White Labeling, Correspondent Lending, and Table Funding: Understanding The Differences and What Works Best for Your Business

Melissa C. Martorella:

Welcome everybody. Thank you for joining Nema and I today. We are really looking forward to talking to you about white labeling, correspondent lending, and table funding. We're going to go over the differences between these options and talk about what might work best for your business. Really looking forward to doing that. If you are in this webinar and you are hoping to share this material with somebody else at your team later on, know that yes, it is being recorded. And after the webinar today, we will send slides and the recording information where you can find it on our website. Fun fact, you can find all of our past webinars on our website. You just have to go in there and search for what you want. It's all free to use, so feel free to look at that at any time. Separately, there is a couple of different options or there are a couple of different options on your task bar that you'll see.

One is a chat box. Please don't use a chat box for your questions. It's not really monitored. So if you have any questions for us throughout the webinar, we will do a q and a at the end, but for that there is another little box. You might have to click the more button to drop down if it's not readily available to you, but it's called q and a and you can put your questions in there and at the end of the webinar, Neman and I will go through those questions and answer them live for you.

I think that was it. Were those all my housekeeping items? I believe so. With that, welcome. If you don't know me, my name's Melissa. I'm one of the partners here at Geraci. I manage our banking and finance team, and the primary thing that we do on our team is advise lenders how to make business purpose loans secured by real estate nationwide. So we deal with lots of compliance related to that and then we draft the loan documents. We help to close a lot of loan documents and then anything related to that loan, whether it's related agreements, forbearances here in California, we can do non-judicial foreclosures, but really anything related to that loan. That's what me and my team are here to do for you. And then with me today, I have Nema.

Nema Daghbandan:

Hello everybody. Nema Daghbandan here now with Lightning Docs. So Lightning Docs for those that do not know is the software product that was originally created in-house at Geraci LLP, but is now a standalone company, is a tool that people can use to generate business purpose loan documents anywhere in the country.

Melissa C. Martorella:

So with that, we will get started today. Agenda for you all, what are we talking about? We are going to go over table funding, white labeling, correspondent lending. We'll talk about the licensing frameworks that may be at play. For each of these options, we'll talk about loan docs and counterparty documentation for each of them, a couple practical advantages or disadvantages, and then we'll go through a q and a. So bear with us. It's not too much content, but it can be a little confusing at times. So happy to answer any questions you might have at the end. So to get started here, let's take a step back really quickly and ground ourselves. What are we not talking about today or what do we not mean when we're talking about white labeling and correspondent lending and all of that? The first thing is you hear these terms thrown out and there might be other names for these as well, but direct lending, balance sheet lending, and retail lending.

We're really not talking about that today, but we'll use it as a framework to kind of ground us. In all of these scenarios, what this means is that the lender is using their own funds to directly fund a loan to a borrower. So Nema comes to me and he needs a loan for whatever his business purpose use is, and I say, sure, I have that money. I will give you Nema some money. I will lend you that loan. Lender, borrower. I'm direct lending, I'm balance sheet lending, or retail lending. I'm not intending to sell that loan necessarily. I'm looking to hold that loan and collect the income stream from it. And then when Nema pays me off, I reconvey the loan or the deed and we move on. That's really basic what that is. There's no third party capital provider. There's nobody sitting in the background with a line of credit or that we're selling these loans to.

I'm really just intending on making these loans and holding them myself. Because of that, as the lender, I will choose my own loan documents set to use. So obviously I'm hoping that you all choose to use Geraci or Lightning Docs, but you're free to use whatever you want, whatever the lender likes and chooses, those are the docs that will be used for that transaction. And then the last consideration that you'll want to think about here is depending where the property is located, what state the property is located in, I might need to be licensed as a lender to make that loan to Nema. Here in California for example, I would need to be licensed. There's exceptions to that, but that's just an example versus if I went back to my home state of Massachusetts, I would not need a license to make that loan to Nema. So it really just depends on where the property is located for that loan. Nema, anything to add?

Nema Daghbandan:

Yeah, and this was the traditional business model of our entire industry all the way up probably until about 2015. This is, they call it the typical mortgage fund model where when we say lender, it doesn't mean this individual, it could be an individual, but more often than not, we're really just talking about your typical business purpose lender that has their own funds usually raised from investors, and they're lending those funds out directly to their borrowers on a retail operational standpoint.

Melissa C. Martorella:

So then we will be adding to this table as we go through the webinar today and adding as we talk about each kind of loan type or lender type. So as a summary here for direct balance sheet or retail lending, when we're talking about loan documentation, it's the lender's choice. They get to do that and choose which documents they want to use. Other documentation, there really is none. There are no other parties you have to worry about. So you're really just looking about that loan document set between the borrower and the lender. Licensing as we mentioned, that lender may need to be licensed. And then finally, any other considerations? This will make a little bit more sense later on. It seems probably straightforward here, but the lender is named as the lender on the loan documents. As we get through some of the other types of loans, you'll understand why we've made this distinction here, even though it seems pretty straightforward.

