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Wholesale Private Lending Compliance and Legal Structures · Private Lending Insights

• [00:00:00] Rocky Butani: Welcome to Private Lending Insights. I'm your host, Rocky Butani. In this episode, I interviewed Melissa Martorella, partner and attorney at Fortra Law. The topic of this interview is wholesale capital structures, including wholesale, brokering, white labeling, table funding, and correspondent lending. I asked Melissa to explain each of them and also talk about licensing requirements, loan documents. [00:00:24] And other legal considerations. This topic is mainly relevant to brokers, lenders, and capital providers, but it could be good information for real estate investors who just have an interest in knowing how capital structures work within private lending. I hope you find this episode to be insightful. [00:00:41] Here's my interview with Melissa Martorella. All right, Melissa. Thanks for joining me for this episode of Private Lending Insights. How's everything at Fortra Law? [00:00:51] Melissa Martorella: Hey, Rocky. Thanks for having me. Uh, everything's. Going really well, staying busy. Um, you know, always a fun new day here with, with random questions and projects, so it's a good time. [00:01:02] Rocky Butani: Well, I know you're busy. Thanks for taking some time for this. Um, so, so I wanted to, uh, talk to you about different wholesale structures in private lending and have you explain to our listeners and viewers, uh, the, you know, some of the, the specifics of the different types of wholesale and, uh, and capital, uh, that, uh, that originators can use to, to leverage other. [00:01:26] Lenders. Uh, and, and mainly for bridge loans. It could be for some DSCR loans, but we're mainly talking about short term bridge loans. Okay. So, um, so with that, why don't we start with, with a basic wholesale lending or what, what, let's say a, you know, the terminology here. Can be, uh, different for different people. [00:01:47] But, but let's just say, let's just take wholesale, uh, as a, as a general term. Uh, tell us a little bit more about it, how it's structured, how it works. [00:01:54] Melissa Martorella: Absolutely. And I'm very excited to talk on this topic, um, because I think it's an area where oftentimes we use. Same term to mean different things. Um, and it's one of those things, you know, I'll get on calls with people and, you know, they'll, they'll say, oh, I'm doing this, but then you have to confirm. [00:02:11] So very excited to go over this topic. Um, but yeah, so to kick it off, *wholesale lending* really what that means, um, it, it's. To me, just any other, you know, broker situation where you have an originator coming, uh, they have a deal, um, but they don't intend to fund that deal themselves. And instead they know a lender who will fund that deal and they're arranging that loan transaction. [00:02:35] They're putting those parties together. Um, that's really all wholesale lending is it's, you know, what we think of when you think of a loan and, and the different parties there. But the big picture is you have a loan originator who's really acting like a broker. Who's putting the parties together and there's going to be a separate lender that funds the loan, uh, to the borrower. [00:02:56] Rocky Butani: Okay. And let's talk about *licensing requirements*. Uh, 'cause there's some states that require licensing and others that don't. Uh, what are, how does the licensing work in t in terms of, uh, what the originator's required to have and what the, the lenders required to have? [00:03:12] Melissa Martorella: Absolutely. Um, so really what you have to look for in this case, and obviously, or maybe it's not obvious, um, I'm just talking about business purpose loans. [00:03:21] I know nothing about consumer loans. If you wanna talk about those, I have a great referral for you. Um, but just for everybody here, um. There, you, you have to look at two different things and you have to look to the state where the property is located, that's securing that loan. So this also assumes that this is a real estate secured transaction. [00:03:38] Um, but you go to the state where the property is located and you ask the question first. Does somebody who is lending money, money in the state secured by real estate, do they need to be licensed? And if the answer is yes, then that lender would need to be licensed. And then the second question you have to ask is that originator, that broker essentially, who's arranging the parties, does that action also require a license in that state? [00:04:02] Um, and then there might be situations where, you know, maybe the broker is required to be licensed but the lender isn't. Or maybe both parties are required to be licensed. But you know, for example, here in California, um, if. There's a licensed broker on a transaction, then the lender actually doesn't need to be licensed. [00:04:20] So there's all sorts of exceptions to the rules. Um, depending on the type of loans you're making, you know, you know, depending on the collateral, the loan size, all of those sorts of things. Um, so it seems sometimes like it could be a, an easy question to answer, but um, it ends up being a little bit more involved. [00:04:37] And that's where we come in to walk everybody through that. [00:04:41] Rocky Butani: Sure. But, uh, let's, let's just cover some, uh, other states where, where this issue comes up. Uh, it's mostly in, in the west. I know there's some exceptions. Mm-hmm. Um, but could you just quickly run through a, a list of a few states that, that people need to watch out for in terms of licensing? [00:04:57] Melissa Martorella: Absolutely. Uh, obviously California. Arizona, um, generally you would need a license. There are some interesting exceptions there though. Um, depending on, like I said, collateral and loan size, Nevada's pretty strict. Um, so that one's difficult. And like you said, a lot of the West Coast states generally will require a license of some sort, either for the lender. [00:05:18] And or the broker. Um, as you go further east in the country, it's