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This episode is sponsored by privatelenderlink.com, where investors and brokers find direct private lending companies throughout the United States. Are you struggling to find the right lender for your deals? Private Lender Link offers a unique service to provide private lender recommendations. Over the past 10 years, they have established relationships with many reputable direct lenders and know each company’s guidelines. Their platform makes the process to get recommendations very easy. Simply provide details about your loan request by filling out a short questionnaire. A Lender Link professional will review the information and invite a few select lenders to view your loan request. The lenders will reach out to you directly to further discuss the deal and provide a quote. Save yourself a lot of time and effort by leveraging private lender links, knowledge, relationships, and 10-plus years in the industry. The network includes lenders for commercial real estate, residential investment properties, and small businesses. To get started, visit privatelenderlink.com and click the big green button at the top.
Kevin Kim:
You’re listening to Lender Lounge with Kevin Kim, a podcast dedicated to the private lending industry. I’m Kevin Kim and my goal is sit down with key figures in the private lending industry to talk about their business and their personal lives. We’ll get their takes on market conditions, the industry at large, and their personal stories. Overall, I really want to learn more about how they started and grew their businesses. So whether you’re a lender, a borrower, a vendor, an investor, or anyone just interested in learning more about private lending, this podcast is definitely for you. Thanks for tuning in and enjoy this week’s episode of Lender Lounge with Kevin Kim.
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Hey guys. Kevin Kim here. Welcome to another episode of Lender Lounge with yours truly Kevin Kim, and we are joined by two of our esteemed guests. Many of you already work with them, many of you already know them, but I’d like to introduce two gentlemen that work with us here at Geraci and we’re going to be interviewing them today. First is our chair of litigation, Steve Ernest, and our of counsel and I call him our big brain of all things mortgage compliance in private lending, Tom Hajda. It’s pronounced Tom Haida, right, Tom?
Tom Hajda:
That’s right, yeah.
Kevin Kim:
So usually when we do these interviews, I want to give you guys a chance to tell the audience about who you are, your background, what you do, and then we can get into it. So who wants to go first?
Tom Hajda:
Steve, you want to go?
Steven Ernest:
I do, and thanks Kev for having us on and giving me this great pin and this great hat.
Kevin Kim:
Love it.
Steven Ernest:
I am the director of litigation here at Geraci and I’m delighted to be here. I’ve been here a little over a year now. We’re having a lot of fun. We’re kicking a lot of butts and we’re taking a lot of names.
Kevin Kim:
So just for our audience to understand what that means, is it all types of litigation? Is it just litigation for… What is it that what your team does when it comes to, I guess you can say, our clientele?
Steven Ernest:
At Geraci we do, I guess, you could say two different varieties of litigation. There’s the part where you’re suing somebody and trying to get them to do something that they don’t want to do. Those are our plaintiff’s cases where ordinarily it’s payment defaults, but there are some extraordinary remedies, but ordinarily it’s guys who were supposed to pay you that didn’t pay you. So we sue them and make their lives as uncomfortable as we possibly can to make it easier for them to do what you want them to do rather than what they want to do, which is not pay you.
The other variety of lawsuits there are is when somebody is suing you. And mostly in the private lending space, we encounter cases that I call wrongful infliction of money. That is one of our clients is issued a loan and the borrower’s life has changed in one fashion or another since that’s happened and they don’t want to pay, but they also don’t want to give back the collateral and they don’t want to do anything. So nationally in our society what they do is start suing everybody and saying it’s everybody else’s fault and they sue the lender as well. It’s a rare occurrence when one of those lawsuits has any merit, but they bring them nonetheless, and we do our best to defend our clients in those. So that’s the other variety.
Kevin Kim:
And how long you’ve been doing this for?
Steven Ernest:
Let’s see. According to that piece of paper behind me, December 1996, so 26 years, a little bit more than a quarter century.
Kevin Kim:
So you’ve always been in litigation?
Steven Ernest:
In my career, yeah.
Kevin Kim:
Fantastic.
Steven Ernest:
I’ve got a whole story to tell about life that it’s a little bit before a lawyer, but as a lawyer, all I’ve done is a litigator. I like fighting.
Kevin Kim:
For our audience and listeners, you have to understand Steve is like a legendary bard, so we’re in for it today. It’s going to be a good one. Tom, give us a little bit of background about yourself, what do you do for the firm and a little bit of background about where you came from.
Tom Hajda:
Yeah, thanks. So I’m really the jack of all trades in the law firm. I work with the transactional group, but in reality, I interface really with all the different departments within the firm. I do a lot of regulatory and compliance work. So for example, I did the research for our 50 state surveys for licensing and registration and different compliance issues such as late fees, prepayment penalties, and other specific state requirements that we need to know not only for hot docs but our clients who perform credit transactions in different states.
I also have a significant bank regulatory background. So with respect to our credit union and our bank clients, I can assist them with their bank regulatory issues. I really work on the more sophisticated non-standard transactional matters. So for example, if you want a loan participation or if you want a hypothecation, or for example, many of our clients receive warehouse lines of credit from banks and I can help them negotiate their credit facilities, whether it’s a warehouse line or a mastery purchase agreement. And I’ve drafted a number of them specific customized credit facilities for those of our clients who want to offer them.