Then moving on the next one, what about wholesale lending? We hear this term thrown out quite a bit as well. Same scenario. Nema comes to me and he is looking for a loan and I make loans perhaps, but I can't fund that loan either. Maybe it's too large for me to handle. Maybe I don't fund that type of loan typically. Maybe he's looking for a fix and flip loan and I just don't deal with construction or rehab and that sort of thing. But in any rate, he's come to me looking for a loan and I cannot fund that loan for Nema, but I know a lender who might be able to fund that loan because they can go up to that loan size, they're familiar with construction loans, whatever the case may be. I have a referral for Nema, so I will make that introduction over to that lender, but I might stay on here as a loan originator because I've been introducing the parties.

I might help process that application, the loan application with the actual lender, maybe Nema and I have a relationship, and so I'm helping to guide this process through with this new lender. You never know, but so I'm kind of playing the middleman. I'm really brokering this loan transaction at the end of the day. Our borrower, a key fact here, is our borrower knows that the lender that's going to be on the loan documents and is going to fund that loan is not the same as me, the loan originator. They know that we are two different people. It's very clear. It's obvious based on communications, things like that, that I am a different party from the person ultimately funding the loan. And then finally, I will oftentimes we're the loan originator will oftentimes receive a fee at closing or some other compensation from the lender. So that might be a loan brokerage fee, it might be other compensation, could be maybe I get a yield spread of some sort for setting up that loan with this lender. There could be all sorts of different compensation that I might receive as a loan originator for setting up the loan between Nema and that lender.

Nema Daghbandan:

Yeah, that's exactly right. And you're already doing this. I think people oftentimes don't use the terminology of wholesale or think of themselves as wholesale, but if you've ever had a third party origination, you probably think of TPO is probably the natural language you would think about this, which was a third party origination. Some third party has brought to you a transaction that could be a broker, don't have to be a broker, it could be a lender, as Melissa already said. It doesn't really matter, but it's some third party, not the borrower directly that has brought the transaction to you in which you are the wholesale lender, similar as you may have been in a situation in which you don't do the transaction. You are a lender by default, but it's not a loan that you do. You only do short-term debt financing and you have a DSCR loan or a long-term rental loan brought to your organization for financing. And you guys don't do that in-house. So great, we will find a wholesale lender to send this borrower to and it'll close in their name. And you are really acting in a broker capacity. You may not call yourself a broker or think of yourself as a broker, but in reality, the loan is being moved to a lender who does not have a relationship directly with the borrower and you are bringing that borrower relationship to them. And now they are a wholesale lender for purposes of understanding the framework we're about to discuss.

Melissa C. Martorella:

And so kind of bringing up that chart again to go through for wholesale lending, same kind of thing. It's lender choice on the loan documents. So now I'm sitting here as that middle party between my borrower and my lender. It's no longer my choice on the loan documents. The lender is going to guide that because ultimately it's their loan. So it's lender choice there for other agreement or other documentations. There might be a broker agreement between me and that lender might outline how I get paid when I get paid, how much, any other terms. I might have an exclusivity agreement with that lender. There could be. It's really limitless options here, but you should definitely have an agreement like this in place if you are that loan originator, that broker, it helps to protect you to make sure that when you're getting paid, it makes sense and it happens properly. And then the same thing for the lender, making sure that things like we were talking about here on the next little part on licensing, maybe I would need to be licensed to technically broker loans in a certain state, making sure that I represent in that agreement that I'm properly licensed to broker that loan to you. So really making sure we're protecting each other as this goes along.

Nema Daghbandan:

And we'll drill down on a few of those concepts. Melissa talked about it a second ago about compensation, right? So how is this loan originator compensated that would go into the broker agreement, right? Is the broker compensated? Will they be listed on the settlement statement of the closing saying here's some origination fee or broker fee, or how will you get considered? Or is it really something that's going to occur after loan closing where for example, if you can bring me DSCR loan and my current rate on DSCR loans is six and a half percent, but you bring a borrower who can do 7%, is that that strip is that split between the funding party and the originating party, right? So how are you compensated in what forms? It could be both of those things. And Moss already identified, well, there's probably some reps and warranties that are going to want to come because since this wasn't a retail transaction anymore and the lender didn't know who the borrower was, and they might intentionally try to keep some sort of guard in between there where the loan originator has that relationship and they don't really want the wholesale lender to be the primary communicating party.

And so you're going to be worried about potential misrepresentations of the loan originator. You're not sure what they're saying to this potential borrower. So you're going to want to make sure they're rep and warranting that they're not going to make any sort of misrepresentations and that there's recourse that they do. And you can structure the agreement kind of based on the trust environment that you have with that originating party to make that determination. And then licensing is a really unique one because you inject a ton of licensing nuance all of a sudden, because we're in that great state of California as an example, you normally need to be licensed as a mortgage lender to make even a business purpose loan in California, you typically either need to be licensed as either a California finance lender or you need to be licensed as a department of real estate broker.

Both of those licenses permit lenders to make loans, but there's a big exception to either of those. And that's any loan which was arranged, brokered effectively by a licensed real estate broker. So if there was a licensed real estate broker who arranged the financing, well then the lender here, the wholesale lender does not need to be licensed in California. You'll find that play out in many other states as well, in which they will say, this wholesale lender, this party who is really just funding the loan is the way that the states think about it. So long as they're not involved in actively trying to originate the loan, they're not the one receiving the application and being really borrower facing. If the lender is willing to play this true passive wholesale lending capacity, many states will say is, well, we don't really need a license there because we are not borrower facing. The loan originator likely needs to be in those licensed states. Your Arizonas, your Californias, Utah, many other states have some form of licensing that's required, but typically it's the loan originator's obligation to be licensed. And the wholesale lender is often exempted from licensing in the situation.