less so. Um, but there are still some odd rules here and there. Um, you know, uh, what was, we were just talking about one today in Georgia, um, where you only need a license if it, if the borrower is an individual and it's an owner occupied business purpose loan. [00:05:38] So. Very random, but it's something that you would need to know. Um, but I will say that for, for most of what people are considering, as a general rule, the further west you go, the more you have to worry about licensing. And the East coast is a little bit easier. [00:05:54] Rocky Butani: I've heard, uh, about some licensing requirements in New York and New Jersey. [00:05:59] Mm-hmm. Um, is, is that a thing in business purpose lending? [00:06:02] Melissa Martorella: So, for both of those, our understanding, uh, and our research tells us that you need a license to broker. In those states. So in this traditional wholesale lending situation, that broker, that party arranging the loan between the borrower and, and the person funding would need to be licensed. [00:06:19] Um, I know there's other research, um, and opinions that are out there, but just based on a read of the law that that's our, um, understanding. [00:06:27] Rocky Butani: And do each of those states have, uh, a different, um, licensing, uh, board or regime or, or do they use the n ml s? [00:06:35] Melissa Martorella: Um, they usually have their own different board that will decide, you know, you know, you need this and. [00:06:42] California. You need this in Arizona, you need this in New Jersey, or whatever it is. Um, so I get that question asked a lot. You know, oh, I'm a DRE broker in California. I can just use my broker license in Arizona. And you can't, Arizona doesn't care that your broker license is in California. They want you licensed there. [00:06:59] Um, they might use something like the NM ML s. That might be a better question for my partner Jen, uh, who gets people licensed and maintains those licenses. As far as you know, oftentimes you can go to the n mls. Website to see and track and get license up licenses updated and that sort of thing. Um, so that it's a helpful way of understanding where people are licensed nationwide. [00:07:19] Um, but otherwise, um, each state is going to have its own, I guess, like governing body or regulations, uh, related to licensing. [00:07:28] Rocky Butani: Okay. And in a state like California and Arizona, Nevada, these are, uh, a few states, uh, that come to mind. That where, where if you're arranging the loan, you've, you have to have a license as a broker, but then the investor or. [00:07:45] Your capital source does not, uh, need to be licensed. Let's just say it's, it's a DRE license. It just a, a broker. They're, they're trying to arrange a loan and they find an investor, whether that's an individual high net worth investor or or another lender across the country. It could be, let's just say. A lender based in New York and, and those situations, um, the, it, it, the, the, the broker is still considered the broker. [00:08:12] They're not really, uh, uh, they're not really putting themselves out there as, as a lender, right. [00:08:17] Melissa Martorella: Right, exactly. They're still acting as a broker. And so in California, at least from a licensing perspective, whoever that investor is, whether it's somebody in California or New York, you know, they don't need to be licensed because there's an exemption to licensing for lenders where if it, if the loan is arranged by a licensed California broker, um, then that lender doesn't need to be licensed. [00:08:35] There are separate securities issues, which again, Jen or Kevin, my other partner, uh, would be able to answer as. Far as when you have investors in other states, um, and, and making sure that that's compliant from like, just an, um, an SEC perspective, um, but from a licensing perspective and actually making the loan that then you would be okay. [00:08:57] Rocky Butani: Okay. And on a national basis, when we're just talking about wholesale lending, a broker, brokers a loan to, uh, a direct lender, uh, what are the potential. Uh, liabilities for, for the, the broker in case something goes wrong with the loan. Uh, is, does that vary based on, on the, the specific arrangement between the two parties, or is there something standardized as far as whether the, the broker originator has any liability in case anything, uh, comes up with the loan? [00:09:28] Melissa Martorella: Um, another wonderful question. Um, so first what I'll say is if the state is deciding that you need a license to be a broker, um, so like California for example, then they have their own requirements for that broker, their disclosure requirements, um, reporting requirements, things like that. There's a higher fiduciary duty between the broker and the borrower and the broker and the lender. [00:09:53] Um, so there's a lot more liability. There. Um, for states where a broker does not need to be licensed to perform that activity, I would say that risk is somewhat less, right? Because they're not a licensed party. You know, it's just me out there being like, Hey Rocky, I've got a deal. You wanna fund it? Um, you know, so I mean, there could be some sort of liability if I've misrepresented things to you, um, you know, gen general business practices and things like that. [00:10:19] Um. However big picture in those situations, the way that I would have it govern is a separate arrangement or separate broker agreement. Um, so if I'm a broker, even in California, um, and you're a lender that I work with a lot, um, I might have a broker agreement in place with you that talks about, you know, what kind of fees do I get paid and when, um, what, what. [00:10:45] Can you rely on about the deals that I'm bringing to you and what can you trust? Um, you know, what are the sort of things that I'm doing for due diligence when I'm presenting you a deal and that sort of thing. And then as far as you know, that will somewhat limit broker liability because if you're. [00:11:02] Saying that I didn't do something that, that broker agreement you said I didn't have to do, you