Seven Essential Elements of Trust Deed Investments:

Knowledge, experience, and integrity of the MLB through whom the transaction may be made or arranged

Market value and equity in the Property and the security for your loan

Borrower’s financial standing and creditworthiness

Escrow process involving the funding of the loan or the purchase of the note

Documents and instruments describing, evidencing, and securing the loan

Loan servicing provisions, authority and compensation

Recovering your investment when the borrower fails to pay

The information that follows will assist you in considering the seven essential elements of a loan transaction which you should understand before funding a loan or purchasing a promissory note. Just read on!

1. Knowledge, experience, and integrity of the MLB through whom the transaction may be made or arranged

Before placing your trust and money with an MLB, you would be wise to call: (1) the Department of Real Estate (DRE) to determine if the MLB and his or her loan representatives are properly licensed, how long each has been licensed, and whether any of the licenses have been disciplined; and (2) the local Better Business Bureau to ask if any complaints have been lodged.

Ask the MLB to provide a professional profile for your review and information as to the approximate number and percentage of loans, if any, negotiated by the MLB which resulted in foreclosure (commenced and/or concluded) during the past few years.

Ask the MLB if he or she is the borrower or if he or she has any relationship to the borrower (e.g., if the MLB is a relative, a shareholder, an officer, a director, or a partner of the borrower). When the MLB is the borrower or related to the borrower, we refer to the transaction as “self-dealing.”

2. Market value and equity of the property and the security for your loan

Introduction

The purpose of this brochure is to provide basic information which you should know if you plan to purchase existing promissory notes or fund loans, the repayment of which is secured by deeds of trust recorded against California real property. The funding of a loan or the purchase of a promissory note is an investment which involves some risk. Prior to becoming a lender of loans or a purchaser of promissory notes, you should be able to answer the following questions:

1. What is a “promissory note?” A promissory note is a written promise to pay or repay a certain amount of money at a certain time, or in a certain number of installments, or on demand to a named person. It usually provides for payment of interest, and its payment can be secured by a deed of trust.

The person receiving the loan proceeds (borrower) becomes obligated to repay the debt by signing a promissory note which specifies: (1) the amount of the loan (principal); (2) the interest rate (interest); (3) the amount and frequency of payments (debt service); (4) when the borrower must repay the principal (due date); and (5) the penalties imposed if the borrower fails to timely pay or tender a payment (late charge) or decides to pay a portion or all of the principal prior to the due date (prepayment penalty). The promissory note identifies the borrower and the person who will receive the payments (lender or note holder).

2. How do you obtain a promissory note? You obtain a promissory note (become a lender or note holder) by either making a loan or purchasing an existing promissory note. Unless the loan is made or arranged by a real estate broker, a private party when making a loan will be subject to an interest rate ceiling imposed by the California State Constitution. Charging a rate in excess of this ceiling is referred to as usury. Even when purchasing an existing promissory note (unless the purchase is arranged by a real estate broker), a private party, depending upon the fact situation, may still be subject to usury.

A broker who for compensation, or in expectation of compensation, (regardless of form) assists the public in making or arranging loans is commonly referred to as a mortgage loan broker (MLB).

3. What secures your investment? Your investment is secured by a deed of trust recorded against the title of the borrower’s property (the Property). Unlike deposits in a bank or savings and loan, which are generally insured by a federal agency (such as FDIC) and may usually be withdrawn with limited notice, the promissory note: (1) involves some risk to principal (a typical feature of all investments); (2) establishes a specific and predetermined period of time for the repayment of your investment; and (3) does not benefit from insurance issued by a federal agency.

In a deed of trust, the borrower (trustor) transfers the Property, in trust, to an independent third party (trustee) who holds conditional title on behalf of the lender or note holder (beneficiary) for the purpose of exercising the following powers: (1) to reconvey the deed of trust once the borrower satisfies all obligations under the promissory note; or (2) to sell the Property if the borrower defaults (known as a foreclosure). Foreclosure involves the process of selling the Property to a third-party bidder or, in the absence of a sufficient third-party bid, acquiring title to the Property. The foreclosure sale, in most cases, satisfies the debt.

Depending upon the method of foreclosure, the nature of the loan, the circumstances of origination, and the value of the Property, you may or may not be able to recover your entire investment. For example, if a third party bids at a non-judicial foreclosure sale an amount equal to or greater than the amount you are owed (including fees, costs, and expenses of the foreclosure), your investment would be fully paid. On the other hand, if you bid the full amount that is owed to you, including all foreclosure fees, costs, and expenses (full credit bid) and there are no third-party bids, you will generally be limited to the Property and its value as the source of repayment of your investment.

The purpose of this brochure is to provide basic information which you should know if you plan to purchase existing promissory notes or fund loans, the repayment of which is secured by deeds of trust recorded against California real property. The funding of a loan or the purchase of a promissory note is an investment which involves some risk. Prior to becoming a lender of loans or a purchaser of promissory notes, you should be able to answer the following questions:

1. What is a “promissory note?” A promissory note is a written promise to pay or repay a certain amount of money at a certain time, or in a certain number of installments, or on demand to a named person. It usually provides for payment of interest, and its payment can be secured by a deed of trust.

The person receiving the loan proceeds (borrower) becomes obligated to repay the debt by signing a promissory note which specifies: (1) the amount of the loan (principal); (2) the interest rate (interest); (3) the amount and frequency of payments (debt service); (4) when the borrower must repay the principal (due date); and (5) the penalties imposed if the borrower fails to timely pay or tender a payment (late charge) or decides to pay a portion or all of the principal prior to the due date (prepayment penalty). The promissory note identifies the borrower and the person who will receive the payments (lender or note holder).