Melissa C. Martorella:

And I think another really interesting factor here too is so you have that in California, that kind of example, but also as we kind of talk about 50 state licensing generally is two comments here. First, there are some states where a lender does not need to be licensed, but the broker does. So it's just an interesting nuance that will pop up in this scenario. And then second too is I often get the pushback that they aren't a broker, this loan originator, that third party intermediary, but it's truly the act that you're doing. You don't have to tell the world that you're a broker, but really what the law cares about and what the statute cares about is the activity you are performing, which would be brokering. And so we would take a look at that activity and make sure that activity is licensed. And then last item here, other considerations, same as the last one, the lender is named as the lender in the loan documents, the loan originator, that middle party is not on that transaction. They are not funding the loan.

All right. Onto the real stuff. What you came here for, sorry, everyone. We had to lay the foundation though. So up first we have white labeling. This is almost identical to wholesale lending. So everything that we just talked about right there, very, very similar, almost identical. There's just one major difference. And that the borrower is often unaware that the lender and the loan originator are not affiliated. And so in that last example, Nina's a borrower of mine, he comes to me for that loan. I'm like, Hey, I can't fund that one. Let me introduce you to John who's going to fund this loan. In this case, I want to pretend to Nema that I am able to fund this loan. And so I might still be getting John to fund this loan, but the way we're setting this up is it still looks to Nema that it's me.

And so oftentimes the way that the lenders will do this or the parties will do this, is the lender who's actually funding that loan transaction will come up with a funding entity with a generic name like funding lender, LLC or something like that. So it's really generic sounding that I can be like, oh yeah, that's my funding lender, LLC for this type of loan transaction. And so it's under the guise that that loan originator is actually funding the loan. So it kind of creates almost like a veil between that originator and that lender. Because of this, the loan originator may or may not receive their compensation through the loan closing. There might be a separate agreement between the actual lender and the loan originator. Similar issues do still arise here about brokering and that sort of thing. So it can get a little messy in certain states with licensing. So it's still something to pay attention to. But otherwise it's this exact same scenario. You have a lender who is one party, a loan originator in the middle who is another party, and then the borrower from the borrower's perspective, it's not clear that the funding lender and that loan originator are different people.

Nema Daghbandan:

That's right.

Melissa C. Martorella:

Yeah. So going over to this little chart, some similarities here on the loan documentation side, again, it is going to be the lender choice because they are the ones named on the loan documents. You'll also want to consider all those agreements between the lender and the loan originator, just like you would in wholesale lending. And similarly on licensing, that lending entity may need to be licensed and that loan originator may need to be licensed as a broker. So all of those considerations are the same. The other considerations, this is where it gets interesting. So obviously the lender is named as the lender on the loan documents. We talked about the lender name being generic so that it's not obvious that it's separate from the loan originator. And the way that you effectuate this in reality is usually there's a law firm or some other third party involved that speaks for the lender that's keeping things together. There's usually different chains of emails involved so that the borrower is not on those threads with the actual lender. There'll be on threads with that loan originator with title, things like that, but they will not be on any sort of thread with the lender. And the law firm is giving and directing advice about the closing, about funding authorizations, about feedback, about the closing documents, setting, closing dates, things like that to really help facilitate that almost facade that it is the loan originator funding the loan when in actuality it's the lender.

Nema Daghbandan:

And that's the really interesting thing about white labeling because, and there's a reason why we spend so much time talking about wholesale lending. It is identical. That is truly what you're doing is you are in fact just a wholesale lender. It is all an artifice. It's all on the practical side of this, not the legal side. The legal framework is identical. There is a third party funding company that's occurring. The loan documents are in that funding company's names. The licenses are the identical license paradigm, which is that company. For example, if you're going to set up a wholesale lender shop in California, you would have the exact same licensing paradigm that would occur here. Is this company properly licensed to make a loan in the state of California? You'd have to answer that question. Maybe there's a wholesale exemption available, maybe it's not. You'd have to understand, but it's an identical legal scenario that we just discussed when we talk about wholesale lending.

So that's I think the biggest demystifying component, which is you're already doing this. Chances are you're doing this in your day-to-day interactions. Either people are bringing UTPO or you are in fact a third party originator for someone else already. And so you're already doing this practice. The only real nuance here, and now we start getting into the practical, it's really this other considerations. That's where the rubber starts hitting the road for purposes of white labeling. The very first thing is you operate under your own trade name today, right? You have probably a lot of brand value under that trade name. Well, guess what? Your third party originator does not want to bring in that trade name into this business. That's the whole premise of this is they are able to market themselves the loaner originator as a direct funding source. That's their goal in this.

And so all of that goodwill and all that hard work and all that licensing structure that you had under your operating company, your lending company, if you are a person that's interested in being this white label lender or this white label funding source, all of that gets thrown out. You can't use it anymore. You can't use your company's name, you can't use your company email signatures. You can't use all the things you've built up for at this time because you would give away right away in the transaction, says, oh, well, I could have just gone to this company in the first place. Why would I go to you originator? You said you're a direct funding party, but I'm just working with this. I'll just go to this company directly and I'll work with them rather than needing to use you at all originators. So now you've got to do some operational steps, right?