know, that limits there. But then it also, you as the lender, gives you some recourse as well. Because if I've told you that I'm going to run credit in all of this and then I make misrepresentations about that, or I don't, um, then you can hold me liable under that agreement, even if it's a state where licensing is not an issue. [00:11:23] Rocky Butani: If, let's just say it's in, in the state of Texas or, or in Florida where you typically don't have broker licensing requirements for business purpose loans, do you typically see the wholesale lender, if, if they are calling themselves a wholesale lender, do you typically see in their agreements or their loan docs where they say anything? [00:11:42] Like if the, the loan defaults, then uh, the broker, uh, has some liability or has to pay back the commission? Do you ever see anything like that? [00:11:52] Melissa Martorella: You could certainly do something like that. I wouldn't see it in the loan documents necessarily, because that's really the contract between the lender and the borrower. [00:12:00] Um, but you could absolutely put something like that in the broker agreement between that broker and that wholesale lender, um, just to talk about, you know, or maybe I say, I'll, you know, if that loan defaults or whatever, you know, I'll take it back. I'll purchase it, uh, from you or, or something like that. [00:12:15] So they, they could have. Terms like that in there, I don't know how friendly they would be, uh, or you know, how, how often it would happen, but you could definitely need to have, have an agreement like that. [00:12:27] Rocky Butani: And I don't see that being a common, uh, you know, occurrence because there's, there's a bunch of wholesale companies out there. [00:12:34] You know, I, I would imagine, I mean, if I was in the broker's shoes, I would, I would not agree to anything like that. Uh, you know, if, uh, you know, if it's just simply a brokered transaction, um, there's, there, there's definitely other lenders out there, uh, that, that probably wouldn't require that [00:12:50] Melissa Martorella: absolutely. [00:12:52] Rocky Butani: Let's talk a little bit about* white label*. There's, there's some wholesale lenders out there that offer the wholesale, uh, lending program with, with a white label option, and, and it seems like a lot of brokers like that. Tell us a little bit more about white labeling and how that works. [00:13:07] Melissa Martorella: First, what I'll say is white labeling is basically identical to wholesaling, where you have a loan originator who's really brokering a deal to a third party. [00:13:16] Um, except what's happening is that loan originator is representing that they're actually funding the deal. Um, and so through that, you know, you'll have. A generic sounding lending entity that's the lender on the loan documents, like funding lender, LLC or something like that. Um, and so if I'm the loan originator, I can be like, Hey, borrower. [00:13:39] Yeah. You know, funding lender, LLC is just my funding entity. You know, that's what I put on the loan documents. But actually it's you, Rocky, and I've just brokered this deal to you. Um, at, at the, its core, that's what it is, is where you're hiding the identity of the true funding source. Um, to the borrower. [00:13:55] So, but otherwise, everything else is the same. So I'm still brokering a loan to another party and it, it's exactly the same as wholesale lending. [00:14:06] Rocky Butani: And in those cases, do you see, uh, where the, the lender is typically in terms of servicing, they're using their real company name, or do they continue to use, uh, that generic LLC. [00:14:20] Funding lender or whatever it is. [00:14:23] Melissa Martorella: Um, I usually, in these cases, a lot of times people will use third party loan servicers or something like that, um, to deal with the loan servicing or even after the fact. I mean, I know even from my own home. Mortgage for my house. You know, servicers change every single day. [00:14:40] So I don't think it's that, uh, uncommon for them after the loan closing to swap a servicer. Uh, but usually what I see in these situations is they either have their separate servicing arm that that's named as a loan servicer in the documents, or they're using a larger, um, loan servicing company who's just handling that for them. [00:15:01] Rocky Butani: Okay, so white label is just hiding who the real lender is, right? Um, but, but in, but are there any legal considerations? I mean, is this, is white labeling allowed in, in all states? [00:15:13] Melissa Martorella: Uh, generally, yes, uh, allowed in all states, um, not the same. Licensing considerations would apply as with wholesale because, you know, you have me brokering and I have you lending. [00:15:24] We're just pretending that you're me. Um, so, you know, you wanna make sure that I'm not misrepresenting you. So maybe in that arrangement, in that agreement that we have in place together. You know, maybe there's something about the things that I can say to borrowers or do or not do just to protect your reputation. [00:15:42] Um, and similarly, the benefit for me for doing this is not only do I, you know, get to market myself out there as having the capital source to fund these loans, but also I'm maintaining those relationships with the borrowers too, because they're thinking that I funded this loan and everything, and so I. [00:15:58] Can usually be more front facing, um, with the borrowers down the line if they need a refinance, if they need a new loan, anything like that. [00:16:06] Rocky Butani: Okay. Makes sense. Now let's switch over to *table funding*. This is a, an interesting one. Uh, and, and there there could be, there could be white labeling with table funding. [00:16:18] But, but aside from that, just tell us, uh, a little bit about table funding. Yes. [00:16:23] Melissa Martorella: So in table funding, this one's interesting and as. Far as I know, uh, uh, California is the only state that actually doesn't allow this. Um, but table funding is like white labeling in the sense that I'm that loan originator, I'm that broker, and