Kevin Kim:
I’ll ask you both, this question you guys can jump in here, what were you doing before you joined us? Tom, you’ve been with us now three years now?
Tom Hajda:
I’ve been three years. Yeah.
Kevin Kim:
Three years now. [inaudible 00:08:06] But you guys have been attorneys for quite some time now, so what were you guys doing before you joined us?
Tom Hajda:
Well, I started practicing almost 39 years ago. I started with a large firm in Boston and my focus was bank regulatory, corporate and consumer regulatory work. And after several years I was hired by the largest bank in Boston and worked there for a number of years and primarily did bank regulatory and consumer regulatory work. Also bought and sold bank branches and different businesses for the bank. And then I was transferred from Boston to Florida where I became the general council of the bank’s mortgage company, and we grew it to be the fifth largest mortgage company in the United States. And then when it was sold, I went to work for a small federal savings association in Florida and we grew the bank from $250 million to over $30 billion and took it public.
So at that point, I was doing mostly corporate and bank regulatory work and worked a lot with outside council and taking it public. After that, I became general council for one of the largest mortgage companies in the United States headquartered in Chicago, then was recruited to work for another financial services company in Chicago to help them open up a new business line for private lending, which is where I met Nema and the management team at Geraci. We needed loan documents that weren’t readily available in the market in all 50 states and I worked with Nema and Melissa in getting those documents together and we liked each other so much and offer was made and I came to work for the firm.
Kevin Kim:
And that firm that you were working at before was doing private lending, correct?
Tom Hajda:
Correct. I helped them build it from the ground up. So they didn’t have a private lending business, but-
Kevin Kim:
They added.
Tom Hajda:
… thought that it was a good business opportunity so I worked with their new president of their private lending company and we built it from the ground up and it was pretty fun.
Kevin Kim:
Cool. Steve, how about yourself? I noticed you changed hats there.
Steven Ernest:
Yeah. Well, I’m a western law man, so you got to wear the hat sometimes.
Kevin Kim:
And you’re quite the gunslinger when it comes to representing clients. One of the reasons why I was so excited for you to join is you were one of the most confidence inspiring litigators that I’ve met in a while. And I’d like to learn more about what you were doing before you joined Geraci in the world of litigation. Were you always in kind of the creditor’s side, or were you doing anything else before that?
Steven Ernest:
Yeah. So Kevin, half of the reason I’m here at this firm is you, because on my interview lunch, you were there with Anthony and you voted thumbs up, so here I am. But straight out of law school, I moved back in with my mom to study for the bar and I spent the worst summer of my life studying for the bar exam and watching the Atlanta Olympics. And then the bar’s over, and what do you do? You got to go get a job. Kevin, as you know, most of my stories are too long, so I’m not going to tell the whole story.
Kevin Kim:
You’re fine, brother.
Steven Ernest:
But I went to this firm that had two lawyers in it and one of them was licensed to practice in Denver and he had some heavy handed clients. He had Fannie Mae and he had Household Bank when that was still a thing and wanted to expand his practice into California but didn’t want to take the bar. So he had hired this creditor’s lawyer in California who was an interesting cat in the fashion that he was a cocaine addict.
Kevin Kim:
Very common mortgage back in the ’90s.
Steven Ernest:
After about eight months, the Colorado guy realized that the California guy wasn’t doing any work like there was a team of paralegals doing sort of the mill work, but the lawyer wasn’t doing any lawyer work. And so he said, “Hey, where’s the work?” And the California guy, as drug addicts, do makes a bunch of excuses about this or that and we need another lawyer. So they hired this guy, I wasn’t even licensed to practice yet, I didn’t have my bar results, to be a clerk and do the stuff. And so I worked there for about a month and got favorable bar results and then they hired me to be a lawyer. And you too probably when you got out of law school already knew how to do everything, but I did not, I didn’t know how to do anything.These are big clients, Household International was a big bank and Fannie Mae was a big organization. And all of their work in California, they were sending to my office and the cocaine guy didn’t do any work.
And so it just dropped on my desk and it was in a sense, terrifying, and in most sense is exhilarating. The first month of practice, December 1996, I probably had five or six trials. Just here’s your file, put your guns on and go to court and go figure it out. So the year and a half that I worked there, I probably got five or six years of experience because usually you go to a firm and they start you off small and make you do little things for a while, but it was me. Here’s a good one. Household Bank during the first summer I was at the firm had this big nationwide, we’re going to get all of our big lawyers to come to Chicago and we’re going to go for three days and wine and dine and have meetings and do some stuff to figure out how we’re going to better represent Household Bank.
And so, they have all their regional council go and it’s all these guys who are in their 60s who have represented Household since their dad handed off Household to them 30 years ago, managing partners of big firms, all these guys. There’s like big room of four general counsel for Household and probably 16 or 20 lawyers from around the country and 25-year-old, this guy sitting there. And it was funny, all the other lawyers are mad looking at me, “What are you doing here?” And I’m like, “Because I’m their lawyer in California. Damn it.” So anyway, I was there a year and a half, and then I went to a mid-sized firm in Orange County and I was there 23 years. So this is a long way of saying my entire career I’ve represented creditors in various fashions. I used to do a lot of bankruptcy, a lot of creditors’ rights with defending their lawsuits, and I’ve probably had 7,000 or 10,000 plaintiff’s cases for creditors.