Because obviously the loan originator doesn't want that. You want to work with that loan originator. You're trying to grow your volumes if you're trying to be this white label lender. And so now you have to go create this fictitious, or not fictitious, but this generalized company that could be any lending company in the world, right? I mean, is it a B, C lender or whatever? It's some extremely generic name that can be used in all contexts. That doesn't trace back to anything per se. If you Google search this thing, does it show up all over the internet, right? What is this company? How is it tied to who is it tied to? And if you had licenses, so for example, if you were in Arizona and you're operating under a mortgage banker license, well guess what? You still now need to get that company licensed with its own mortgage banker license.

It has the exact same licensing requirements as your previous one. So you've got to spend some time if you want to do this, there's a buildup game to get you there, right? Because all of those things that you did previously with your current lending company, now you need to recreate with your white label company option. And then the last part of this is really making sure that you have the practical closing dynamics figured out. How are you going to close this load? How are you going to make sure that the originator can go out to their borrower and say, yep, I'm the funding company. We are related to one another without ruining that customer service experience from their perspective. So how do you have separate emails that now get injected at closing? Are you using a law firm to try to be that intermediary? What are you doing so that the borrower really doesn't realize that at the end of the day is they're not actually working with the originator anymore, they're really working with you. And so how do you structure the closing dynamics to create that and how much brain damage do you want to do to get you there? And that's typically why law firms are introduced so that they don't have to go through all of these closing dynamics and they can kind of hand it off to the trusted intermediary to actually manage the closing process for them so that they're not exposing their internal team to the borrower directly.

Melissa C. Martorella:

Absolutely. And so with that though, we will move along and we'll talk about table funding, which is oftentimes, I think sometimes confused with this, but we'll get into that. So table funding is very similar to white labeling except the loan originator is naming themselves as the lender on the loan documents. So there still might be the same arrangement where a law firm is sitting in the middle here helping to fund the loan and close the loan and negotiate with the parties and deal with all of that. The main difference though is instead of having that lender as the named lender on the loan documents, the loan originator is going to put their name on the loan documents. And what happens is concurrently at closing an assignment from that loan originator to the actual lender who's funding the escrow is going to occur. And so essentially that loan is being sold at the table from the loan originator to the lender again.

So that's oftentimes you do see attorneys involved or law firms trying to do the same thing. The loan originator has very similar goals here as they do in the white label scenario where they are trying to represent that they have the funds to make the loan. They don't want it known that there is a lender sitting behind that is actually funding the loan, but the entire time they're intending to sell that loan or really have somebody else fund that loan in that transaction except here because the loan originator is on the loan documents, we need now an assignment. So we need an extra document and an extra title endorsement to your policy to effectuate that.

Nema Daghbandan:

Yeah, I think if you're a loan originator, this is the holy grail, right? Because in the previous example, in the white label one, you're trying to create this structure which appears to relate you to the funding source, but in this situation, your borrower truly has no idea that you are not the funding source because you're handing them a set of loan documents with your company's name, your brand identity. It's all sitting there at the loan closing level. And so for all intents and purposes, you are the lender. And so it gives your, particularly for those that have these really significant TPO relationships and which you're getting a lot of volume from a particular originator and you trust them, you've got a good working relationship with them, they're almost like a contractor for you at this point. You're really an extension of your company. And so other than acquiring them, this is the next best thing, which is let me get your deal flow into the door. I'll continue to be a reliable funding source for you, but I'll give you all the appearances of a direct lender relationship.

Melissa C. Martorella:

So a few things here that we'll talk about. Interestingly on loan documentation, it's still the lender's choice because even though that loan originator is now named as lender on the loan documents, it is being immediately sold to the actual lender, to the table funding lender that's funding the loan. So that table funding lender is going to determine what kind of loan documents are used in the transaction. So interestingly enough, even though they're not named on the loan documents, it is still their choice. Other documentation is very similar in the sense that you still want an agreement between that lender and the loan originator payment and all of that stuff that Nema talked about earlier. That's all still very relevant here, if not even more so when you're talking about now there might be underwriting considerations and things like that in order to have these loans assigned immediately at the table.

So there might be other agreements that outline the types of loans that these loan originators can set up for table funding because the table funding lender is still likely involved at some point with the funding of this loan transaction that might be part of the underwriting and processing of that loan before it's actually approved and then funded. But still, it'll make it easier for that loan originator to go out and get loans and bring them for funding if they have an underwriting guideline or box for 'em. Other documentation too, we talked about that assignment. I mean, really what is happening here is the loan is being sold. And so we have to think about it that way. In the way that you've transferred that interest in the loan from the loan originator who's named on the loan documents to the lender is via that assignment.

And you would a couple that with a title endorsement, assigning the title policy over from that loan originator over to the actual lender licensing. Very similar licensing considerations, except that loan originator may need to be licensed as a lender now, not just as a broker. They are the lender on the transaction, then that lender may need to be licensed to really purchase that loan. So you'll be thinking about that. And then also though, an interesting consideration is a licensed party might be required to sell the loan depending on the state and the laws in place about buying and purchasing loans. That may be a consideration. And then the last little thing I'll talk about here is California prohibits us. I think it's the only state that does, so you can't do this in California. We're sorry. I know everywhere else you can do this. You can't do it here. Unfortunately.