I'm trying to represent to everybody that I have the, the capital to make this loan, to the point where instead of using that generic. [00:16:45] LLC name, that's actually you, Rocky. As the lender, I'm actually naming myself as the lender in the loan documents. So Melissa is the lender and I'm saying, yep, yep. I'm funding this loan. Except what's happening is actually at the funding table is you Rocky are the real lender and you're funding the loan and you are funding the escrow or the title. [00:17:06] Um, and I am simultaneously with getting those loan documents signed by the borrower. I am. Assigning the loan over to you. Um, and so there, there's a little bit more involved on that because now the licensing scheme changes a little bit. Um, you know, now instead of me needing to know whether I need a license as a broker. [00:17:26] Now I'm representing that I'm a direct lender. Now I have to, if, you know, maybe, maybe a certain state didn't require a broker to be licensed, but it requires a lender, so now I have to make sure I have the right license in place. Um, some states require you to be licensed to sell a loan or use a broker to sell a loan. [00:17:44] So have I dealt with that transaction properly? And in a few states it requires a license to purchase the loan. So, uh, you'd have to make sure you have the right license in place to even purchase that loan after the fact, because that's really what that assignment is that I think people don't think about is yeah, your table funding, but ultimately is you're purchasing the loan from me. [00:18:06] If, if we're being very technical about it. Um, so we have to think about the different licensing that's in play and the activities that each party in the transaction, um, is taking. And, and like I said, California does prohibit this, so you have to look at that as well. [00:18:21] Rocky Butani: So in table funding, when you say the loan gets assigned, um, this is really, uh, in, in closing, right? [00:18:29] So it's, uh, mm-hmm. The, the originator, the broker, they're not, they're not putting up their own capital. It's just the, the funds are coming in from, from the, the investor or wholesale. A company or, or the table funder, whatever term you want to use. Um, but, but does, does it matter to the borrower or does, does the borrower, uh, know that this is happening? [00:18:52] Melissa Martorella: They usually, again, similar to white, uh, white labeling, they similarly won't know that, that it's you up until that moment even, or even after the fact. They might not know again, you know, my loan's been assigned a million times, you know. Who do I care at the end of the day? No. Um, but so there, there is that, like, that borrower might not actually know that you are ultimately going to be the lender on this thing until they get some servicing, disclosure or notification down the line. [00:19:22] Rocky Butani: Okay, so California is the only state that doesn't allow this. And, uh, what would, what's the, the reasoning behind that? Uh, what, you know, what, what's so bad about table funding for California? [00:19:34] Melissa Martorella: I think for California, a lot of this has to do with protecting consumers. Um, even if it's a business purpose loan. [00:19:42] Excuse me. Um, so I think a big part of that is they want the parties involved to be honest about what they're doing. The other thing too is the broker license in California and the lender license in California are also governed by two different regulating bodies. Um, so I'm sure there is some sort of conflict between the two as well. [00:20:01] Um, but I think mostly, and again, I don't know if this is me spitballing, but I think a lot of it is protecting the consumer, protecting the ultimate borrower. Um. To know who's actually in on their transaction. [00:20:14] Rocky Butani: Makes sense. So it's just, it's just full transparency that, that, hey, you, you know, we need everyone, uh, in the transaction to know where the money's really coming from. [00:20:23] Right. Yeah. Okay. And, um, let's talk a little bit more about the assignment, uh, of the loan. Um, so assigning the loan is, I mean, is is there extra work that goes into this? Is this something that, that the brokers need to need to pay extra for? Or is it, is it kind of a seamless process, uh, when you're closing a loan? [00:20:44] Melissa Martorella: Yeah. Uh, I mean, it's another document that, so it's really, you should have both an assignment and an A launch, um, to the note. Um, but the assignment is the really super important one. Uh, it's the assignment of the mortgage or deed of trust, and it has to be recorded, which also means it must be notarized. [00:21:01] So there's some additional costs just right there between recording and notary, um, that, you know, that. Broker who's pretending they're the lender, they'll have to, you know, they have to sign that and get it notarized and we pay for the recording fees and that whole thing. Usually a lot of those costs are passed through to the borrower when these are happening at the closing table, though. [00:21:20] Um, otherwise, you know, for example, when we are preparing a set of documents and we're closing a loan that we know is being table funded, this is often just baked into the whole. Collateral package that we're preparing. So we'll send the loan documents to be signed and then we also say, Hey, broker, or you know, hey Lender, uh, you have to, here's the assignment over to Rocky. [00:21:41] You know, make sure you get this executed and sent into the closing table so that when they record that mortgage or deed of trust, they can record that assignment right after. [00:21:51] Rocky Butani: And the loan docs, like you said, have the originator's name on it. Mm-hmm. Not the assigned party. Mm-hmm. Um, but have you ever come across situations where the company, the loan's gonna be assigned to says, Hey, I don't like. [00:22:07] Your loan docs or, or I need something different in these docs. Uh, is that generally worked out in advance before the loan's even originated? [00:22:15] Melissa Martorella: Yeah, I would say it's usually