Kevin Kim:
Now this is mostly mortgage or kind of all kinds of creditors. Because I know we’ve been putting out a lot of content for your team about replevin and stuff like that. So you have some experience in auto, right?
Steven Ernest:
So yeah, lots of real estate both on the front and the back end of this and then through the middle, a considerable amount of personal property. So mostly vehicles, but I once went to court to get relief from the automatic stay in bankruptcy so that my client could repossess. I mean, this literally a weed eater.
Kevin Kim:
There you go.
Steven Ernest:
Doesn’t matter what it is, anything, whatever it is. Sometimes you see medical equipment, MRI machine, stuff like that. But most of it, it’s automobiles as far as personal property goes.
Kevin Kim:
So you guys have both been working in what I would consider kind of financial services, creditors. And Tom, you’re on the in-house side, the transactional side. Steve, you’re on the litigation side. I have to ask because I always like to ask kind of war stories about the biggest screw up you saw a lender make because one of the things that we always ask our lenders like what’s one of the biggest mistakes you’ve seen in a borrower make, and how can our borrower listeners learn from that? And as people who represent lenders for such a long time, what are some of the really big mistakes or big screws you seen lenders make?
Steven Ernest:
So this is sort of worse than a screw-up, but I had a case in trademark dispute in Eugene, Oregon that we went to trial on. And as it turned out, the clients, the assignment that he was using, he had claimed since it was 15 years prior, so mid-’80s back then, he said, “Yeah, I’ve got this assignment all through the case.” “Hey, I’ve got to find that document, we need the original document.” He goes, “Ah, I don’t know where it is, I got to find it.” I’m like, “Look, we’re pinning our whole case on this so you need to find this thing and we need to have it.” So we get to a settlement conference in front of the judge and he finally produces this thing. And the other side had the guy who allegedly had signed this thing in the other room and he walked in and said, “I never signed that. That’s not my signature.” My client had dummied up the principle piece of evidence that we needed in our entire case,-
Kevin Kim:
It’s a forgery.
Steven Ernest:
… in front of a federal judge and handed it to a federal judge, and that was a tough day.
Kevin Kim:
I’ve heard of borrowers forging documents. I’ve never heard of a client or a lender forging documents themselves. I mean, it’s an obvious statement, but audience don’t forge stuff.
Steven Ernest:
Yes, don’t commit crimes.
Kevin Kim:
Yeah. Tom, how about yourself?
Tom Hajda:
When I started working for the bank in Boston, it was shortly a year or two before Bank Secrecy Act. Well, one of the main impetus for Bank Secrecy Act was the bank I worked for. The bank made an extremely large commercial loan to a local business person who lived in the North End of the city. And every month, the principal of the borrower would come in with this loan payments to our North End branch and the payments were consisted of cash in a brown paper bag. And that went on for quite some time until it came to someone’s attention that this might not be an ordinary course proceeds. So when the federal authorities discovered that the borrower was one of the crime mobs or one of the major capos of the local crime mob, the bank got in big trouble. 12 months later, Bank Secrecy Act was enacted. So we learned from the ground up, you need to do a little bit of “know your customer before you lend”.
Kevin Kim:
Do some diligence. Yeah, know who you owe money still.
Tom Hajda:
Just a little bit, right.
Kevin Kim:
That’s a good idea. And what’s really funny is that these are very extreme examples, but I’ve had similar anecdotes told to me, and it’s fascinating how much you see that kind of stuff out there like how brazen some people can be.
Tom Hajda:
I think that’s right. I mean, the reason we have all these laws is something happened where Congress thought, “Well, maybe we better address it with legislation.”
Kevin Kim:
And that is a kind of good segue telling me you’ve become quite the industry expert and widely sought after when it comes to a lot of these esoteric laws and compliance issues that until even before you joined, we were completely surprised by a lot of these random rules out there. And it’s fascinating how little private lending is regulated, but also how much it’s regulated. And so, can you give us our audience an example of some of these esoteric regulatory regimes that you had to deal with? And we’ve had these conversations privately. So I mean, when you’re dealing with clients like things that are kind of commonly overlooked but are really esoteric regulatory regimes that they have to comply with as private lenders. Because a lot of folks out there, our audience think, “Yeah, private lending, hard money lending, there’s not much to it.” And I still get that question, but I like to hear your thoughts on that.
Tom Hajda:
So coming from principally of banking background, your private lending is completely at the other end of the spectrum. So even though there are a lot more regulations than people think, it’s still a lot like the Wild West thing, the way things were prior to Graham-Leach-Bliley and the collapse of the economy during the Bush administration. But in our industry, a lot of new businesses open up, they put out their shingle, they start lending and they go about their business and they think, “Well, I’m not regulated at all.” In fact, there are a number of laws that do apply that larger lenders have discovered now comply with, especially those that are affiliated with the large holding company or bank. But a lot of the traditionally consumer-oriented regulations still do apply to private lending. So, for example, many private lenders don’t realize that HMDA, the Home Mortgage Disclosure Act applies.
So if you’ve made 100 covered loans for two straight years, you need to submit a loan application register with a Consumer Financial Protection Bureau and that information then is collected so that statisticians and Washington can determine if you’re discriminating against a particular protected class. In addition, the Equal Credit Opportunity Act applies, which is really an anti-discrimination statute. So all of the regulations under ECOA apply including the notice of a right to copy of appraisal, notice of non-disclosure. And there’s really about 200 pages of regulations that deal with how you collect signatures and many of our clients really are unaware that those regulations apply.