Nema Daghbandan:

This is an interesting situation, and we're often asked and tasked in a situation like this, which is, what should I do? Because is a white label table fund. How should I think if I'm going to build a program, what should I build? And it is easier to do a table funded loan from a licensing structure question. It's actually much easier to go and table fund loans than it is a white label. You're not getting this new company formed, created, and then you've got a bunch of licenses that have to then flow with that company. So in the table funding context, you don't have to do any of that right in the table funding context. And then your originator loves it, right? Because they are, in fact, they go out to the world and says, I'm a direct lender, so I prove it to you. I've got loan documents that say I'm the direct lender.

It's a win-win on that side of it. But there's additional Now, formality in the closing process, you originally recorded this deed of trust or mortgage, and that de of trust has got the name of the originator. It has to get assigned to the funding party. And now you've got to make sure that happened, right? So did title actually record that deed of trust or mortgage and immediately record that assignment? Does your title policy show that chain of title occur as well, right? So there's a little bit of a post-close follow up versus on that white label, which again just looks like a wholesale, is it closed in the name of the funding party? So that step doesn't exist if you did it in a white label or a wholesale lending where you did inject this whole new concept of an loan origination and a loan sale now occurring at the exact same time.

And that takes a little bit of more post-close qa, QC to make sure that you actually did this correctly. But it's great for your broker originator. They're going to love that. But typically what we see in this situation is this sort of table funding program does not make sense at scale. And what I mean by that is you should not, it would be very hard to implement this with every single originator in the world because they're going to have to understand the formalities. So for example, if Melissa comes to me and she's the originator and I'm the funding source, I've got to explain to her, Hey, I'm going to send you an original assignment and a launch. I'm going to need you to sign that. You're going to have to send that to the closing agent along with the loan documents. They're all going to have to happen 'em at the same time.

So you'd have to train every single originating party that you work with. Hey, here's the mechanics of how to close this loan and it be unfamiliar rather than if Melissa's my primary TPO party, it makes much more sense. Look, I'm going to teach you this once and we'll build out a system so if you've got five people or whatever that look like this. And so oftentimes you kind of have people that might have both a white label and a table funding. The table funding tends to be for those really strong relationships in which they're a higher trust environment, and you're really trying to give them an ability to scale their business. And you would've, as a lender, probably thought of them as a company you could have potentially acquired. At the end of the day, that's kind of the relationship without having to go through the headache of acquiring them is you just become a dedicated funding source to them, almost like a warehouse line of credit or a forward flow capital markets participant.

It's a very similar arrangement, but you're doing that for your originator rather than your capital markets partner doing it for you. The other thing that I like about this arrangement or table funding specifically is that it tends to be less licensing intensive. And so let me give you some concrete examples of how that plays out. In the state of Michigan, you do need to be licensed as a real estate broker if you're going to arrange or broker a transaction. So let's say you're in the white label or in the wholesale lending example. If you are the loan originator, you must be licensed as a real estate broker to be borrower facing and to transact there, right? It doesn't matter whether it's wholesale or white label, the broker would've had to been licensed as a broker. But interesting enough, if you're in the state of Michigan, you do not need to be licensed as a lender to make a business purpose loan.

So here in this context is well, who's the lender for purposes of the regulatory environment? The lender is the loan originator, right? They're the ones named on the mortgage in Michigan. So they're going to close the name, they're going to close the loan in their name, and therefore they're able to bypass this whole licensing regime altogether because you don't need to be licensed to be a lender. You do need one to be licensed, or sorry, you do need to be licensed as a broker, and therefore, unless you're the named lender, you would've needed to be licensed. So it actually can play out oftentimes to the advantage on the licensing side by using this table funding arrangement. And you can bypass states like Michigan, new York's, another example that comes top of mind. I think New Jersey has a similar rule set. There's a few states that give you a little bit of a competitive advantage by using this approach rather than the wholesale lending or the white label approach.

But the biggest pain in this whole situation is you do have a loan sale that's occurring contemporaneously, and that causes friction, right? So if you kind of think about it as you've got a title policy, did that title policy come back and actually name the funding party as the true insured? Because you're going to want to make sure that happens. You have questions like property insurance, who is the mortgagee for property insurance? Is it the lenders it, the funding party? Those are the sorts of issues you want to make sure, and that's why I says you do add drag on the post-closing side of your business because you've got to have somebody going in after every single file and says, look, the funding party has to be really the end lender, and did that occur in this situation? So that is an extra step that you'll have to do if you do choose to do a table funding approach.

Melissa C. Martorella:

Absolutely. And then as just a wrap up here too, talked briefly about California prohibiting this. So really the options that you have here as that loan originator is you can either wholesale the loan in California, assuming the right licenses are in place, which means that lender needs to be licensed as a lender, you would have to be licensed as a broker in California. So you would have that option to you if you really want that lender to fund the loan and not yourself. Or if you do want to represent that you can fund these loans and assign it after the fact, then you can be a direct lender, but you have to fund that loan. You have to have the capital to fund the escrow, and then you can immediately sell it over to that table funding lender that you would use in any other state, but you have to fund that loan and then assign it after the fact and be paid. Then that table funding lender would pay you, not the escrow. So there's a little bit more nuance there, but that's just something to consider to get around in California. Lots of licensing implications. So happy to go over those with you guys for any specific scenarios you might have here in California.