worked out in advance and it's something where, you know, there are also not. I mean, there's a lot of people doing this, but there's not like so many people. [00:22:25] So we have worked with a lot of them too. So if you know, I, chances are I've worked with that, that lender and I know, oh, they always want this prepayment penalty, or they want extension language that looks like. This. Um, so it's something that I'm, we're very familiar with over on our side to say, oh, it's so and so is the table funder. [00:22:45] Got it. Make sure we use the doc set that has their, you know, standard revisions in mind. Um, but if it were a new one as well, you know, that's the process that we would go through too. It would say, Hey, it's nice to meet you. Here's our standard doc set. What do you like to see? You know, any changes do, do we need to make, uh, so that when these loans are closing, you know that the documents are what in the place that they should be. [00:23:08] Rocky Butani: One final thing about table funding is, um, it is this, is this kind of a common practice in, in most states. And, and are, are brokers using table funding with large institutional lenders or is it generally with, uh, smaller individual high net worth investors or family offices? [00:23:29] Melissa Martorella: Uh, I mean, I suppose you could do it with both. [00:23:31] Um, we usually see it with much larger groups that are acting, um, as, as that table funding lender, just because they have the resources to be able to handle the volume of loans in that, in that capacity and the servicing and tracking the assignments and all of that. That's not to say that, you know, you and I couldn't go do this, just not in California. [00:23:52] Um, but we could do this and, and, and that, that's fine. Um. But usually what I'm seeing is it's larger institutions that are acting in that capacity usually. [00:24:04] Rocky Butani: And what about potential liability for the originator, if they've, uh, if they've brokered the loan or not brokered, if they've originated the loan and, and it's assigned, uh, even though their, their name was on the loan docs. [00:24:17] When it gets assigned, are they releasing their liability from the deal? [00:24:22] Melissa Martorella: That's another great question. I mean. So generally what will happen and, and you should absolutely have this in place, is if you are a table funder like that, you'll. Definitely want to make sure that there's some agreement in place between that original self. [00:24:39] It outlines what happens. Well, you know, I was named as the lender for, you know, 30 seconds before I sent it over to you or signed it over to you and now I'm being sued in a chain of title thing or something like is there an indemnity clause or what, whatever is going on. Um, and similarly, if I've actually misrepresented a horrible loan to you that you ended up. [00:24:58] Funding, you know, what does that recourse look like? So you can definitely have that, um, in place in, in that sort of third party agreement. The other thing that I'll say as well is when you're getting these assignments, especially from a title perspective, this is why I like to make sure that. It does happen right away at closing. [00:25:15] Uh, sometimes these assignments will delay, um, over to that ultimate lender who's funding the loan. And the problem that I have with that is you want to make sure all of the insurance around you, both title insurance and property insurance liability insurance are actually naming. You the ultimate lender on those documents or you're getting endorsements to those insurance policies, um, to make sure that you are also covered as well. [00:25:39] So it's just there's a lot to, that kind of goes on in these. Um, so you usually have a third party, like a law firm, um, processing a lot of these loans to close them because they're getting all of that information and making sure it's all organized prior to the loan funding. [00:25:57] Rocky Butani: And, and what if there's a case where the originator has a table funder lined up, uh, all the docs, uh, and, and insurance and like you said, names that table funder. [00:26:08] Mm-hmm. And then, and then it. It changes midway. You just have to do redo everything to, to get it to a different capital source. [00:26:16] Melissa Martorella: Exactly. So new, new assignments, new all, all of that. Sometimes new underwriters, sometimes new docs if they like a different set of documents, so yeah. Hopefully that doesn't happen too often though. [00:26:30] Rocky Butani: Okay. And, uh, if someone's using a table funding arrangement, do they typically need to, to have, um, uh, a a little bit more legal servicing, or not servicing, that's not not the right word, do they typically have to have, uh, an attorney involved in the deal versus using an automated loan doc software? [00:26:51] Melissa Martorella: Um, absolutely. [00:26:52] I think you can definitely go both ways. Um, you know, some people, especially when they have strong closing coordinators and that sort of thing in house, so those larger institutions, it makes sense that you're using an automated platform. Um, but I do think for a lot of reasons, especially where you have all of these moving parts, you have, you know, hidden parties and that whole thing, I think it's oftentimes helpful to have a law firm, um, as an intermediary, helping to make sure that the loan closes correctly and on time. [00:27:21] Rocky Butani: Okay. Alright. Sounds good. Um, alright. That's all I had for table funding. Awesome. Why don't we take a quick break and we'll be right back. Support for this show comes from Four Casa, an amazing data platform for private lending and real estate investing private lenders. Note buyers, capital providers, real estate investors used for CASA in a variety of different ways. [00:27:43] You can see which lenders have funded which loans. You could see which real estate investors have gotten funding or sold a property or purchase a property. You can see loan assignments to know where the loan was sold to after funding. Many people use forecast as a prospecting