Decoding In Re Moon and the SB 1146 Solution

Melissa C. Martorella:

Welcome everybody. We will get started here today. Thank you for joining today's webinar. Today we have our sweet year-end strategies theme as we round out the end of the year. And today we are going to be talking about understanding in re moon and loan extensions in California. I'm really not doing much here, but as you all know me, my name's Melissa Martorella. I'm one of the partners at Geraci and I help to manage our banking and finance team. You've reached out to us quite a bit about questions about how to deal with modifications, extensions and those sorts of things in California in light of the in re moon decision, but with me today are two of my senior attorneys, Kyle and Nichole, who really manage these things quite well and are heading up the transactions in particular. So if you guys wanted to do a brief introduction of yourselves. Kyle, do you want to go first?

Kyle Niewoehner:

Yeah. My name is Kyle Niewoehner. As Melissa said, I'm one of the transactional attorneys in our banking and finance department. I work on amongst other things, modifications and forbearances. And so I've been dealing with this particular issue for the last couple of years over and over in great detail. I know that it's a complicated issue and there's a lot of questions about it. So excited to get into this today.

Nichole Moore:

Nichole. Hi, my name is Nichole Moore and along with Kyle, I'm one of the attorneys on the banking and finance team here at Geraci. Much like Kyle, I work on a lot of these modifications, extensions and forbearances with most of you all, and we've seen this quite a bit. So if you work with me you know pretty much the drill.

Melissa C. Martorella:

Awesome. And before we get started to kick off just a few housekeeping items now that I see it's slowing down with our participants entering the zoom. As a reminder, this webinar is being recorded shortly after the presentation the link will be circulated to all of you who attended as well as to people who signed up but maybe couldn't make it. So if you want to watch it again, forward it to somebody who missed out, feel free to do so. Similarly, the slides will be available after the fact, so we always get a question or two about that. Is it being recorded and can I get the slides? And yes, you will just wait for that recap email. There will also be some links to other articles and resources on our website about this topic. So look for that post webinar sometime today. And then the last item housekeeping item to talk about here is there is a chat box in the Zoom.

Please don't use that for questions. There's also a q and a and you might have to click more to see the q and a. If you have questions, feel free to put them in there. And at the very end of the webinar we will go through those with you and make sure that we answer any questions that you have. And then if you feel like your question is very complicated or you wanted to talk to somebody, feel free to reach out to any of us and we would be happy to talk to you as well. So with that, we will get started today. Little agenda overview here. So first we're going to be talking about in re moon and its ramifications. So overview of the case and its impact on loan modifications and extensions, talking about how to address these modifications while this decision is in effect. So best practices for handling active loan modifications while this decision is still relevant. Then we'll talk a little bit about Senate Bill 1146 key provisions and how it alters this loan mod landscape and what lenders need to know. And then we'll also talk about some solutions and effective dates. So things you can do in the interim, important timelines for compliance, things like that to really help you guys out on the business end. And then lastly, we will have a q and an open discussion and audience questions. So we will get it started here. Nichole.

Nichole Moore:

Hi guys. So yeah, so most of you all are pretty familiar with just the overview and the basic outcome of the In re moon case. I'm going to give you a little bit more background for those who may not understand everything that had happened to the case and how we got to where we are now. But basically what happened was in June of 2015, Mark and Lori Moon, they borrowed around $759,000 for business purposes from Milestone Financial LLC secured by their residence. They were represented by a real estate broker. However, in this case, the lender was neither a DRE broker or a CFL lender. And so because of this, the DRE issued a cease and desist preventing Milestone from making additional loans until it was properly licensed. So that is a very important distinction with in re moon and perhaps with some of the loans that you may be originated.

The loan itself, it was an interest only loan at 11.3%. The loan term was for two years. There was a 10% late charge and a default rate of about 17.3% plus late fees. There was language in the loan documents that stated that the provisions that were provided in those documents were to be considered reasonable liquidated damages. The lender and the borrowers, they both agreed to these provisions. Fast forward in 2016, the Moons were unable to make their payments and they entered into an extension with Milestone LLC. So what this extension did was it extended the maturity date, it changed the principal balance to just over $900,000. It reduced the interest rate from 11.3 to 11.05% and it increased the default rate. And then it also added a provision that applied the late charge to quote any payment then due including the final balloon payment. And once again, all of these provisions were supported by the language in the loan documents and indicated that these were all to be considered reasonable liquidated damages.