The last one that we're going to talk about today is correspondent lending. I was very intimidated by this term for a long time because I was like, oh my gosh, it's so serious, but it's really not. It's very similar to direct lending except that loan originator plans to sell the loan to a loan purchaser. So basically same scenario, Nema is, my borrower, he comes to me looking for a loan. I'm like, yeah, I can fund that loan to you, Nema, but I have a plan to later sell this loan to somebody else who I know likes these kinds of loans. And so unlike in table funding where maybe that ultimate lender is directly funding the escrow, I'm still going to fund that escrow. I'm still going to fund that loan to Nema. My name's going to be on the loan documents. He's working with me as we underwrite this loan.

We'll talk about underwriting in just a moment, but it looks like I am making a loan to Nema because I am, but there's an assignment later on because that correspondent lender, I have some sort of agreement with them in which they're going to purchase the loans that I originate. It might be there might be a seasoning period to make sure that the loan doesn't go in default right away. There might be other requirements as that correspondent lender looks at these loans that I've originated, but ultimately they will end up purchasing them from me. So similarly, there's an assignment there from me as the loan originator over to that correspondent lender, but it's happening after the fact. So the way that we would've dealt with this in the table funding scenario is we would've gotten that together right away as we're drafting loan documents, we're sending the loan documents over here for closing, we're sending that assignment over to the originator so that they can sign that and send that into the escrow, and everything's getting recorded all at once. In this case, I'm holding onto this assignment and I'm waiting until that correspondent lender says, okay, I'm ready to purchase this loan from you. And then I sign that assignment, get that recorded as I am paid by the correspondent lender as they purchase that loan for me. And then title transfers over to that correspondent lender. Same thing. You would also get an endorsement to your title policy.

We can talk a little bit about the underwriting here too. There are really two options, either delegated or non delegated. If underwriting is delegated to the loan originator, that means me as that loan originator. I'm working with my borrower, Nema to underwrite that loan directly. So I'm collecting all sorts of information about Nema, about his project, about the loan, and I'm going through and diligently collecting all of that information. Because of that though, because I am in charge of that, I might miss something or I might make a decision in the underwriting process that I'm okay funding this loan, but ultimately that correspondent lender down the line as they review this loan that I funded, they might say, actually, I didn't like that you skipped over that or that you didn't dig into this more, whatever the case may be. And so they might not end up purchasing that loan if they don't like how I underwrote it.

So because of that, there's a little bit more risk to me there as that loan originator. I will usually earn higher fees because I have more risk and responsibility as I'm underwriting this loan transaction. On the flip side, if we have non delegated underwriting, that correspondent lender is really directing all of the underwriting decisions. So they might be involved. I might be talking to them day in, day out about this loan, getting their sign off. It might be a little bit clunkier, take a little bit more time to get these loans processed because really that correspondent lender is directing all of those decisions. As I'm collecting information from Nema, I'm sending immediately to the correspondent lender for review and approval. So really, I am almost like a loan processor at this point for that correspondent lender. In this case though, what happens is that correspondent lender almost always then purchases the loan. So the fees to me are often lower because there's a reduced risk there. If they're almost guaranteed to purchase that loan from me down the line because they were so involved with the underwriting and decision makings on whether or not to fund this loan, then chances are they're going to purchase it. And so the fee and risk to me is much, much less.

Nema Daghbandan:

And I mean, it is funny, right? Because this concept comes from the mortgage banking. If anybody's ever been involved in convention mortgage banking, this is just how that entire business model runs, which is you probably have some sort of line of credit from a funding source. That funding source either gives you a delegated or non delegated underwriting criteria, and they're effectively either committed or not committed on the front end to buyer loans. That's how conventional mortgage banking has run and continues to run. And this concept already exists in our world. So for example, in its most simple form, if you sell loans today, you kind of think about it. How does that process work? Well, it's basically a delegated process, right? The purchasers have given you guidelines in advance. Here's the conforming qualities of a loan that we're looking for. You will fund this off of your own balance sheet.

You're going to underwrite this and try to do a good job assuming you did the right thing. Chances are we're going to buy the loan and you're going to earn whatever the fee is as part of that transaction, right? So we're delegated underwriting for correspondent lending is actually something we're already doing, whether we want to call it that, right? That's probably the best way to understand how you sell most of your loans today. Non delegated is obviously taking it a step further, and that's really saying is you're really just a conduit for that funding source. And there's almost always a guarantee of purchase that comes, which makes sense because you are underwriting to a very specific end buyer. And so it would make sense that they are going to effectively have to either guarantee to purchase of the loan, and oftentimes they will oftentimes provide some sort of funding facility that comes along with that, right? So you may not actually have to fund the loan even with your own capital. They may be providing you some sort of line of credit or something to help you fund those loans as well, to manage that period between the time from you funding it until that loan is actually sold to them, taking that money off of their line of credit, but again, already happening in the conventional mortgage making world and becoming more common here in the private lending world.

Melissa C. Martorella:

And our last little sum up slide here. So under correspondent lending for loan documentation, it's interesting. It could be either, it could be either the loan originator lender choice or it could be the correspondent lender choice. We see it both ways. Oftentimes, the correspondent lenders will have pre-approved loan documents, so they could say, Hey, we like Geraci's loan documents. If you use them, that's one less issue that we have to look for. Your loans might be approved faster, so they might have a list of pre-approved document providers that you can look at to make that part go smoother. If not, you are as that loan often allowed to use whatever loan documents you want, but usually it just takes more time when you are then selling that loan to the correspondent lender because they have to review them, make sure all the right provisions are in place and that sort of thing as they're approving your loan documents.