tool. I personally use it to vet lenders and for general market insights. [00:28:04] It's become an essential part of our business, and I just wish I had access to it sooner. We published some of for CASA's data on private lender link.com. When you do a search for lenders, you could see the top 20 lenders in each market. And we've also added, uh, the top real estate investors in each state and for some of the metro areas. [00:28:23] Visit for casa.com. Schedule a demo and please mention that you heard about them from Lender Link and the private Lending Insights podcast. We're back with Melissa Marella and now we're gonna talk about correspondent lending. This one has some complexities just because I've seen a bunch of lenders use the term correspondent when it may not be correspondent in the technical terms. [00:28:44] So, uh, why don't you explain correspondent lending to us. [00:28:48] Melissa Martorella: Absolutely. Um, so we were talking a little bit before about table funding. What I'll say in this case is, you know, in table funding, I was that originator, I was putting myself as a lender on the loan documents, but I didn't have any money. Rocky had the money. [00:29:03] So, you know, Rocky's funding that loan. Um, in this case I do have mon money, uh, with the correspondent lending, and so I am actually making this loan. I'm later signing it to Rocky Rocky's buying this loan from me. Um, but that's the big difference there is I actually fund the escrow and fund the loan closing, and then you're purchasing the loan from me after the fact. [00:29:28] Um, so that's the major difference there is the funding source and where the money to close the loan is coming from. [00:29:37] Rocky Butani: So the originator on a, on a deal, that's a correspondent arrangement. Um, they need to be licensed as a lender versus a broker. [00:29:46] Melissa Martorella: Right? Exactly. Exactly. Yeah. [00:29:49] Rocky Butani: So if there's a wholesale capital source out there that says, Hey, we offer a correspondent lending program, uh, that means both of them have to be licensed as a lender. [00:29:59] If they're lending in a state that requires licensing, [00:30:02] Melissa Martorella: most likely, yes. [00:30:05] Rocky Butani: Okay. And when, when people fund loans in a correspondent, uh, situation, do they typically just have a balance sheet where they're, they're, you know, they have the money to fund it and then they sell it shortly after? Do they. Use warehouse lines. [00:30:21] Uh, how did, how does that work? [00:30:23] Melissa Martorella: Yeah, absolutely. I mean, any and all of those options, um, usually if you're going to be doing this sort of correspondent lending or, you know, working with correspondent lenders, you'll be able to maintain your balance sheet for a while. So it's not like, you know, I'm making three loans and I'm like, oh gosh, please, Rocky, buy one ASAP because I gotta fund this other one tomorrow. [00:30:42] That's not a good business practice. Uh, so, but usually what's happening is I have the ability, um, to make these loans myself, but then I want to deploy capital again because, you know, I can make those origination fees. Maybe I'm collecting an interest spread, something like that. Um, and I want to work that game. [00:31:00] But then you are more. Did and, you know, have servicing the loan for the, for its life and, and, and getting interest in that whole thing. So it could be, you know, that maybe, maybe some of them I even keep on my books, um, might sell to you as a third party shortly thereafter. Maybe I do have a warehouse line that I can utilize to fund these loans initially. [00:31:21] Um, and then as I'm selling them off to you pay down my warehouse line. Um, so there could be, you know, many different. Options there. Um, as far as you know, for that, for that originator, um, how they're funding the transactions. [00:31:36] Rocky Butani: So, as far as I know, correspondent lending is very common in the consumer mortgage space, but in private lending, where I've typically seen it or heard about it is there's a large institutional lender out there that says, Hey, we, we offer a correspondent program and, and, uh. [00:31:56] You know, they, they say, Hey, we will offer you, uh, this warehouse line or, or a credit line. Um, but I've never quite understood how that worked. Um, and, and obviously I can, I can ask one of the, the lenders for the specifics on, on how they, they, uh, how they structure it or arrange it. Uh, but as far as, you know, how does that typically work within, within private lending with these larger national firms offering a correspondent program to, um, to a smaller lender or a broker? [00:32:28] Melissa Martorella: Absolutely. Um, I think a lot of that will be, you know, we've often talked about this agreement between the originator and the lender and what that means. In this case, it's gonna be even more in depth because it's not gonna just talk about, Hey, you're bringing me deals that I'm funding. In this case it. [00:32:43] I'm really selling loans to you. And so now what does that look like? What did you know? Is there like a seasoning period where these loans have to, you know, not be in default right away? Um, what, what are the terms of these loans that you accept as the purchaser? You know, do you not accept pre prepayment penalties? [00:33:04] Do you always wanna see one? Um, are there interest rates that you don't offer, or interest programs that you don't offer? Is there collateral types that you don't like? There's like a whole list of things where you can say, here are, here's the box of loans and, and the terms for loans that I would be happy to purchase, Melissa. [00:33:22] You know, so long as you're originating those and you can show, you know, on a loan tape that you know, these loans meet these characteristics, I'd be happy to buy them from you. Um, and then, you know, there might be repurchase, uh, rules and that's. Sort of thing if the loans are in default or are not as, as represented to you. [00:33:39] Um, but so that agreement tends to be very, very complex versus the other originator