All of the Bank Secrecy Act and know your customer rules apply, and fair lending applies. If you want to sell your loans and then they’re going to be securitized where banks are going to be involved, you need to comply with the flood regulations and they’re really a host of others that do apply. And a lot of this is really low-hanging fruit. So if in the future of regulators going to take a look at different compliance issues, it really would behoove a private lender to pick up the phone and give a call and just get a list of some of the requirements that they have and put some basic policies and procedures in place.
Kevin Kim:
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Very good. Steve, in a similar vein, you represent these folks when they’re now in a crisis, they’re being sued, they want to sue someone, now they’ve got a confit on their hands. In your mind, on the private lending side specific for our audience, what are some things that they can do to ensure success in those instances? Because litigation is oftentimes a matter of how prepared you are for, like you mentioned earlier, the guy didn’t have the evidence he needed. Is there anything that you found over your years that our listeners can take away that if I’m going to be entering into some disputes or maybe some litigation, I should take this to heart when it comes to preparing and being ready for that kind of stuff?
Steven Ernest:
So the compliance regulations are nearly so onerous in private lending as they are in consumer facing transactions. Most of our loans are commercial, so that makes it tremendously more easy for the folks to stay out of trouble, they’re not going to get calls from regulators to nearly the degree. But be good stewards of your documents, be good record keepers. Something that I see from our clients somewhat with a decent amount of regularity is you’ve may got your borrower and your loan and then you’ve got a guarantor, and they either forget about the guarantor or they consider the guarantor and the borrower to be the same entity or person. Now remember, whenever you’re making a modification to your loan, you have to notify your guarantor, and if you don’t do that, you probably have voided your guarantee.
Kevin Kim:
There you go.
Steven Ernest:
So just being on the phone with your borrower and extending terms or changing an interest rate or waving something, you never know how minuscule it’s going to be this mundane change that you think you’re making to keep them in the property or extend some terms or get the loan to be performing again. What you might have done is just walked away from $7 million of guarantee. So you really need to be careful that you’re giving notice to your guarantor of every modification to your loan. And a lot of clients don’t do that, they don’t think of doing it.
Kevin Kim:
Right. And there’s a lot of informality in how they approach the managing of their assets, the loan portfolio and servicing their loans. You see a lot of things you can call it subpar policy and procedure. And back to your point, Tom, like the whole policy and procedures concept, not just regulatorily speaking and how you manage to comply with all the regulatory requirements, but also how you’re interfacing with borrowers and not jeopardize the underlying asset because sound like to me that’s a pretty overlooked issue. I hear a lot of clients informally extend loan terms over the phone or via email and they don’t have anything formal in place. So it’s a good point for a lot of our listeners.
I want to ask you both a question about your initial reaction when you were first interfacing with private lending. What’s really interesting about this interview is that you both have a pretty diverse experience when it comes to creditors, all types of creditors. Tom, you worked with banks and credit unions and also loan servicing and private lending. Steve, sounds like you worked with all types of lenders. What was your initial reaction when you guys started interfacing with private lending? Because I know you both at your previous firms had your initial interaction with this industry. What was your reaction to? How did you respond to this space?
Steven Ernest:
The first sort of big case I had here dealt with a client that was fractional interest and there were, I think, about 35 investors in it. And it was strange to have 35 people that had equal and sometimes differing opinions on the same issue. And at least what I was accustomed to doing as a lawyer is you find the right person at the client on the phone and you talk to them and give them advice and then they get to make business decisions. And what you really want is your clients to take your advice, because if they’re not, then what do they need you for? But when you’re talking to the manager of this fractionalized interest and then he’s got to get back to 35 people and with those 35 people then come 16 questions and 16 different opinions, and it was unusual.
Kevin Kim:
Very much. I mean, the sponsor feels that same pain, he’s hurting cats at all times.
Steven Ernest:
There’s a strange set of circumstances.
Kevin Kim:
Right. And that was your initial reaction. It’s strange this is a very weird setup. Never seen this kind of arrangement before ever.
Steven Ernest:
Yeah. And sometimes things in litigation move at a very flirtatious pace, but sometimes decisions have to be made in by lunch tomorrow, we’ve got to get this one made. And somebody is taking the question back to 35 people and putting into a democratic voter. I don’t really know what was happening behind the scenes, but it was, guys, we got to get this bus moving.
Kevin Kim:
Tom, how about yourself?
Tom Hajda:
It was just a different planet for me. Many people who participate in the private lending space really view loans as a personal investment. So not only do you just have companies that make these private loans to standard borrowers, but you have individuals who say, “I view this as an investment.” And you might have two, three, four, five or more people all participate as lenders in a loan, the fractionalized loan that Steve was talking about. Or to divide it up, you may have one lender make the loan and then participate interests out to others where they have a contractual right to a flow of the loan payments, which I had never really seen before. Or if someone wants to fob off some of the risk of a loan, they can hypothecate. There are just any number of ways that people can slice the apple, and I’d never really seen that before.