So things were going along. And then in 2019, the Moons decided they wanted to refinance this loan and they requested a payoff statement from Milestone. And this is where things kind of went awry. So once the Moons received their payoff statement from Milestone, the payoff was for over $1.2 million and it included a prepayment penalty of about $115,000. And Milestone referred to this fee in the litigation, excuse me, as a late charge on the balloon payment. So as a result of this demand of over $1.2 million in this additional prepayment penalties slash late fee, the Moons were unable to finance. So in 2019, the moon sued Milestone and in their lawsuit they alleged four causes of action, one for declaratory relief, breach of contract, fraud, and also interference with contract in relation to the refinance. So while this lawsuit was pending the Milestone, the lender convinced the non-judicial foreclosure in response, the Moons filed a chapter 13 position and the case was later converted to a chapter 11 and the lawsuit was removed to the bankruptcy court.

Once the Moons filed for chapter 13, the parties they attempted to mediate, they were unsuccessful. So both parties moved for summary judgment. What happened during the summary judgment phase, the Moons presented some unpleaded claims in their motion that one, the loan was usurious. Two, the prepayment penalty was unenforceable. And three, that Milestone, the lender was unable to impose both a late charge and default interest, which you've probably heard us say time and time again. And then of course, the court then granted a partial summary judgment to the Moons on their claim relating to usury, and they sustained their challenge on the prepayment penalty. So that's how we got to where we are today. Next slide.

So as a result of the in re moon decision that came down from the bankruptcy court, we see California's civil code section 1916.1. And I'm not going to bore you by reading the entire statute with to you because I'm sure most of you are very, very familiar. But what we want to highlight is part three of the statute that stated that the loan, the forbearance, or I'm sorry, a forbearance or a loan that was made or arranged by a licensed real estate broker in order to extend a loan, it had to be done by the then purchase broker. So it could not be a DRE broker, as you've seen, it could not be the CFL lender if there was no CFL lender at the time, it had to be negotiated by the original purchase broker. And so in this case, although the lender was attempting to help the borrowers, the judge stated that the lender had three options. The lender had an option either to get licensed, had an option to lower the interest rate to be below the 10% limit in California or to foreclose on the property. However, unappealing or consequential doing so may have been to the Moons. So we're going to move to the next slide.

And so basically, as I just mentioned, the problem that moon created was that in order for a lender or a broker to maintain the usury exemption, it had to be negotiated by the original purchase lender, I'm sorry, purchase broker. And it severely limited the lender's options or opportunities to extend a loan or to even work out a loan extension of modification for borrowers in order to assist them in avoiding foreclosure without increasing the interest rate. And so next slide. As a result, some stakeholders got together and decided to petition the governor in order to fix the issues that were created by Moon. And last month, governor Newsom signed Senate Bill 1146, which fixed these issues, hopefully Giro, see the California Mortgage Association, the National Private Lenders Association legislative Committee, the American Association of Private Lenders, and a bunch of other stakeholders gathered together throughout the time that this has been going on in order to come up with the solution that Kyle is now going to discuss with you.

Kyle Niewoehner:

So high level here, the new SB 1146 bill is providing that any licensed broker can negotiate a forbearance or a modification of a loan and keep a usury exemption. And if we move to the next slide here, we've got kind of an overview of it and we're going to go into more detail in a minute. But the new language is, it clarifies that for a forbearance you can use any licensed real estate broker to broker the forbearance. It doesn't have to be the broker who certainly who arranged the purchase of the property or even the broker who arranged the loan, and it adds to the existing exemption for an extension or modification that again, it can be any licensed real estate broker. And then on the next slide here we have the actual language of the new civil code 1916.1. I do want to clarify here that we've highlighted and underlined a bunch of words here.

This is not a red line from the old version of the statute, so this is not all of the changes in the statute. What we're doing here is highlighting what we think are some of the most significant parts of the new statute. And you'll notice particularly when you get to part one in the definition of when is a loan arranged by a broker that they added a bunch of new language about which things can be arranged by a broker. So if you remember the existing statute in that part of it said basically any loan that's arranged by a licensed real estate broker is exempt from US three. And so they updated the language there so that it's not just a loan, it's a loan or forbearance extension or modification of a loan for another. So that's kind of the crux of it here is whereas before you had an exemption for a loan that is arranged by a licensed real estate broker, we all understood that that part has now been broadened to say it's not just a loan, it's a forbearance extension or a modification of a loan.

