AAPL Emergency COVID-19 Meeting
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During the COVID-19 pandemic, it was easy to feel isolated and out of touch when large portions of the populace were sheltering-in-place, businesses were closed, and the economy being at a near-standstill. So the American Association of Private Lenders and Geraci LLP wanted to show you their love by bringing the private lender community to you.
On Monday April 6, during the height of the COVID-19 crisis, they hosted a virtual event to bring you much-needed private lender market intelligence and business best practices. Subject matter experts from the Accounting, Appraisals, Banking, Legal, Loan Origination/Brokerage, Small Business Association, and Technology fields each provided a 3-5 minute update on “the thing you need to know right now”, after which the floor opened to questions.
Nema Daghbandan, Esq.:
All right everyone. Well thank you for joining us here today. We'll let the attendees continue to come on in. We'll make a couple repetitive announcements throughout this webinar just so everyone understands how this webinar works. So the first thing is that all of you as attendees should have a toolbar at the bottom of your screen. The toolbar has a Q&A section, a chat section, as well as a raise hands throughout the webinar. We'll prompt you to ask questions or to raise hands or otherwise to participate in this webinar. All of you in the background do automatically have your mics muted, which means that you can speak as much as you want in the background there. If you're an attendee, we can't hear you. The panelists here will have their mics unmuted and you'll be able to hear from them throughout the presentation. This presentation is being recorded and will be available later on. Again, we'll repeat these announcements as more people attend, but for now, Eddie, why don't you go ahead and kick us off?
Hey everyone. Eddie Wilson here with the American Association of Private Lenders and we are so excited that you joined us today. It is our privilege to be able to serve you. I'm obviously - Nema, for some reason I cannot get the slides to advance even though you've given me control, so I apologize. There we go. But again, just want to say thank you so much for joining us. We have been talking about doing this specific webinar to try to help those that are struggling or in need of help and felt like we could put together a good panelist for you today, a group of panelists today to really help you with your lending business as an association. Obviously we talked to people who are both struggling and who are looking for the opportunity that's most likely to come. And we want to be sensitive to both.
There are those that are struggling and trying to figure out what's next and how do I keep my company afloat. And then there are those that see the opportunity that seem to be around the bend in the market. And so we want to make sure that we're serving both. And so that's our goal today is to obviously give you resources to help you manage your business more efficiently and more effectively, and then also to try to help you in any way that we can. We've received a lot of requests over the past couple of weeks to help with either finding capital or servicing the leads that are still being generated by your businesses. I know many of you that are primarily dependent on the capital markets are struggling to service all the leads that are coming in. And so we try to remain as neutral as possible.
And so what we've been doing is passing those over to our partner, Geraci LLP, to help us with the facilitation of those needs. And so we've had a lot of conversations with people looking for capital, people looking to service the leads that are coming in. And so we've passed those primarily through, primarily through the medium of Geraci to try to help facilitate those. But you can always reach out to us and I know we're going to provide a survey for you to try to help with that even further, but just want to let you know that that's what we're here for and we want to help you as much as possible. Nema, can you go to the next slide please?
So one thing that we want to do is we have a large amount of borrowers coming to the A PL website. Now the uptick in our traffic is huge and most of them are on our member profile page looking for you, looking for those that are still deploying capital. If you have not updated your member dashboard, please, if you're a member, go there and make sure that you update your member dashboard and let them know if you are still lending and what the terms are. I know that your terms are changing sometimes daily, sometimes weekly, but as much as you can update that because we have thousands of people still coming to the A PL website looking for you and if you're a member, we want to make sure that we give them good information on you. So make sure you keep that updated. Next slide please.
And so one other thing that we've been doing is an association along with a lot of other webinars. You've probably seen us on partnering with Think Realty this past week and trying to draw a lot of attention to what Geraci is doing as they've been helping tremendously is we have put together this page, which is apl online.com/covid19, and you can register for a free private lender geared COVID-19 virtual events. We've been doing a series of them and want to continue to provide those for you and we'll continue over the weeks to come, as long as it stays relevant. And so we want to make sure that you are getting notices and notifications on that. So make sure you go on there. Also, we're posting all videos, previous videos both from what generosity has been able to do as well as Think Realty and other and partnerships that we have to try to help you during this time period.
And then we're going to constantly put out information on there. So if you don't mind, go to that page and sign up there virtually. And then last slide for me. There we go. So just want to thank you so much for joining today. I appreciate your time. I hope that all the panelists are helpful to you. If you have any feedback for us, please let us know. And then also make sure you're connecting with us on social media, both Instagram, LinkedIn, Facebook and we'll continue to answer your questions. So I'm going to turn it over to our partner, Nema, who is going to give us his presentation. Thanks Nema.