In the banking world, if you want to introduce a new loan product or a new loan or customer, it goes through risk management, it goes through audit, it goes through legal and compliance, then you have to go to your board of directors and approve it, then you present it to your bank regulators. Here, people come up with thoughts, they call me up and say, “I think I want to do this,” and then they do it. And they don’t only do it, they do it in about a week, whereas the same process at a bank might take six to 12 months.
Kevin Kim:
Right. And let me ask you this as a follow-up question, Tom, because your clientele is pretty diverse, is the same I call it entrepreneurial spirit of consistent across the spectrum or is it more of the small lenders that are, I guess, you can call it creative when it comes to their designs?
Tom Hajda:
No, it’s a much more creative industry, principally because they aren’t so heavily regulated because they don’t have to go through so many channels. And our clients meet a very basic need, which is we need to get capital out into the marketplace and our clients can deploy it very quickly and creatively without having to go through a regulatory regimen. So because of that, I see much more diverse financial products and I see individuals really sitting down with their council, with their borrowers and with their accountants and really forging a partnership to try to figure out how to get things done. So creatively, it’s a lot more fun in this marketplace because you’re really not stuck within the formal architecture of loans like you would see within the banking industry. Here, I just see new things every day.
Kevin Kim:
And we are the main alternative. Well, we were the ones that said yes, and the bank said no.
Tom Hajda:
I think that’s right.
Kevin Kim:
Yeah. I want to switch gears and pick your guys’ brain when it comes to, I don’t know if we can call it professional advice, but a lot of our listeners are young professionals, new professionals, still figuring out get their seat legs underneath them. And I’d like to ask you guys, from a professional development standpoint, do you guys have any advice to folks who are listening and how to be successful as a professional in their careers? Because you guys have had lengthy careers, you guys have had done a lot in your careers and I consider you both very successful and you’ve achieved a lot. Anything for our listeners? I mean, personally myself as well, I’d like to ask you guys what you guys think about what do you guys think is one of the keys to success for a professional out there, whether it be an attorney or not?
Steven Ernest:
So you said seat legs so I put on the boat hat.
Kevin Kim:
All right. That’s a boat hat?
Steven Ernest:
Yeah, that’s the name of my boat, right there.
Kevin Kim:
For our audience, Steve is quite a sailor.
Steven Ernest:
It’s a funny thing now. And you said a young professional, so I alluded to the unusual circumstances that gave birth to my legal career earlier in the episode, but, that I know of anyway, there isn’t an alternative to putting in the hours. Everybody I know who’s been successful as a lawyer, at some point in their career, has been a big horse guy. Folks want to leave at 5:30 and go home and go do whatever they’re going to do. But starting out, you’re going to have to put in the 2,200-hour years, which are 200-hour months.
And there isn’t a substitute for that because what you’re doing is, like I said earlier, I didn’t know how to do anything when I finished the bar and got out of law school and so you’re going to have to learn it and the only way you can learn it is when the projects come around raising your hand and saying, “Yeah, I’ll take care of that and I’d learning how to do it.” Because every time you learn how to do it, somebody is paying you to figure something out and you’re putting that tool in your toolbox and you can take that anywhere you go. Whether you get fired or whether you quit or whether you start your own firm or do whatever you’re going to do, everything that you learn you’re taking with you and using this building block for your career.
And the second one is getting in touch with the client and letting them know that you care about them. Especially from a litigation perspective, I’ve never had a client in my career call me to tell me what a great day they’re having, they just don’t do that with litigators. It’s always a negative interaction when they have to deal with lawyers of my ilk and they want somebody who can take this big problem that they’ve got that they don’t know how to deal with and let them know, “It’s going to be okay and I’m going to take care of it for you.” So letting your clients know that you care and actually caring that you’re going to put the time and that you’re not just interested in writing down eight hours and sending them a bill at the end of the month, you really are going to take care of case.
Kevin Kim:
Clients can tell, they can tell whether you care or not and it’s very easy to for them to pick it up. That’s a good one. I like that. Tom, how about yourself?
Tom Hajda:
Well, from the client’s perspective, if you want to be a private lender and be successful, I think that you really need to take the notion that you can be a lender specialist and throw it out the window, you really need to be a master of just about everything to be successful, you need to start up a company, which means you need to get it formed. If you’re in a licensing state, you need to get it licensed, you need to understand how to employ people and what the employment rules are, and then you have to pay taxes and you need to understand financial accounting before you even begin to make your first loan. You need to know how to underwrite, you need to understand what some of the risks are. There’s a whole legal overlay and especially when Steve was talking about fractionalized loans, well, securities law issues come up.
I mean, even I had never really thought about securities with respect to just making a loan. So to be successful, not only the hard work and focusing before you start in raising the money, are you going to set up a fund? Do you have investors who are at your side, or are you going to try to leverage it and get a credit facility? There are just so many different things that a successful business person needs to know. And I’ve seen some incredibly bright, energetic young people who just dive in and they start saying, “Oh, well, I have to do this and I have to do that and put it all together.” But you need to be part lawyer, you need to be part compliance specialist, entrepreneur, business person, tax specialist, accounting, employer. So it’s really something.
Kevin Kim:
So have the diverse set of skills. It sounds like it’s-
Tom Hajda:
Really a renaissance person.