And so we'll also look at part 300 minute, but this is crucial because it removes all of that confusion and the issue over, oh, you need a broker that arranged the purchase of this property. And as Nichole will talk about in a little bit, one of the things we're advising people on currently is you can always just do a new loan. And the reason why you can do a new loan and have a usury exemption is because of part one here when it talks about arranging a loan as a real estate broker. And so rather than it just being a loan now, it covers forbearances extensions and modifications. And so when this law comes into effect on January 1st, it's going to go to the way that I think a lot of people had always assumed that the law was, which is that if you have a licensed broker involved in a transaction, even if it's a or a forbearance, that you should have a usury exemption there.

There was also some broadening of the language down in part three of where it says arranges or negotiates for another, a forbearance extension, modification or refinancing of any loan secured by real property in connection with a past transaction in which A, so previously you'll see we highlighted right there, we crossed out the word and it says a broker now. So that's another change. They're kind of just through the kitchen sink at this and try to make sure this problem is solved there. And rather than it being, you need to have the broker who brokered a purchase of the property, it's saying any broker, broker the purchase of the property, you can now have a broker negotiate a forbearance or extension or modification and it doesn't have to be the same broker. So you could have some other broker that did the purchase of the property and now you have a new broker that is brokering a forbearance or an extension or a modification.

So they really tried to solve the problem multiple ways here in the statute and just kind of make sure that there's no way we're going to have this problem again in the future, which is I think great, it's good news for everybody. And going to the next slide here, what does this mean if the reasoning is followed by other courts then up until January 1st, 2025? This is still an issue because the new SB 1146 bill, while it solves all of this, it does not become effective until January 1st of next year. So we still have two more months here where there's potential jeopardy. And I want to point out here especially that even after the new law comes into effect, if a borrower were to sue you about something you do, let's say next week, in the beginning of November, when a court goes and looks at this, even if the court's not looking at it until 2026 or something like that, the court is going to go back and say, what was the effective law at the time that you did this extension of forbearance, et cetera.

And so even if this goes to court after the new law is effective, if you do it right now in these couple of gap months, there's still jeopardy for you because the new law is not effective and it's not going to be effective retroactively once it does come into effect. So just to clarify there, you do still have this issue for the next couple of months, and the reason why we say it's followed by other courts is of course, because the in re moon decision has gone through federal courts, California courts have never actually ruled on this, and California courts do have final authority. So the California Supreme Court would have final authority on this issue as it's a California law issue, but there's no indication at this point that California courts are going to get to it. Or even if they do that, they would overturn it because you can see from the statutory language that this is a pretty literal reading of the statute.

And so we don't wouldn't assume that a California court would overturn that decision even if somehow the California Supreme Court did end up dealing with it. And so the situation we're in here is, as Nichole described, since the loan brokers that we have are almost never the people who broker the property sale, then if you have a DRE brokered loan, you're using that as your usury exemption. It's really risky right now to do a modification or a forbearance, particularly an extension of forbearance without losing your usury exemption. And as I'm sure, a lot of that's how we've been advising in terms of the CFL, given that we only have two months left here of this being in effect. And it takes longer than that to get a CFL right now, getting a CFL if you haven't already started that process is probably rather impractical, but I know a lot of our clients have multiple types of licenses, and so in the next couple of months, this is still a reason to consider using a CFL in different types of situations.

Obviously for loans that you already originated using your broker license, it's pretty tricky to try then to use a CF later, you'd have to transfer the loan over to your CL lender or something like that. But for loans where you do have a C FFL involved, that's a good thing to remember that you don't have to worry about this. And even if you had both a CFL lender and a DRE broker, you're okay that the CFL lender has its own exemption. Even if there's also a DRE broker on the loan, you don't have this issue as long as there's a CFO lender, this is not applicable. And then moving ahead to the next slide here, just to reiterate, after January 1st, any licensed broker is going to be able to arrange a forbearance, a modification or extension, and you're going to be able to keep the usury exemption intact. So at that point, hopefully we all don't have to worry about this anymore, don't have to have these long discussions about what to do, how to handle it. So that's good news, but in the meantime, pass it back to Nichole here to talk about what your options are in the next two months.