agreements are more so, um, talking about fees and representations and that sort of thing. [00:33:51] Rocky Butani: And how about, uh, loan docs? Does that work similar to table funding? Where, where the, the, the loan buyer is sort of predetermined? [00:33:59] Or, or, or does, does, is there extra work that that needs to be done when the loan's assigned? [00:34:04] Melissa Martorella: That's another great question. I know that a lot of, um, correspondent lenders will want to see a certain, um, set of loan documents in there. Um, that said, I, I know that. And the reason for that is because it makes it very easy for them to purchase the loans. [00:34:19] Because if I can show you our loan documents and you like our loan documents and you know, to look in these three sections for the things that you care about, to verify that it's a type of loan that you want, that's easy. Versus if it's. You know, some random set of loan documents out there that, that becomes hard because now you have to read them all. [00:34:37] Not that you shouldn't every time, but now you really have to dig in and make sure, um, that the documents say what they need to say, that you have reps and warranties in there, that all of the terms are correct and it makes it difficult. So oftentimes in that agreement with the correspondent lender, it'll talk about accepted, um, loan documents, um, that the originators can use. [00:35:00] Rocky Butani: And the correspondent. Lender or the, the capital source, do they need to be licensed? Um, if applicable in that state? [00:35:10] Melissa Martorella: Yeah, if, if applicable. You know, some states will require somebody who's purchasing a loan to be licensed. So if that's the case, um, then you would need to make sure that you were licensed. [00:35:20] And then similarly, you know, on, on my end as the originator, there might be states that say you have to be licensed to sell a loan. And so that might be. Separate license or, um, different from the lending license potentially. Um, so another thing to look out for, [00:35:37] Rocky Butani: but loan buying it, it seems like it, it's an activity that's not, um, where, where a license wouldn't be required for it. [00:35:46] It's, it's really an investment. Are are there any states that, that stand out where this is, that this is a requirement that you need a license just to acquire a, a loan or a note? [00:35:58] Melissa Martorella: I can't think of off the top of my head. I know there are a few. It's very rare. Um, but there are a few that are out there. Um, so it's just something that I would check in before you, you start doing that. [00:36:10] Rocky Butani: Okay. But, but most of the country, it's, it's not really an issue. Exactly. Yeah. Okay, great. And, and how about, uh, legal liability? If, if someone's, you know, putting themselves out there as a lender, they've got the balance sheet or the warehouse line. To fund that loan. Um, but they're assigning it. Is it, is it similar in terms of table funding and, and um, uh, in terms of, uh, the liability that the originator might hold? [00:36:37] Melissa Martorella: I would say there's probably slightly more liability in this situation because at the end of the day, you're most likely as the originator holding onto the paper for longer, you know, than a day or a couple of hours, um, like you would in the other situations. In this case, I would say, you know, if say for example, there's a seasoning period, and you know, before I sell the loan to you, you know, I have to show that there's two months of timely payments by the borrower. [00:37:05] Um, you know, for those two months if I fail to service those loans properly. Or, you know, like if there's things that I do during that timeframe that, you know, put this loan at risk, there's liability that pop up there. So hopefully, you know those agreements that you have in place. Um, with the warehouse, lenders will go over those circumstances so that originator knows exactly what they need to worry about, um, as they're selling these loans. [00:37:31] Rocky Butani: It seems like with these different capital structures, um, or of, of wholesaling or brokering it, it, the economics must get better as you go up and level, right? Like when you start at, at a wholesale, um, you know, you're just getting preferred pricing and then, then you go into table funding, you have to deal with a lot more legal stuff and potential liability. [00:37:53] Then you go to correspondent lending and it's way more liability and. Way more expense. Mm-hmm. So it, it, there, there must be, uh, more profit in, in, in these different deals as, as you go up the food chain, right? [00:38:05] Melissa Martorella: I would think so. I mean, I never see this side or, I mean I may put like fees on a closing statement, but it's very rare that I'm like in on the economics of the deal. [00:38:14] Um, but I will say, I think. Even though, you know, it might seem, seem that like, okay, if I'm just, you know, wholesaling or whatever, like maybe I can, you know, collect a big broker fee, or if I'm that lender I can collect a lot, all of the interest rate or whatever it is. But I will say like, as you go up, like yes. [00:38:33] The liability is more, but then for example, with this correspondent lending program or or whatnot, I have the ability to redeploy capital over and over again as I'm selling these loans to you. And so maybe there is a gain to be made there on, you know, the origination fees or maybe there's a yield spread in place or something like that. [00:38:53] Um, where I am, it is more economical. I, I don't know though, so. I really have no idea what's the side or I don't know. [00:39:03] Rocky Butani: No problem. Um, and then, uh, tell us a little bit about, uh, Fortra Law and your role in, in, uh, helping brokers and capital providers or lenders, uh, with these different types of wholesale structures. [00:39:16] Melissa Martorella: Absolutely. Um, you know, I think the biggest thing, I alluded to it at the beginning, but it's always jumping on a call and figure out what people mean by the terms they're using. Um, people like to throw