Kevin Kim:
Yeah, it’s true. Especially for the clients who are lenders, they have to have add multifaceted. I agree with that. A lot of our clients who are CEOs of the company, they wore all those hats until they were defined or grew to be able to hire those people in the long-term.
Tom Hajda:
Absolutely. You have two or three people who do literally everything for a few years, and as you start to grow, you have a marketing team and you have a legal group and you have a financial officer and salespeople. But wearing all the hats at first, you just need to really be a diverse person to make it work.
Kevin Kim:
So I’d like to ask you, because you guys have both also seen a lot of ups and downs in the market and being in the credit world, it’s now the end of November 2022. This episode is going to air early 2023 and it’s been quite the year and we’re still in for it, it doesn’t look like it’s going to get any better for the near future. I’d like to hear your guys’ thoughts on that and what our audience can do, not just our clients, what our audience can do and getting ready for that. And don’t say you call Geraci because that’s the obvious one. Anyone want to start first?
Steven Ernest:
I haven’t been through as many of these as Tom has, but this is my fourth recession as a practitioner. We had the Clinton one in the late ’90s and then we had the September 11th one and we had the 2008 banking collapse that Tom blamed on George Bush II a few minutes ago.
Tom Hajda:
No, it happened during his administration, but I wouldn’t claim a report.
Steven Ernest:
So the first three had a pretty predictable cycle to them sort of parabolic. The interest rates went up, and the property values went down and unemployment went up, and the economy went down and all those things happened naturally together as the recession rose and then it arched and came to the bottom and then everything corrected itself and unemployment went down, and interest rates went down and values went back up and all those things happened that is somewhat predictable. This one I think is markedly different. With inflation, I think it’s going to be harder for values to go down as steeply because every dollar that is a reduction in collateral value is really $30 or so in true reduction of collateral value because those dollars are inflated. So that’s one thing that I think is going to be different about this one.
Second, I don’t know that we’re going to see the defaults that we did, especially in the housing sector, because during the pandemic, I refinanced my house three different times and I’m on a 15-year fixed at 1.9%. So I don’t see all of these defaults because people aren’t going to let those loans go.
Kevin Kim:
In three months.
Steven Ernest:
They’re just not going to default from those. And so, there’s not going to be the defaults in foreclosures in repossessions and sales of REOs that cascades the drop in property value. I don’t think we’re going to see that, it’s going to be quite a lot different. It needs to be harder for folks to find places to put money than we’re going to see REO opportunities like that.
Kevin Kim:
So as a litigator, what would you tell our audience how to prepare for this incoming strange or this current strange recession that we’re in or about to enter? Because that is, to me, one of the worst possible case scenarios for this kind of recession because you don’t have foreclosures and we don’t have dipping values, but we have really severe volatility. Scares the crap out of me. So if that’s the case, what can our listeners do to prepare on just batten the hatches and pray to God?
Steven Ernest:
That’s another boating thing. Do you know what battening down hatches is? That’s a real thing.
Kevin Kim:
I’m sure it is. I’m sure it is.
Steven Ernest:
I leave that for a different Lender Lounge because I have an answer to your question. So one consistent in all of these recessions, in all of my years of gaining wisdom in this, when the economy is going down, clients, the creditors are generally loath to make expenditures related to their loans. That is, “This one’s failing, I don’t want to chase these guys around because it’s good money chasing bad money.” Well, when the economy is going down, that is the best time to lean on your deadbeat customers or borrowers because more than you don’t want to spend money on these things, they may not have the money anyway. So they are going to be extremely reticent to fund a defense if even one they have. It’s the easiest time to get judgements and to secure your judgements because they’re not going to tangle with you nearly as much as they would three years ago or five years from now.
And when you get those judgements, I call it fishing with 10,000 lines, you’re throwing a bunch of lines in the water and in a few years once you’ve forgotten about this borrower and this borrower has forgotten about you, an escrow company is going to call you or you’re going to get some wiring instructions and you’re going to get a big check and your money is going to show up and it’ll be one of the happier days of your life because a debt that you had long since written off, you might have to make some correcting entries is going to give you some money that just rains down on you. And now is the time to get those for a variety of reasons, but primarily because it’s the easiest and quickest time you’re ever going to have to secure those.
Kevin Kim:
So you actually say tighten up your policies and get a little more aggressive with your borrowers.
Steven Ernest:
A lot more aggressive now because like I say, they’re not going to fight you back now.
Kevin Kim:
Unless it gets worse, they’re just going to walk away. Is that seems to be the case?
Steven Ernest:
Yeah. And once you get a judgment, all of their defenses are merged into it. Statute of limitations, wrongful foreclosure, whatever their elder abuse, whatever it is they think they’re going to raise, once you have a judgment, those are all over. You’ve merged all those in and you’ve merged them all in cheaply, so you’ve bought yourself a great deal of peace of mind at a probably 30 cents on the dollar that pays you back forever.
Kevin Kim:
All right, cool. Tom, how about yourself?
Tom Hajda:
The past financial crises were more of a severe market correction or a confluence of events that really led to some devastating consequences. What I am seeing now is the fed incrementally raising rates again and again and again to try to stem inflation and it’s going to lead to perhaps a bit of a rocky landing. But the consequences that I’m seeing for a lot of my clients is really difficult to find someone to buy their loans. So if your business model is, “I originate, I sell, I get my gain on sale, I take my money and I do it again,” it’s getting difficult. For those lenders who have a portfolio model, I think they’re in a lot better shape. And those clients who are able to secure a bank warehouse line for example, are going to be in a lot better shape.
