Chapter 5 - Legal Issues for Investors

When you invest in a trust deed there are certain legal issues that you need to consider. Regardless if you secure your trust deed investment through a single lender (whole) or by more than one lender (fractionalized), you will still need to follow certain rules and regulations as stated by real estate law.

Real Estate Law


The Real Estate Law includes what is commonly referred to as the multi-lender law. This multi-lender law has certain restrictions which it can impose on the investor. Some of these laws include, but are not limited to the following:

? The investor must have their loan serviced by a mortgage loan broker (MLB) and have a written agreement. Furthermore, the investor and the MLB need to arrange for a third party to take part in loan servicing. The third party should be a qualified, licensed real estate broker.

? A loan can have no more than 10 note holders or lenders.

? The investor is not permitted to invest more than 10% of their annual income or net worth

? Based on the type of property that is considered collateral, defined loan-to-value ratios are not to be exceeded

? Only under limited circumstances is the MLB allowed to self-deal.

? The investors loan is not permitted to be indirectly secured though any other deed of trust or promissory note, and is only secured directly through the property.


TILA - Section 32


Aside from the Real Estate Law, you may find that your loan documents will feature another legal document known as the federal Truth-in-Lending Act (TILA). The TILA was amended in 1994 and was created in respect to loans that are secured by a borrowers principal property. The rules of the TILA affect all mortgage transactions that are described as having fees or rates that are above a specific amount or percentage. Such mortgage transactions are known as high rate/high fee or Section 32 loans.

A loan that is considered to be high rate is one where the appraisal exceeds ten points on the Treasury Security yield that has similar development. A high fee loan, on the other hand, is one where the total fees and points are greater than 8% of the total loan amount. If you have any questions concerning the TILA, you can contact the Federal Trade Commission, as the TILA regulations are enforced by them.

As you can see there are many legal issues for investors to consider before they invest in a deed of trust. Make sure you understand all legalities concerning trust deeds before you make your investment.

Quitclaim Deed For A Trust

BorrowersAnother important aspect of the underwriting process is finding out how the borrower intends to refinance the loan in regard to the loan terms that have been specified in the promissory note.

Tax Liens Tax liens have priority over deeds of trust. Furthermore, in-house counsel will start foreclosure within 24 hours after a default has occurred on the loan. The trust deed will be returned to the borrower once they satisfy all of the terms and conditions that were outlined in the promissory note2. Such mortgage transactions are known as high rate/high fee or Section 32 loans. Once the payment has been received in full, and the funds are cleared, the loan servicing officer will then begin to issue the appropriate checks to the investor(s) involved in the loan.

In addition, you should also have a good idea of what to expect from your mortgage broker, and should be able to make educated decisions in regards to the loans you wish to invest in.
1 = the 10% annual yield. As an investor, you should never feel embarrassed to ask questions. Therefore, a ,000 loan to a property worth 0,000 has a 70% LTV.

_ A loan can have no more than 10 note holders or lenders.
Lastly, should the foreclosure be stalled or halted by a borrowers bankruptcy petition, the in-house legal counsel will immediately try to relieve the stall or request the bankruptcy court provide sufficient protection. A bankruptcy petition that is filed in a federal bankruptcy court before the foreclosure sale of property stops the trustee, in a foreclosure process, from selling the property until the automatic stay is lifted. When it comes to Loan to Value Ratio that concerns homes occupied by owners, you should never lend out a LTV that exceeds 60%, even if the home appears to be the most ideal of owner occupied homes. This is a fact you wont want to forget should a tax lien appear. Although it may appear that each title insurance policy listed above appear similar, that ALTA policy is recognized as being far superior to the CLTA policy. What about IRAs and other Retirement Programs?