Other documentation is very similar. There's many different agreements between that lender, the correspondent lender, and the loan originator. And there's also that assignment of the loan that's going from the loan originator over to the lender licensing, very, very similar as in table funding. And then finally, other considerations that loan originator is named as a lender in the loan documents because they are funding the loan. The big, big difference between correspondent lending and table funding, aside from the fact that that assignment is happening so much later in time, is that in table funding, the loan originator is not funding the loan in correspondent lending. They do have the money to fund that loan, and then they are later having the loan purchased by the correspondent lender. So that is a big difference at the closing table there.

Nema Daghbandan:

That's right. Perfect summation.

Melissa C. Martorella:

Awesome. And with that, we flew through this. That's everything we wanted to talk to you guys about today. I know it was a lot of information, but I think it was a lot of good information. We have a few questions here, so we will get to those in a moment. But if you guys do have any questions down the line, something pops up later on. You have a transaction that you don't know how to work through, or maybe you're thinking of revamping your business model and you want to think about one of these options, you can reach out to me. You can reach out to Nema, either of us are happy to talk to you about this and connect you with our corporate team who could help you get licensed or set up entities and all of that fun stuff. So we can definitely assist there. But yeah, with that, we'll go to our q and a. First question. As a private money lender in California, can the broker originator share points with me? This is a great question. We get this all the time. So long, is that broker originator is also licensed properly in California. They can collect the fee on the transaction. In fact, they have to be licensed if they're going to help broker originate that loan.

Nema Daghbandan:

That's right. And yes, they can share if let's say, for example, there's two points in that transaction. The unlicensed loan, sorry, the unlicensed lender can receive an origination fee. Even though you are unlicensed, so long as there was a licensed real estate broker arranged in that loan transaction, you can easily share fees and put all those fees on a settlement statement.

Melissa C. Martorella:

And Jim, you had the follow-up, which Nema just answered is if the lender is unlicensed, can that licensed broker share the origination fees with me in California? Yes, you can have an origination fee in California even if you are unlicensed. And another question from our friend, Jim, what is the benefit of white labeling? Nema? I feel like you're going to handle this much better than I will.

Nema Daghbandan:

Yeah, I mean, in the private lending industry, being a lender is caches. There's a inherent brand value of being and more importantly, being able to deliver on that promise. So white labeling has exploded in the past few years because it's given what were effectively mortgage brokers previously a real option to service a lot of different clients. And also too, if you kind of think about it, is the white labeling parties beyond just being a funding source and having the burden of raising the capital necessary to be a funding source, they also often have a very diversified portfolio of loans that they're willing to offer. So they can, for example, be DSCR lender where you're not one, and they can be a ground up construction funding force when you're not one. So oftentimes they're there. You may be a private lender who is your own funding source in most of your transactions, but there's a box that you like to lend on, and there are certain loans that fit cleanly in your direct retail funding channel, and it provides an opportunity to continue to maintain that direct borrower relationship while at the same time giving and making sure that your borrower understands that you are a legitimate lender, while at the same time giving you an ability to expand the reach of your products to beyond what you would normally be comfortable funding on your own.

Melissa C. Martorella:

Next question. This might also be for you, Nema, from our friend Jeff here for table funding. How do warehouse lenders look at this?

Nema Daghbandan:

It's a great question, and Jeff, great to see that you're on here. So the best way to think about this, and probably may just make a broader question for those because Jeff is extremely smart. He knows what he's talking about. So let me expand this question out, which is if you're going to set up a table funding program, what you're really doing as you're saying is, Hey, I'm going to have somebody other than me, the funding source, be named as a lender, and I've probably got my capital sources. I might have a line of credit, I might have some investment banking agreements. And so I've entered into agreements on my side of it saying, how are these loans going to close? I've made some reps and warranties to my capital providers, right? So that's the first level of inquiries is you need to have a conversation with your capital markets providers to make sure they are okay with you doing this.

I can tell you practically speaking, because we see this all the time with our own Lightning Docs users and law firm clients, many of them do in their institutional nature. So I'm very aware that very large capital markets partners are aware of this structure and have approve this structure, but it is a conversation with them. So it's not something that I think you can do automatically and start offering this option to your good loan originators without first having a conversation with your capital markets parties about does this work for you? Let me show you the chain of title. Because normally what happens is it's just an understanding from their perspective of how do I know that? Because my agreement is with you funding party. It's not with this loan originator, but they're named on the loan document. So I don't have a relationship with this party and I don't want a relationship with this party, is the way they're thinking about this.