Nichole Moore:

Yeah, so between now and January 1st, your options are either to refinance the loan, we see a lot of clients who are going this route to refinance the loan if you want to do any sort of extension or other type of modification. And then you can do so if you're not a CFL lender, as Kyle mentioned, just use a DRE broker in order to get that normal exemption and you can move forward as you normally would. The second option, kind of like what the judge and In re moon said, you can foreclose. That's not necessarily the most optimal or the best decision, especially not for your borrowers, but if it comes down to it and you want to get a maturity date off your books, you can come to us and you can foreclose because otherwise it would jeopardize your usury exemption if you were to try to extend and modify without being a CFL broker or I'm sorry, a CFL lender or using a DRE broker.

And that also may motivate the borrower to agree to refinance or sell the property on their own. The third option that you have here, next slide, Melissa, is you could find the original purchase broker. It's rarely possible. We have seen this happen on a few occasions, but if you're actually able to track down the original purchase broker who brokered the purchase of the property, then that broker would be able to broker or negotiate the extension of modification and you would be able to keep your usury exemption for the modification or refining, I'm sorry, the forbearance. And last but not least, you can do nothing. You can just sit on it and let the loan do what it does until January 1st and then once January 1st hits, you can come to us and we can help you out with modifying, extending forbearing, whatever you want to do because as Kyle mentioned, what's currently in effect will no longer be in effect. So those are your four options between now and December 31st, 2024. Hopefully it's been helpful. If you have any additional questions, feel free to come to us. I think now we're probably moving on to questions. If anyone has any questions, then I'll turn it back over to Melissa.

Melissa C. Martorella:

Awesome, thank you all. We appreciate your attention during our webinar. Before we get into the q and a, we have our contact information up here on the slides right now, so if you do have any questions you want to reach out, feel free to reach out to any of us. We are more than happy to assist you. In the meantime, let me pull up the q and a. First question that I have here is can you have the extension signed now but not have it take effect until January one?

Kyle Niewoehner:

I'll take that one. We would not advise you to have it signed right now, even if you put in the document that it's effective as of January 1st, that's kind of murky. It's difficult to say how a court would look at that because while you make it effective then if you're already having it executed and it's difficult to quantify the risk here, but there's a risk that the court looks at that and says, you really were doing it beforehand and you were just trying to avoid this particular issue. And you'd also have to keep in mind that even if you did that, it wouldn't be effective until January 1st. So let's say you were doing a forbearance, I mean presumably the forbearance would be starting immediately because that's the nature of a forbearance. So in that situation, I think that wouldn't even work for an extension. I guess again, if your loan is maturing before January 1st, I think a court's not even going to buy that because obviously you're already extending If your loan, let's say your loan matures on January 1st, that's probably the only scenario what I could say.

This would even possibly work that if your loan matures on January 1st and you make your extension effective as of then and you get assigned ahead of time, that's probably okay because as long as you're not changing anything else about the loan prior to January 1st, nothing is actually happening up until that date that in that situation I could see you're probably okay if it's just like the loan matures on January 1st, obviously it's only going to be effective then because the loan doesn't mature until then and you get it signed ahead of time, that's probably fine. But any of these other situations, like if your loan is maturing before then if you're doing a forbearance before, then that's not going to work.

Melissa C. Martorella:

Next question. Does this apply to new loans closed after January one or all loans closed before or after?

Nichole Moore:

I'll take that one. So this will apply to all loans closed after January 1st, but if you have an old loan that you choose not to modify until after January 1st, the new law will apply to your new modification as well.

Melissa C. Martorella:

So basically in sum, as long as it's after January 1st, you're

Nichole Moore:

Good to go.

Melissa C. Martorella:

Next question, it's a little long. I'm finding the term purchasing broker under the current law a bit confusing. You would need the broker who is licensed to represent the buyer in the purchase, which seems absurd. What about cases of refinancing were the only relevant broker is the mortgage broker. Clearly the courts do not understand a loan transaction. I mean, Kyle, go ahead.

Kyle Niewoehner:

Yes, and that's actually the crux of the issue is as you're saying, it doesn't make sense for the way that industry works and the court interpreted the statute very literally with I think not really any concern for how the practicalities of the lending industry actually works because as you're noting, a lot of transactions are refinances, this would seemingly not even be a relevant thing. And yet the way that the court is reading the statute, they're just basically saying in those situations there's not even really a chance to comply. I mean, I guess there is sort of in a theoretical way, you could still go back to whoever brokered the purchase of the property for whoever owns the property right now, however far back that is. But as we discussed, that's just not realistic in the vast majority of situations. And so in a lot of these situations, there's just no way to comply is kind of the problem here and why it's been such a headache for everyone, as you're saying, it's just not realistic and not possible to comply in a vast majority of situations.

