the finder s fee exemption to pay referral fees is the limited scope of the exclusion and the potential that a referring party will take some action (intentionally or inadvertently) that renders the exemption unavailable. The difficulty with operating within the common law finder s fee exemption is exasperated by the fact that the actions that constitute solicitation or negotiation do not appear in any statute or regulation and have simply evolved over time and appear in sometimes inconsistent case law decisions and sporadic guidance issued by regulators. New Statutory Referral Fee Procedures Enactment of the Referral Fee Exemption represents a potential statutory bright line rule for CFL Lenders to utilize to better ensure that referral fees paid to unlicensed individuals are, in fact, compliant under CFL Law. Unfortunately, payment of finders or other non-licensed individuals has long been disfavored by regulators and is often seen as an easily abused way to avoid CFL Law licensing requirements and the protections they provide. In an apparent attempt to address these concerns, use of the Referral Fee Exemption includes several substantive limitations and subjects the CFL Lender to underwriting and other restrictions that go beyond a mere codification of the existing finder s exemption. These restrictions and requirements are discussed further, below. continued on page 38 Points of Interest Fall 2016 Page 37

40 Referral Fee continued from page 37 Referring Party Requirements and Restrictions First, it is important to note that compliance by a CFL Lender with the additional requirements of the Referral Fee Exemption does not provide additional leeway when it comes to the actions a finder may take in connection with borrower referrals. The exemption expressly prohibits the unlicensed person from (i) participating in any loan negotiations; (ii) counseling or advising the borrower about a loan; (iii) participating in the preparation of any loan documents, including credit applications; (iv) contacting the licensee on behalf of the borrower other than to refer the borrower; (v) gathering loan documentation from the borrower or delivering the documentation to the licensee; (vi) communicating lending decisions or inquiries to the borrower; (vii) participating in establishing any sales literature or marketing materials; (viii) or obtaining the borrower s signature on documents. So, while the exemption provides a convenient list of actions that may not be taken by a referring party, the list is essentially a codification of the existing restrictions (i.e., a finder may do nothing more than introduce the parties). The Referral Fee Exemption also expressly forbids a referring party from making materially false or misleading statements or engaging in any false advertising or fraudulent activities in connection with the loan. This may seem somewhat inconsistent or redundant since the terms of the exemption already prohibit the referring party from making any statements, doing any advertising or engaging in any nonintroduction activities whether or not they are false or misleading. However, the Referral Fee Exemption also expressly makes the CFL Lender liable for any misrepresentations made to the borrower in connection with the loan so, apparently, the restriction on false or misleading statements needed to be made abundantly clear. Loan Restrictions Under Finance Code Section 22602, the Referral Fee Exemption may only be utilized in connection with commercial loans (i.e., non-consumer purpose loans) with an interest rate of 36% per annum or less. This, in and of itself, should not be problematic for most private lenders. The additional requirements applicable to consumer loans have already pushed many private lenders away from consumer loans altogether, and if you re making loans for more than 36% interest... well... call me (on second thought, don t). In order for the Referral Fee Exemption to apply, however, the CFL Lender must obtain documentation from the prospective borrower evidencing the borrower s commercial status. Examples of acceptable forms of documentation include a seller s permit, business license, articles of incorporation, income tax returns showing business income, or bank account statements showing business income. Notably absent from the list of examples is a simple certification of commercial or business purpose by the borrower. Consequently, the language of the Referral Fee Exemption seems to suggest something more than borrower certification is required to verify the commercial status of the loan for the purposes of the Referral Fee Exemption. Confirmation of Ability to Pay In order to utilize the Referral Fee Exemption the CFL Licensee is also required to determine the borrower s ability to pay back the loan. So, even though the loan is a verified commercial loan, the licensee is required and obtain documentation to ensure that the prospective borrower will have sufficient monthly gross revenue with which to repay the loan. If the CFL Lender determines through its underwriting that the prospective borrower s total monthly expenses, including debt service payments on the loan for which the prospective borrower is being considered, will exceed the prospective borrower s monthly gross revenue, the loan does not qualify under the Referral Fee Exemption. Examples of acceptable forms of documentation for verifying current and projected gross monthly revenue and monthly expenses are given in the exemption and include, tax returns, bank statements, merchant financial statements, business plans, business history, and industry-specific knowledge and experience. If the prospective borrower is a sole proprietor or a corporation and the loan will be secured by a personal guarantee provided by the owner of the corporation, a credit report from at least one consumer credit reporting agency that compiles and maintains files on consumers on a nationwide basis must also be obtained and considered. Statutory Disclosure Finally, the Referral Fee Exemption requires the CFL Licensee to provide a prospective borrower who has been referred by an unlicensed person with a specified disclosure at the time the licensee receives an application for the loan. The CFL Licensee must also receive an acknowledgement from the prospective borrower that the disclosure was received. The statutorily required disclosure reads as follows: You have been referred to us by [Name of Unlicensed Person]. If you are approved for the loan, we may pay a fee to [Name of Unlicensed Person] for the successful referral. [Licensee], and not [Name of Unlicensed Person] is the sole party authorized to offer a loan to you. You should ensure that you understand any loan offer we may extend to you before agreeing to the loan terms. If you wish to report a complaint about this loan transaction, you may contact the Department of Business Oversight at ASK-CORP ( ), or file your complaint online at Conclusion In the end, some may find the new Referral Fee Exemption useful in some circumstances; however, I think asset based private lenders will find the additional limitations it imposes frustrating at best and prohibitive at worst. At the very least, any CFL Lender wishing to utilize the new Referral Fee Exemption will be required to balance the potential additional certainty the statutory exemption can provide against the additional conditions that must be met to operate within its standards. Page 38 Fall 2016 Points of Interest