And so you've got to explain to them and show them, yes, there was a deed of trust or mortgage it named them, but there's also this assignment that recorded at the exact same time, I am your counterparty. I am the owner of this loan, and so you're going to get this collateral just like any other collateral. I can then do another assignment from me to you, capital markets party, giving you ownership right to this loan. We're really just adding one additional layer. And this kind of reminds me of going back to conventional mortgage banking. They did like the Mers days, right? You got some original party name, but it's probably that loan probably went through 30 changes of ownership all throughout that process. It's not that different. You're just adding one more change of ownership in this context, which for a moment in time, this loan was owned by the loan originator, but the moment that date of trust recorded and that assignment recorded right after that ownership ended and it went to the funding party, which may go down to the capital markets party, and an assignment recorded the very next day,

Melissa C. Martorella:

We have a question from an anonymous attendee white label loan seems intentionally deceptive. I understand why some brokers don't want the borrower to know who the lender is, but why is this legal? But I think as Nema kind of alluded to throughout here, the biggest reason for this is that loan originator who's out here working with borrowers, making interactions, they've got their own company built up, and they're trying to maintain the fact that they are able to fund loans. As Nema mentioned a couple times before, if the borrowers knew that that originator was not the one ultimately funding the loan, they might skip out on them in that process and go directly to the lender. So it really helps here, but oftentimes that lender that might be the best fit for that borrower, they might not be able to do everything that that originator is doing, process that loan, underwrite that loan, all of that stuff. They're really helping along this scenario or the loan scenario here. So they're really helping facilitate this transaction between the borrower and that ultimate lender. I don't know if you have anything that you want to add to that. It reminds

Nema Daghbandan:

Me if you actually, and I would love to go back to the conventional mortgage bank context because I think it really, they're already doing what we are starting to do. That's actually probably the best I think about is when I took out my home loan from some independent mortgage bank years ago. Well, what did they do? They sold it to Wells Fargo a month later. Can I have just gone to Wells Fargo and done? There's always this kind of ruse concept of, Hey, are you even the funding party? Because when I contacted that mortgage bank, well, technically they used some line of credit or otherwise with Wells Fargo, presumably when they did it. And so even though I think, and I agree with you conceptually that this kind of feels funny, that we're working in this capacity is the mortgage market has effectively been this way.

It's been people who are borrower facing, could be a correspondent lender, could be a loan originator, but they are borrower facing. You do not have that borrower relationship, but you want to be able to fund that loan. So now we're just providing multiple vehicles. It could be a table fund, it could be a white label, it could be a correspondent lender. These are all vehicles that get to the same result. They just do it in different ways. So while I agree with you that it feels a little bit different, but in reality the result is the same, meaning that borrower received a funded loan. They don't probably actually care who funded it at the end of the day and lets the originator save face and be able to continue to build their brand identity.

Melissa C. Martorella:

Question from our friend Belinda, by funding via white labeling, do you see that the originator retains any of the asset management servicing directly to the borrower, such as renovation draw administration? Is this a means to retain the debtor relationship? Go ahead, Nema.

Nema Daghbandan:

It's a tricky one, right? So the answer is whatever the funding party wants it to be, it would be very odd to me to be able to do this at any scale in which you're giving that funding party, or sorry, the originating party, any sort of control post origination, I think it would be very challenging. It's unlikely they do. It's probably more likely in a table funding arrangement if you actually needed to go that route, because it kind of goes back into, there's probably a few people you're working with, it really helps them maintain that relationship. You may in fact want them to maintain that relationship. It might be helpful for you because you want that to be a repeat loan situation for your own purposes as well. But the practical consideration of this is the party we haven't talked about in any of this is we're talking about a funding party, but as you all know now, is that funding party. That funding party probably has a funding party, right? So at the end of the day, there's also call it the real money that sits at the end of this tunnel and that real money may send it down to a loan. Securitization takes all of this out of anybody's control, and so now you've got a trust administrator and all those sorts of things. So it depends on who is the funding party, who is their capital markets provider. Those will probably dictate more so the relationship that the loan originator gets to maintain after loan origination.

Melissa C. Martorella:

We have another question from an anonymous attendee. Right now, we are getting unexpected high volume of loans and we are having issues keeping up with our capital running out. In your opinion, what would be the best to use of the three?

Nema Daghbandan:

Yeah, this situation in the context, you are the loan originator we just described, right? That's really you, which is you're running out of capital. You need a funding source, so what kind of funding source do you want? Which one is the white label one where it makes more sense for your business model. Maybe we should be doing a Google search right after this about white label parties or send us an email and we'll happily help you as well. Maybe you want to find somebody that's more on the table finding side is that as an originator that's very advantageous to you because you are the name lender. It's going to look and feel to your borrowers the same. So it kind of depends on who those capital providers are, how much of the borrower relationship you're able to maintain. These are all the fun questions, which is, and what kind of loans can they fund?

We're at a golden age of private lending in which there's lots of new options. There's lots of people. We're on the better side of the capital markets right now, which is there's more money than even though you might be having a cash crunch. The reality of the situation, if you think about it from a macro level is that there is more money than deals right now. And so there's lots of money trying to chase deals. They might not be deals that you do, so you've got to balance that. But there is large amounts of capital for certain types of deals available in the market. But that's a conversation between you and the funding source to figure out does that work for my model. But again, feel free to reach out to either of us and we're happy to make as many connections as we can over there.

Melissa C. Martorella:

Cool. And I would say the one caveat to this of course is if you're in California or your loans are in California, unfortunately table funding is off the table. Right? That's all I have for questions today. Oh, thank you, Don. Great job on the presentation. Appreciate, love you, Don. But we appreciate you all. It's always a pleasure talking to you all about this stuff. If you have any other questions, again, our contact information is here. The slides and the recording will be available shortly if you want to circulate these to anybody who missed it that you think might benefit. Otherwise, thank you all. I hope you have a wonderful rest of your day.