Melissa C. Martorella:

Next question here. As a lender, if I do not issue a loan payoff demand when the due date has come and gone, is that considered an extension? As a lender, am I creating a problem if I allow the borrower to make loan payments for three years past the due date? Kyle, do you want that one or do you want that one?

Kyle Niewoehner:

Sure. Yeah, so not issuing a payoff when the loan matures. I think you're okay there because that's pretty common, even outside of situations where people are worried about this, lenders commonly will just kind of leave it for a little while after a loan matures and give the borrower some time to resolve the situation in one way or another. Now, if you let it go for three years, that's kind of tricky. The question there is going to be what were your communications with the borrower? Did you just literally have no communications with the borrower for that whole time and they were just making payments and no one said anything? It's tough to say in that situation, but if you had some type of communication with the borrower and just sort of affirmed that you're going to continue to accept payments that may be an issue. Now in the moon case, the issue was pretty clear because there was a formal written agreement and that was what the court really focused on, and that's really contemplated by the statute.

Here is some type of a formal agreement. Obviously we don't have any more precedent on this issue as to whether an email from a lender saying I'll continue to accept payments, whether that would count, but it's certainly possible that that would be seen as some type of a forbearance or an extension. And so yeah, it gets complicated if you're collecting payments for three years and you've made some type of even informal affirmation to the borrower that you're just going to keep accepting payments, there's definitely a risk there that a court might look at that and say, you've effectively just extended the loan or granted a forbearance or something like that, a period of years. I think you have a pretty good size risk for just a couple of months. So we don't think there is much risk because it's pretty common for lenders to just, like I said, to give borrowers a little bit of time to deal with the situation. So if you just collect one or two months of payments and you're not communicating with them, you're not saying, Hey, we're giving you more time or something like that, then you should be okay. But at the point where you start making any type of promises to the borrower or telling them this is fine to just keep making interest payments, there's definitely some risk there that a court would see that as an effective forbearance or extension of the loan.

Melissa C. Martorella:

And I would add too, from a foreclosure perspective down the line, I think you end up with an issue perhaps being able to jump to foreclosure as quickly as you wanted to. If they missed just one payment down the line and calling it a maturity date default and having it tie all the way back to the original maturity date, I think you're going to have some trouble there because I think you've kind of waived perhaps some of your ability to do that. So what I would probably recommend in this situation as well is some sort of letter to your borrower. I know that you don't perhaps want to do a formal extension and that sort of thing, but I would probably do a letter to your borrower saying, Hey, just so you know, the maturity date has passed. I'm accepting this payment and I'll apply it to the interest that's due.

But technically two things. One, the maturity date has passed, and two, this is a default technically because you haven't made the maturity date payment. So then in theory, you could also start charging maturity or default interest due to failure to pay the maturity date payment. I think if you don't start setting that trail, it could cause problems down the line if this just continues on forever and you never end up fixing it. Kind of twofold here, not just the extension problem, but also on a foreclosure issue down the line, making sure that you have a good trail of documentation for what you've done. The next question, what about automatic extensions in the original note? How are those handled?

Nichole Moore:

So to Kyle's point that this was an issue that was not determined by the court, and so as Kyle also mentioned that the court really looked at the four corners of the document in that case. And so it's probably okay if there's an automatic distention language that's in the document, but also remember another nuance or important difference that in the In re moon case is that the loan was already usurious to begin with. So if your loan is the terms are proper and appropriate in every other case, it's highly likely that the court would honor an automatic extension language because that's language that the borrower agreed to at origination. I don't know if Kyle, you have any other anything to add to that? I feel like that's how we generally handle automatic extension language.

Kyle Niewoehner:

And I would just say also there we don't know what you mean exactly by automatic. That's something that's something that we would probably look at if you brought it to us is how automatic is it? Because it's one thing to give a borrower a conditional, right? And then there's a bunch of stuff, and then the lender may even have discretion as to whether or not to grant the extension if the lender has discretion to grant it or not grant it. That's not really automatic. An automatic extension that would be really safe for these purposes would be something actually automatic where the lender doesn't have discretion and where it just says if the loan is not in default at this point, it's going to extend for a given period of time or something like that. So we'd have to look at what do you mean by automatic? What does the language actually say?

