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.

Fractionalized Trust Deed

Any assignment of the trust deed that is displayed in the policy is valid and enforceable.

All deeds of trust are insured by a reputable Title Insurance Company that is recognized nation wide, and all costs that are related to underwriting, documentation and servicing of the loan are paid by the borrower. It requires that the borrower usually make regular monthly payments of interest and principal throughout the period of the loan. The borrower could loose their property (home, land, etc.

5% annual yield.
The reason is because the original note is not a recorded instrument, like the trust deed. Thus, it is highly recommended that if you do decide to lend to either of the above mentioned entities, you require a larger money down payment and/or a lower Loan to Value. The holder of this not is protected by the law, as they are considered to be in good faith holding this negotiable note. You need to understand that while some notes can be negotiable, others are not. That being said, there are ways in which junior lien holders can protect themselves should this happen.

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.
Names of both the buyer and seller as well as their proper title (ex: joint partnership, corporation, individual person, and so on) 3. Within its pages you will discover all of the essential aspects that are required in order to make investing in a deed of trust a secure and safe risk taking experience. _ A stock is a gamble. Therefore, borrowers will do everything they possibly can to avoid foreclosure, as it is extremely costly to them, and has the potential to damage their credit. Acceleration Clause V An acceleration clause should be apart of the escrow documents. For instance there are: Improvement and Renovation Construction Loan V this loan is funded to enhance the value of property based on upgrades and modifications.