I’ve spoken with a number of aggregators and said, “What in the world is going on here, why is it so, why have you slowed down to what you’re buying?” But the securitization is a lot in large part of dried up because investors can get a higher coupon rate through other investments than these loans because here, you have a pool of loans at a fixed rate of interest and then all of a sudden rates go up and then they have this opportunity cost because then the new loans can go higher. And I said, “Well, what about those lenders who specialize in the longer term like 15, 30-year loans, rental property loans for example? If the loans are adjustable rate and tied to so for Wall Street Prime or the like, will those be easier securitized?” And they said, “Absolutely.” And there is a fairly robust market for the purchase of adjustable rate boards.
Kevin Kim:
Yeah. Rental came back in a big way like the DSCR programs.
Tom Hajda:
Exactly, with the adjustable rates, but a lot of the borrowers are still resisting adjust rate loans because they like the certainty of fixed rate. So I foresee in the rental market there being a lot more arms and I think then those loans would be a bit more liquid. And so, if lenders are able to maybe pivot and do more of those loans, I think they’re going to be a lot better off in this market.
Kevin Kim:
So for our listeners out there, if you aren’t already doing them, DSCR loans with adjustable rates, start doing them because seems to be there’s a little more of an opportunity there than you’ll find in your traditional asset class.
All right. I want to change gears again and actually, this is the one big question I wanted to ask you guys on this show was kind of like, this is kind of war story time, I wanted you guys to tell me about something that you’re really proud of in your career, a little bit muscle flexing time, something that you did or an accomplishment in your career over the past few years that you’re really proud of and why it was significant to you as professional. Steve, I know you’ve got a few of these, come on.
Steven Ernest:
I keep going first. Tom, do you want me to go first again?
Kevin Kim:
No, it’s okay. You get Tom to prep.
Steven Ernest:
So I had an antitrust case go to trial in San Mateo about, I don’t know, six or eight years ago. And I was defending the world’s foremost luxury car manufacturer. You can probably figure out who that is. And the plaintiff in it was this chain of autobody shops that was affiliated with the dealerships for this luxury auto manufacturer. And when the case started, they wanted more than $1 million of damages. Cases start you always, “Well, what is it that you want?” And they wanted like $130 million or something and well, that’s not going to happen, just going to write you a check for that. And so, the case went on forever. We were all over the country, probably 50 or 80 depositions doing all kinds of stuff.
And the number eventually came down to about $50 million, which isn’t qualitatively from a settlement standpoint different from $130 million because we valued the case at less than $1 million anyway, we thought the case was soaking wet worth about $4,000, but it doesn’t dispel them from getting themselves in front of a jury. So what I did is strategically took bites out of their possible damages and one of the elements of damage they were seeking was this business interruption or loss of business. And then they projected that forward and they had an economist and a couple of different experts who described how those damages were the result of what my client had done.
And I don’t want to get too much into foreign languages in the weeds, but we brought these motions in limine to strike those damages before the trial started. And one of those was granted so that they couldn’t put on their economist and their business guy and all of this and they couldn’t claim these damages at trial. And so, with the stroke of a judge’s pen before the trial even started, the possibility of their damages changed from about $45 million to, if I remember correctly, $370,000. And the client, the general counsel of this corporation was sitting in the gallery in the first row, when we won that, we walked out in the hall and he goes, “That is the damnest thing I ever saw in my life.” That’s what general counsel’s offices at clients do is they evaluate risk.
And when you walk into court thinking, “Well, if this goes as badly as it could, it could cost us $50 million.” And you walk out and as badly as it’ll go, it’ll cost $375,000, you can imagine how happy they are. And we went through I think a three-week trial on that case and when it finally ended, we defensed it so we didn’t have to pay them anything and they had to pay all of our costs, which was kind of fun. It’s fun to send them that bill and say, “Thanks for suing us for all these years. You can pay our bill now.” And they have to. They sent us a check, so that was [inaudible 00:57:44]
Kevin Kim:
That’s vindicating. I like that. I like that. I like these kind of stories because that little vindication at the end is quite satisfying. That’s really nice. Tom, how about yourself?
Tom Hajda:
Well, I guess my proudest moment was really helping the bank, which I was general counsel navigate and survive the 2008 crisis, a lot of banks failed. And our principal product line was mortgage loans, which was really precisely the problem with the market. And because we ran a very sort of strict risk conscious mortgage lending program, we didn’t allow the liar loans in a lot of the crazier programs, but the regulators were really concerned. I think everyone was afraid at first, including the regulators and they clamped down, and the government said, “We can make this tarp money available to banks.” And we were able to avoid taking that money and there are all these special regulatory actions that were being taken against the banks and trying to do that and navigate losses and working with the management team. And we came out stronger than ever and it is probably my proudest moment.
Kevin Kim:
Wow. I don’t think I know a bank that’s a no tarp. That’s fantastic.
Tom Hajda:
Yep.
Kevin Kim:
That was cool. All right. Okay, so the last segment of our show is going to be asking questions kind of rapid fire about a little more about you guys personally. First question is, what was your very first job?