Melissa C. Martorella:

And I think remember too big picture this statute at hand as well as dealing with an exemption to usury. And so if your loan is just simply not usurious, none of this matters to begin with. If your interest rate and points and all of that fun stuff is all below 10% a year, you really don't have to worry about this. But it is when you start thinking about what's your interest rate, are you charging a fee for the extension or mod, that sort of thing. And if it starts creeping up, that's when you might want to think about the statute. The next question, how does this apply to a non purchase of property loan arranged by a DRE broker? I'm not sure I understand that question. How does this apply to a non purchase of property loan?

Kyle Niewoehner:

I think it's like that question earlier of saying if it was like a refi, then how do you even comply on this? Yeah, so just to read it, the answer is you just kind of stuck. You could, again, theoretically, if you could go find the person who brokered the purchase of the property to the existing owner, even though it was part of a different transaction, who knows how long ago, that would be your only real chance to comply. Otherwise you're left with the options that Nichole outlined at the end where it's just not really viable to do an extension of the existing loan and keep your usury exemption

Melissa C. Martorella:

For interpreting that for me. Next question. When you say do nothing, can the lender accept payments after maturity? Would that not be a constructive extension?

Nichole Moore:

I think Kyle just kind of touched on that already.

Kyle Niewoehner:

Yeah I think that does kind of go to that one of how long can you accept them and yeah, just probably not for too long. And again, it just really depends on what your communication is with the borrower. What are you telling them? And if you're telling them anything, you can probably get away with at least a couple of months.

Melissa C. Martorella:

Next question. Our Lightning Docs note allows a conditional extension after six months if all the conditional extension terms are met because the extension was already specified in the documents that were originated by a California real estate broker, must we use a broker again to allow the extension? I believe this was ever touched upon, but if you guys want to restate too.

Nichole Moore:

Yeah, and it also depends on, I don't know how you're originating your loans, but if you're originating your loan with a DRE broker to begin with, then you'll be okay. But the issue arises here is if you are not a CFL and you do not use a DRE broker when you originate the loan, then there's a problem. And as we mentioned, this particular issue was not touched on, so we really don't know how a court would rule on it, but like Kyle said, if the extension is in the lender's discussion, you're kind of treading on thin ice whether or not it would be in violation of the in re moon as it currently stands.

Kyle Niewoehner:

And I think in terms of our standard language, we normally do give the lender discretion, and there's also a list of requirements and things that need to be evaluated or confirmed to grant the extension. And so if it's our normal conditional right to extension language, that's not really an automatic extension that's still at the lender's discretion.

Melissa C. Martorella:

Excuse me. Next question. What about all modifications done prior to January 1st and prior to the moon ruling? Would none of them be exempt from usury

Kyle Niewoehner:

That's correct. This is, yeah, before January 1st of next year, this is what it is. In terms of stuff done before the moon decision, you're definitely in jeopardy there. Obviously the moon case was before the moon decision and it is a court decision, so they're just interpreting existing law. And this law, we were looking into this a lot given how big the issue has been, and this is from the eighties, the current statutory language. So yeah, I mean the potential liability there goes back decades. And I would say probably the one thing is that if a court is looking at this and it was you did it before the decision, probably you are on the lower spectrum of the potential penalties. Like in the moon case, the court only made them forfeit the interest that was above the usury limit in that situation. And obviously there's a lot more severe penalties that can be imposed in California for usury.

And so I think the question there is more so on the side of how severely is the court going to deal with you? And probably if it's clear that you didn't know about this issue before you did the extension or forbearance or whatever it is, it's probably going to be the same type of penalty as the moon case, which is much less severe than a court could impose if the court looked at it and said, yeah, this lender knew exactly what they were doing and they were just trying to gouge to this borrower, et cetera, and then they might be imposing trouble damages or et cetera. So you're definitely still potentially liable if it was before the moon decision, but I would think the court would be pretty lenient in the penalties they imposed.