around phrases and sometimes, you know, you might be meaning that to say one thing and I understanding it to be something completely different. [00:39:36] Um, it's kind of a funny joke, but even in our office, you know, on, on my team, um, you know, we borrowers are borrowers. But sometimes on our corporate in securities team, you know, Kevin calls them investors, but to me an investor is a lender and so there like even that sort of thing, you really have to dig in and be like, what do you mean by that word? [00:39:56] What is the actual activity you're trying to do? So oftentimes when I'm talking to people, I'm figuring out what. They're trying to do. Uh, it's not because I haven't heard of it before or I need you to educate me. It's because I'm trying to understand what your goals are because then I can answer these questions correctly. [00:40:12] You know, I can understand, you know, do you need a license? Is there another agreement that has to be in place? Um, is that activity prohibited in the state you're trying to do? Um, so really digging in on that, and I think at the end of the day, that's the big. Service that Fortra provides is that we are experts in this space as far as helping you get the deal done. [00:40:33] You know, we're not out here, you know, deal killers. We're not trying to crush your dreams. You know, if you're coming to us with questions and we're giving you an answer, you know, we're. Trying our best to figure out how to make it so that you can do that deal. And it might require some restructuring, depending, um, on the laws of that state. [00:40:51] So I would say that's probably the biggest area where we can help. And of course, you know, we draft documents and all of that, but I would say most of the time that my team and I spend, um, with our clients is on the structuring and figuring out their business and, you know, these big picture strategies. [00:41:07] Rocky Butani: And as far as the docs does, um, uh, any investor or lender that's table funding or offering correspondent lending when they, when they need loan docs, is it typically they, they just need it, uh, set up from what, for one time and then it's, it's a same for all the transactions in the future. [00:41:28] Melissa Martorella: Um, so usually what we can do, I mean, oftentimes like, you know, like I said, like some of those bigger, uh, institutions, like they wanna see certain provisions, but the thing is, is every loan is different. [00:41:40] So I hate the idea of getting templates out there because things are always changing and, you know, maybe you know that. Provision was worked well in these set of documents, but when you take that out, maybe that actually changes and you needed to add something else when you did that. And so I really don't like templates for that purpose. [00:41:59] Um, the other thing that I'll say too is, you know, laws are changing all of the time. And here at Fort we have, um, a crazy research process and outside counsel, you know, process where we're always going through, uh, looking at new laws. Getting our documents updated, um, making sure they're compliant. And so it's something where, you know, yeah, that doc set, you know, works today and that's how you record a deed of trust today. [00:42:23] But, you know, tomorrow they could pass a law that says, now you need three inch margins on the first page, or something like that. And so while that document could record yesterday, it won't today. Um, and so that's another reason why I'm pretty against templates. Um, I just, I don't. See them getting updated, uh, in the way that they should, and I think that can ultimately cause some more problems. [00:42:45] Rocky Butani: Well, let's say there's a situation where the originator is, is offering table funding to, um, a, a capital provider investor, a lender, and, and they have their own set of loan docs, but then the, the person actually funding the loan, uh, the, the capital source, they, you know, they need to review those docs and make sure it, uh, it meets their. [00:43:08] Criteria or guidelines. Um, right. Is is there anything, uh, I mean, is that a common scenario that you typically review the originator's docs compared to what the needs of the capital source is and, and then make adjustments to the whole doc set? [00:43:24] Melissa Martorella: Um, we can, I will say though, um, that is much more, uh, costly than if we were to prepare them ourselves. [00:43:33] We can. Um, but you know, there's just like a time value there of, you know, again, for me to read through an entire set of documents, make changes and updates and that whole thing, like that's gonna take far more time than for me to draft a set of documents based on a template that I know and I'm familiar with, and know where changes need to be. [00:43:50] So we can, and we have. Um, but it's definitely probably the, not the most cost effective way. [00:43:56] Rocky Butani: Sure. Makes sense. Alright, well thanks for all that information. Um, was there anything else that I missed? Anything else you wanted to add? [00:44:05] Melissa Martorella: I don't think so. This is a great topic, uh, complicated one, but one I'm glad to hopefully get some clarity to the industry on [00:44:12] Rocky Butani: Absolutely. [00:44:13] Me too. That's, that's why we're doing this. So, so, so thanks for all your insights. Thanks for your time and, uh, look forward to seeing you at. The next conference. [00:44:22] Melissa Martorella: Can't wait. Thank you so much, Rocky. [00:44:25] Rocky Butani: And that's a wrap for this episode of Private Lending Insights. Follow Melissa Martorella on LinkedIn. Her and her partners at Fortra Law will periodically host webinars. [00:44:35] They write articles and put out a lot of great content focused on private lending Fortra Law is listed in the services directory of private lender link.com. I'll put a link to that in the description. Reach out to them to learn more about their services. And please mention that you heard about them from Lender Link and the Private Lending Insights podcast. [00:44:53] Thanks for tuning in and listening all the way to the end.