Tom Hajda:
Well, I guess, I’ll start this time. So I’m older than anyone else in the firm and back when I was young, when you went to a gas station, there was actually a person who would pump your gas for you and they’d wash your windows and check your oil and that’s what I did.
Kevin Kim:
You were a gas station attendant?
Tom Hajda:
I was the gas station attendant. And I would do all of that work and come up and say, “How are you?” And then take the money and walk in. And when I was trying to get my first serious job and I was putting a resume together, I didn’t really know what to say, so I put down petroleum transfer engineer and then I had a lot of interesting questions.
Kevin Kim:
I like that. I mean, I still exists in New Jersey, I think. Steve, how about you?
Steven Ernest:
So I was born in Southern California. I’ve lived here my whole life. And when I was in high school, my first job was at a car dealership. And when people would buy their new Toyotas during the ’80s, they didn’t know how to use the radio and the air conditioner and open the sunroof and all that kind of stuff. So the salesman would sell them the car and then take them to finance to organize the payments and sign the papers and all that, and they’d come back out and the salesman didn’t want to talk to the customer anymore because anything they say they thought would potentially blow up their deal. So my job was to take the person who had just bought their car and show him this is how the radio works, this is how you manage the equalizer, this is where your oil dipstick is, this is how you open the sunroof and all that kind of stuff.
And the car dealership I worked at Anaheim Toyota isn’t even there anymore, it’s over by Disneyland and they’ve torn it down for commercial purposes. But there was a terrible dealership and they didn’t sell very many cars. So all I really did at my job is I’d go sit in this office and do my calculus homework, I’d just sit there for hours and do my high school homework because they weren’t selling any cars, so there was no customers for me to describe anything to.
Kevin Kim:
All right. Next question is, what is the one business tool that you cannot live without?
Steven Ernest:
I know it. Can I go first again, Tom?
Tom Hajda:
Yeah.
Steven Ernest:
So I’m a hugely competitive person. I went to graduate school at the U. And as a litigator, you have to be competitive. It’s a zero sum binary game, somebody is going to win and somebody is going to lose, and you have to have a lot of fight in you. There has to be plenty of aggression and know how to manage it, but it has to be there. This isn’t sort of a clock in and clock out job, you’re going to be worrying about your cases all night long. And if you like to fight, if the fight is in you and the aggression is in you, there can be a great deal of success for you in this practice. But without it, it’s going to be unpleasant and a long road for you. I don’t think it’ll work.
Kevin Kim:
So it’s a mindset, or it’s the hat. Is it that actually that particular hat that you have to have at all times?
Steven Ernest:
Don’t ever touch that hat. I only have one hat left, too. I’m hopeful the next question will lend itself to it, but I’m down to one hat that you haven’t seen.
Kevin Kim:
But I like that the competitive and the mentality is important. Tom, how about yourself, is there any particular tool that you just cannot live with without?
Tom Hajda:
Well, like the caveman, which existed when I was young, I had to create my own tools. So a lot of what I do, Kevin, is compliance regulatory and it differs in every state. So over the last three years and actually the last five years, I did it when I was general counsel at the company, I started up private money business was to put together my own surveys, my own charts, whether it’s federal requirements or state requirements. I’ve literally spent thousands of hours putting those tools together. So when a client calls me up or I get an email, I know exactly which survey or which chart or which tool that I’ve built has the answer. And I can go to that and be very cost effective and timely in getting back to my client and answering the question.
Kevin Kim:
So, that’s survey. And that’s a widely used tool then in the office and also with clients that purchased them. All right, guys, this is the last question of the episode we’re going to ask you guys. What do you guys do when you’re not out there kicking butts and taking names as the big brain and the guy that sit on next? What are you guys doing? Steve?
Steven Ernest:
Sure. I have two wonderful children and a lovely wife at home and I race sailboats, so I spend a lot of time on and around boats. And if you don’t like chores, boats are not a good hobby or activity because there’s always stuff to do. But we’re getting ready next year, 2023, we’re going to race in the springtime to Cabo and during the summer to Hawaii.
Kevin Kim:
Very cool. Very cool. I don’t know anyone else in this world that does that, which is a really cool thing, Steve. Tom, how about yourself?
Tom Hajda:
Really cool. Yeah, I have nothing exciting like sailing, but I love to eat and drink.
Kevin Kim:
So do I.
Tom Hajda:
It’s not always convenient to run out to a restaurant and the part of Florida where I live doesn’t necessarily have the best restaurant, so I’ve learned to cook and I really enjoy it. After doing lawyer work all day long, it’s really nice to do something very different. So cooking is the opposite of practicing law. I can start and I can finish in just an hour or two, then I get to eat it.
Kevin Kim:
Right. And it’s creative too, it’s fun, right?
Tom Hajda:
Exactly. Whereas a lot of times practicing law, although I love practicing law and I’ve done it for a long time, it’s not always as creative a process, it’s doing something like pulling out a cookbook and starting on something completely different.
Kevin Kim:
I like that. All right, guys. Well, I think that’s all the time we have for this episode. To our audience out there, thank you for listening to this episode of Lender Lounge with Kevin Kim. This time, we had the great pleasure of interviewing Steve and Tom and I really hope you listen to this one. Look out on the next episode coming soon to Spotify or Apple playlist near you. This is Kevin Kim signing off.
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