Melissa C. Martorella:

This next one was the same thing or transactions extensions prior to moon relevant in as Kyle just explained. Yes. Next question. If your note describes the ability to provide one six month extension, we were advised this is okay to do just the one even before January 1st. Do you agree? I think as everybody said here, it really depends on what that extension says. If it's all that has to happen is the borrower has to make a payment or the loan has to be not in default in good standing and it's automatically given, I think that's pretty clear. But if there are conditions to it, I think that's where you potentially run up on some problems has been advised. The next question, how long is SB 1146? Good for? In general, it just is amending the law, so hopefully forever until the law is hopefully not amended again or if it is for the better even. So it should be forever. What happens if the modification reduces the rate to be below usury? Again, this statute really only applies if the loan is above that interest rate to get you a usury exemption. So if you end up producing your interest rate, you wouldn't need the usury exemption, which is what this statute is all about.

Nichole Moore:

Yeah, that was I think option one. So when we say refinance, if you're not a CFL and you're not going to use a DRE broker, when we say refinance, you would reduce your interest rates. So that would be, the loan would no longer be you serious.

Kyle Niewoehner:

Well, I think that actually if you're going to reduce the rate, you could potentially also still extend it because you understanding that you no longer have your exemption, but if you're compliant with usury, if you're under 10%, obviously it's still okay because you're just not even usurious. I think it's also worth noting there again that if you're reducing the rate, but it's still usurious, that's exactly the situation that Moon was in. As Nichole discussed kind of at the beginning of this, that was actually the situation. They didn't increase the rate, they actually decreased the rate and they still got hit. So important clarification there that if you go below usury rate, that's fine, you're totally compliant then, but reducing the rate, but still being above usury is not fine.

Melissa C. Martorella:

Next question, in terms of interest rates, would there be any other limits we should be aware of other than the usury rates for modifications or extensions even with the legislation becoming effective in the upcoming? I think in general, remember the California constitution says 10%, it's a little bit more complicated than that, but in general it's 10% is your cap for a loan would start becoming usurious, and then you have all sorts of exemptions to that requirement like this statute if you are a California finance lender, things like that. And so remember that when you're considering the rate of your loan, it's not just the interest rate, but it is also any points and fees and things like that that the lender or the brokers are charging. So making sure that all of that is considered when you're doing that analysis. I don't know if I have anything else to say on that, Kyle or Nichole?

Kyle Niewoehner:

No, I think that's exactly right. I think that sums it up. And then yeah, the point about points and other types of fees is I think we can't emphasize that too much either because that's something that comes up a lot as well where people will want to say, well, can I just reduce the interest rate and then I'll charge fees and yeah, you can't make it up with fees.

Melissa C. Martorella:

Next question. So as long as we are a CFL lender, are we in the clear you're good to go? If the note rate is under 10%, but the default rate is greater than 10%, is the loan considered usurious? So default interest in California is exempt from usury, whether it doesn't matter if you have a broker or if you're a CFL lender, it's just straight out exempt. So you're okay if that's the default interest rate, but I would make sure that any points or fees, if the interest rate is 9.5% and you're charging a one point fee and it's a 12 month term, that might put you over that 10%. So you want to pay attention to that. Late fees will not add to that though, so you would be okay on that side. Next question, arranged by a DRE broker, I would say that broker better charge a fee on the mod docs. They could not do this for free. What or where does one put that? This was arranged by a broker.

Nichole Moore:

We kind of talked about that before, the rare instance that we didn't think would come up, but Kyle, do you want to take that or when you say where do you put it? Do you mean in the loan documents or

Melissa C. Martorella:

That's what I'm thinking it means is in the agreement or in the mod.

Nichole Moore:

Okay. So in our documents, we put it in the lender, the closing instructions, and so you'll see where it has the lender and then it'll have the broker and then we'll include the DRE broker number. So that title sees that because not to go off on a tangent, but now title companies are also requiring DRE brokers to sign affidavits basically stating that they are brokering this loan and they are properly licensed in order to issue the altar 27. So on our documents we have, if the lender's a CFL lender will put the CFL license number and we'll also put the DRE broker license number.

Melissa C. Martorella:

We also have a section, for example, in our loan documents, there is a section that will say in the loan agreement that will say it was arranged by a DRE broker or made by a CFL lender depending on the situation. And I don't recall if we do that in our mods as well. We used to maybe, but I don't know if we changed the structure of it in the interim. So go ahead.

