Summary:
The Borrower's deliberate concealment of crucial information about a proposed loan transaction has created a complex and potentially risky situation for the lender. This highlights the vital need for a comprehensive risk assessment and thorough due diligence.
The lender’s due diligence, marked by skepticism and rigorous inquiry, has effectively unveiled the full extent of the Borrower's financial obligations, which were a tangled web of deceit. This success underscores the paramount importance of thorough risk assessment and due diligence in such transactions.
The Borrower's actions can be likened to a complex business arrangement, a merry-go-round of secrecy that further complicates the situation.
The wife was unaware of anything until she received a subpoena for a deposition relating to equipment loan defaults in the operating company.
Then, (shi_ hit the fan- SHIF ) between the husband and the wife. Irony always has its place and rears its ugly head at unexpected times.
The proposed transaction was of such an intricate nature that it necessitated the expertise of an experienced funding mortgage broker to decipher its complexities and understand their potential Impact on a future loan in the servicing department, should the loan be funded.
In hindsight, it’s evident that this Borrower's actions were marked by sneakiness, deviousness, and dishonesty, thereby adding a layer of risk to the lender. The Borrower's actions not only complicated the transaction but also increased the lender’s risk exposure, as they were unaware of the Borrower's intricate financial situation and potential liabilities.
But the silence was not golden. He was in hot water for various defaulted loan obligations and was having a comeuppance with his wife. Suspense is waiting for us to tell us how the wife responded.
The transaction’s complexity made it challenging to thoroughly verify each issue, underscoring the crucial need for comprehensive due diligence and thorough investigation in such transactions. Our commitment to this thorough investigation should instill confidence in all parties involved.
Article:
The procuring mortgage broker states
My client needs a loan to pay various judgments, liens, and tax obligations. He has a substantial amount of equity in his real estate and is likely worth more than $10-20 million. Would he ever default? I will obtain an application for you, the reviewer.
The prudent lender responded a couple of weeks later:
After the lender’s underwriting department has conducted due diligence, the broker/lender, responsible for facilitating the transaction and ensuring all necessary information is provided, responds to the Borrower's procuring mortgage broker. The broker lender’s role is crucial in such transactions, as they are responsible for verifying the information provided by the Borrower and ensuring that all potential risks are identified and addressed.
As potential lenders, we have meticulously conducted due diligence on every transaction. Our comprehensive background search on the Borrower and the Borrower's operating company, along with our thorough review of court records, revealed a more complex situation than initially presented. This rigorous process, which involved [specific steps of due diligence], should reassure all concerned about our unwavering commitment to uncovering all potential transaction risks.
Our rigorous due diligence process is designed to reassure all parties involved about our unwavering commitment to uncovering and addressing all material facts and potential risks. What was initially represented as a few judgments, liens, and tax obligations has unexpectedly transformed into an immensely complex underwriting exercise, underscoring the importance of being prepared for surprises in the lending process.
This transaction had three parties:
- The primary principal borrowers who own at least 15 pieces of real estate,
- An operating company owned and actively operated by the Borrower and managed by a close relative
- A newly formed separate company started and operated by a close relative, which is not part of this loan request.
- The Borrower has a business enterprise with numerous judgments and liens, separate from the Borrower's individual judgments and liabilities.
- The Borrower has a business enterprise with numerous judgments and liens, separate from the Borrower's individual judgments. This Borrower owns numerous prime real estate properties, some of which are free and clear of any liens. The equity to borrow against is more than adequate.
- The Borrower has a significant financial burden, approximately $2 million in state and federal personal tax arrearages and judgments.
- The Borrower had a Lis Pendens record (notice of pending legal action) on numerous properties, as equipment lenders used his individual properties as collateral for repayment.
- There are also multiple defaults on large pieces of leased business equipment that he has personally guaranteed.
- No new loans or conveyances are possible unless these obligations are satisfied, as they are all a matter of public record, and lien priority dictates that they take precedence over any newly recorded lien.
- The Borrower operates as an individual investor and President of one or more corporations. He and the entities are separate and distinct from each other.
- The operating company, which is owned separately by the Borrower from the individual, also has $2 million in civil judgments and liens. The company has not paid California employment taxes for almost two years.
- The company has also defaulted on lease payments for multiple pieces of large equipment, which the Borrower personally guaranteed.
- Some equipment lease defaults included personal guarantees; therefore, the judgment becomes an individual obligation of approximately $300,000.
- The Borrower and the lawyer argue that business debts cannot be attached to the individual or his unrelated real estate holdings. Therefore, a title insurer must insure these new real estate loans.
- The Borrower often fails to pay vendor service providers in his business, which frequently results in litigation. Multiple civil judgments have been issued against the company.
- A borrower-related party has established a new company in the same line of business—the new company has assumed ownership of all active customer accounts. The operational buildings and the equipment used in the latest industry are the same. However, even the new company continues to default on equipment payments owed by the old company. It appears, although not verified, that the Borrower is attempting to put his defaulting company, which is in debt by two million, into insolvency without filing for bankruptcy or paying its creditors.
- The new company would take over the business accounts and operate a functioning enterprise with a projected profit. The intent is that all tax obligations, judgments, and other obligations remain in the old insolvent company.
- All arrears in taxes, judgments, and liens of the old operating company would disappear in insolvency.
- While one may consider the underhanded maneuvers a brilliant estate planning scheme, the loan request was declined for apparent legal and ethical reasons. The Borrower's actions, including the attempt to transfer liabilities to a new company and the History of defaults and litigation, raised serious concerns about the Borrower's financial responsibility and the potential for future defaults.
- The broker/lender perceives that there will be future litigation if the new operating company defaults on equipment leases, all of which have personal guarantees that lead back to the borrowers as individuals.
- This perception highlights the importance of thorough risk assessment in such transactions, ensuring that we are always prepared and proactive, particularly when potential future litigation is a concern.