41 Mortgage Industry Information, Opinions & Tips Office Surveys and CalBRE Special Investogators n past articles I have written about CalBRE audits and the steps that the auditors follow during the audit. But, there is another section of the CalBRE that can visit your office and look into your activities. This group of employees falls under the enforcement section and are now called Special Investigators (formerly Deputy Commissioners). Unlike the auditors who call the broker and make appointments for the audits, the Special Investigators can just appear at your door unannounced, or they could call and make an appointment for a date in the future. As part of their job description, they need to conduct a number of these office visits on a monthly basis. Your office could be chosen next! The focus of these visits is to make sure that the licensee is compliant with the rules and regulations of the CalBRE. If problems are found during this visit, the Special Investigator can refer the case to the audit section or to the legal section, so you want to make sure that you are compliant before the unexpected appearance of the Special Investigator. So, what is he/she looking at during the visit? Licenses and Contracts: A broker must have a copy of each Salesperson or Broker-Associate license (printed online by each individual agent via e-licensing on the CalBRE website and given to the broker) and a contract with each licensee. The contract must cover supervision, responsibilities and compensation. Note that the Designated-Officer/Broker must have a contract with all licensees, even if the licensee is a spouse or co-owner or even if they aren t performing licensed activities. No exceptions. Transaction Files: Agreements and disclosures are carefully reviewed. The Special Investigator could go back the full three years (retention time for most files, but four years for certain mortgage disclosures) in selecting files to review, but usually only looks at the last six months to a year. Supervision: The enforcement section and the Special Investigators look closely at how well the broker is supervising the activities of the company and the licensees. Written policies and procedures are mandatory and then the Special Investigator will investigate to see if they are being followed. He or she will talk to employees and licensees to verify that the information the broker is giving is indeed correct. This is unlike the auditors who generally don t talk to the employees and aren t as aggressive with the questions. Training: The Special Investigators ask many questions about a broker s method of training his/her staff and licensees. How often are office meetings held? How are problems in files remedied? Who answers licensee and consumer problems/complaints? Once the broker answers these questions, the Special Investigators often ask the very same questions of staff and licensees (perhaps even calling them at home to interview them) and compare the answers that they received from the broker. Trust Account: The Special Investigators will generally refer trust account reviews to the auditors, but they could ask to look at a recent reconciliation and general ledger to see if there are any obvious issues or discrepancies. The office survey/visit usually only takes a couple of hours, but depending on the size and scope of the brokerage the Special Investigator could be there a full day or even multiple days. After the visit, the Special Investigator may call or write selected clients (getting the information from the files themselves) to check on the services provided by the company. The outcome of this sort of investigation can be a Corrective Action Letter (CAL) that lists the violations found and a request that the broker respond with the actions that he/she has taken to both fix the problems continued on page 40 Points of Interest Fall 2016 Page 39

42 Stricktly Strickland continued from page 39 and what procedures he/she has implemented to make sure the violations don t happen again. For example, a recent Office Survey resulted in the CAL listing one MLDS that was not signed by the borrower out of 16 files reviewed and generic company business cards that did not include the CalBRE and NMLS numbers of the corporation. A letter to the Special Investigator detailing the broker s actions to correct the items found and what he was going to do to make sure they would not happen again closed out the matter. Another outcome of an office visit, which is much more serious, could be that the case is turned over to enforcement for a cite and fine penalty ($2500 maximum) or an accusation. This is something you don t want to happen! Again, I say, strive to be in compliance at all times and when the Special Investigator shows up at your door, be respectful and courteous and know that they are just doing their job. Pam Strickland is an independent compliance consultant who helps brokers be prepared for just such a visit from the CalBRE. She can be reached at From the President continued from page 2 asking each member to extend an invitation to one potential new member to attend a CMA event, and allow them to experience the benefits of CMA membership firsthand. Our third goal is the introduction of a newly formed committee chaired by past president Richard Temme, the Broker Forum Focus Group. CMA members have responded positively to the members-only focus group concept, in particular, Glen Goldan s very popular Pool Managers Focus Group held at the Spring and Fall seminars. The expanded forum concept will continue the small round-table format, and also feature presentations on topics of interest expressed by members. Proposed topics include discussions on construction lending, forms and loan documents, and commercial lending. This popular forum setting allows members a more informal place to discuss and ask questions of presenters and attorneys participating in the discussions. Further information will be released on the expanding Broker Forum Focus Group in the coming months. Stay tuned! It is important that CMA members stay ahead of the curve, even in good times, with regard to supporting membership growth, continuing education, legislative activities, and PAC contributions. You will hear more on these topics and more from BOD members, Committee Chairs, and me in the coming year. We are always in need of volunteers, so please let us know if you would like to serve on one of our committees! I look forward to seeing everyone in Las Vegas. Yours Truly, Mark E. Forbes Page 40 Fall 2016 Points of Interest