Kyle Niewoehner:

Yeah, I think we have, although in some of these situations because of moon, it hasn't been applicable, but I know in our forbearances we had language and I think that we should be in our modifications as well, especially after January 1st when we basically have this language where you get a new exemption. Effectively, I think we'll want to be including that on the fee thing. Generally speaking, this is exactly correct, that if you have a DRE broker and you're relying on that, you need to make sure that they are getting paid a fee. If you go back and look at that statutory language again, it actually says that the broker acts for compensation. And so if you have a broker involved in the deal and they're not getting paid for some reason, you actually don't get to take advantage of the basic exemption even on a new loan, if they're not getting paid, you actually don't have this statutory exemption.

So yes, the broker needs to be paid, and we do see that sometimes where there's situations where for whatever reason people have a broker and they're like, oh, but this broker doesn't need to get paid, and we have to say, no, you do need to pay them. You need to pay them at least something because otherwise you're not getting the statutory exemption. Now, we did have a very rare situation come up recently where we were dealing with this moon case and we actually had the property purchase broker get involved. And so we were looking at that situation, which we've only had really a few times, and the part of the statute that the moon case is concerned about, where you have a purchase broker who is brokering an extension or a forbearance, it actually doesn't have the same acts for compensation language. And so in that very rare circumstance, it seems like it may be possible that you can use them, and they don't get paid for the extension of the forbearance because they already got paid for brokering the purchase of the property. At least that's how the statute reads that they acted for compensation originally with the purchase of the property. Now, in that case, we still told them, Hey, it would be best practice here to pay them for brokering this extension, but the statutory language there actually is a little bit different. So if you found yourself in that very rare situation, we'd be happy to talk to you about it further.

Melissa C. Martorella:

Next question, are you usury exempt if you are a DRE licensed broker regardless of the rate? Yeah, so in general, if the loan is arranged by a DRE licensed broker, that loan is exempt from usury, so it doesn't matter what you're charging. There's another related concept called unconscionability where if the interest rate and fees charge are so high that no reasonable person would've entered into that contract, it's considered unconscionable and you might have to give back fees and that sort of thing, but it's a very subjective standard. There's no bright line rule of 30% or something like that. It's all very fact specific. So it depends on risk, the loan itself, things like that. But in general, the loan arranged by a DRE broker would be exempt from usury, but then remember that's just talking about the loan. Now we're talking about mods and extensions here, at least through the end of the year, and that's where these issues pop up. Or you might not get that even if arranged by a license, if the moderate extension is arranged by a licensed broker. So just bear that in mind.

Kyle Niewoehner:

I don't know if that was part of their question too. But there's repeating again too, that if you are actually a licensed broker and you're acting as a lender, you are exempt and you don't have to worry about the moon issue either. It's almost like you're a CFL basically because of the way the statute is written. The initial exemption is for loans that are made or arranged by a licensed broker, and then it goes into the definition of arranged, and that's where you hit the issue that the moon case dealt with was in the definition of arrange. So if you are a licensed broker, but in that deal you're acting as the lender, you are actually exempt and you don't have to worry about the moon case

Melissa C. Martorella:

Next question is interest rate or APR with all fees under 10%, and it would be the rate plus all the fees under 10%. Next question, if you make an extension, reducing the interest rate to 10% and make the extension fee do a payoff and it's after January 1st, is that a workaround for the usury issue? I would say probably not, because that broker is helping to arrange that loan before January one. And again, as we're talking about the APR and things like that, you're clearly exceeding that 10% rate even with that C not being due until payoff. So I would say no.

Kyle Niewoehner:

Yeah, I think the court is going to look at when did you enter into it, and then they're going to say, what did the bar actually have to pay over the whole course of the term here? So yeah, I don't think that's a way around it.

Melissa C. Martorella:

And then can a CFL modify an existing note if a DRE loan is sold to them? And I believe the answer to that is yes.

Kyle Niewoehner:

Yeah, I know we've had a lot of discussions about the different loan sale scenarios are the most complicated part of this,

Melissa C. Martorella:

Yeah.

Kyle Niewoehner:

But I think if you're a CFL and you are now the lender, you're now the beneficiary of the loan. That should be fine.

Melissa C. Martorella:

Awesome. And that is all of the questions that we have here. Thank you all for joining us today. If you have any other questions, reminder, our emails are up on the screen. Feel free to reach out to any of us. We would be more than happy to answer those questions for you. We're looking forward to working with you all. Thank you.