Nema Daghbandan, Esq.:
Appreciate that Eddie. And just another quick housekeeping message while we're here. So again, for those of you that are attending, there is a Q&A box, a chat box and a raise hand available to you. Our recommendation here is just a hold off for now. At the end of the presentation will go ahead and you can enter questions in that Q&A box. We have really wide audience here in terms of panelists that can speak to a pretty wide subject matter and we want to answer as many questions as we can. But again, there's different mediums to do it. The best one's going to be either that Q&A box. We'll let you raise your hands and unmute your audio so you can ask those questions directly or otherwise participate directly. So nice to meet you everyone here. This is Nema Daghbandan with Geraci LLP.
This is a really interesting time for us and I'm sure for you as well. We are normally in the business of writing loan documents and providing compliance advice and we have very much been in the business of counseling our clients, particularly related to default related issues. And so that's the hot button issue of the day for us, which is particularly right now is April one payments were due. Some people have got grace periods till April 10th, but really managing both the requests for deferrals and also understanding how to manage whether you're going to do a forbearance or not and whether you even have the ability to foreclose. So those are really the two issues that we are dealing with a lot on our desk right now. So hopefully we can clear up some of the confusion that relates to it. So the first thing here is that I suspect a lot of you out there have had your borrowers reach out and they may think that they are entitled to some sort of payment deferral.
There's a lot of misinformation out there about are lenders required to let their borrowers defer payments right now from a federal law perspective, federally related mortgage loans, so FHFA loans or these consumer loans do have a requirement to defer certain payments, but as it pertains to private lender loans, these restrictions don't apply. So there is no federal prohibition or federal requirement to defer payments right now. So when you're dealing with these requests, here are some recommendations that we would put out there. First is we would recommend to not have a blanket policy in place. So what I mean by that is take a look at forbearances on a case by case basis. What we are experiencing is that a lot of borrowers have liquidity and have capacity to make payments right now, but they're fearful and rightfully so, even though they have the ability to make payments they don't want to because they don't know what tomorrow brings.
And so they're requesting payment deferrals more from an irrational fear perspective rather than an actual inability to make payments. And so we try to counsel our clients right now saying, look at these situations differently. If there's a clear I'm not getting an income stream and therefore can't make your payment, they should be treated different than a borrower who has a significant balance sheet that they can make payments off of, just that they don't want to because they're fearful. So the most common forbearance that we are seeing right now is a 60 day payment deferral. So putting that into practical words here is April and may payments being deferred with the first payment being due on June one, the amounts that are being deferred in April and may are being tacked on to the maturity of the loan. Those payments do not have interest on interest.
We're not charging default interest, we're not really charging late charges. Just a straight up you owed these two months payment. Now we're going to tack it onto the maturity of this loan. We don't know whether this is just going to be a 60 day issue and so it may extend further than that. And so we also would recommend that you have some sort of unilateral discretion in that forbearance agreement which permits the lender to extend this payment deferral. One thing that I would very much caution you about out there when you're making these agreements is this is not a time to be loose with your documentation. So I would not be exchanging these over emails. Absolutely not over phone calls. You really need an actual forbearance agreement. The lessons of 2008, 2009 was that sloppy documentation ended up in years of litigation. And so be very careful about how you approach forbearances right now and make sure they are written agreements, they're signed by both of the parties.
This is not a time to lack discipline about the contracts you have in place. And the last point here is if you choose not to defer, then the recommendation here is to foreclose. And the reason for that is these are borrowers who you've decided have the capacity and ability to continue to pay you but are choosing not to. Another lesson from 2008 and 2009, particularly from judicial foreclosure states is that these systems will get backed up massively. And so what was a 18 month foreclosure timeline in many states will likely become two to three years, sometimes even four years because they have to process all of these requests. So if you know you're going to proceed with a default anyways, you should initiate the foreclosure. And that takes us to our next slide and the last slide for me here, which is there's a lot of confusion about whether you can foreclose right now.
So first thing is that there is no federal restriction for private lender loans. We talked about that earlier. There are FHFA restrictions on foreclosures. There's a chart up here and a screen up here that shows all the states that have some actual prohibition on foreclosures. It's widely varied within this. This is not meant to be that all of these states prohibit you from doing so. There is just some prohibition in each one of these states. So it might be you can't initiate an owner occupied foreclosure. Some states you can't complete the foreclosure, but you could start a foreclosure. Some are related to county specific prohibition. So to the degree that you have any specific questions about your state, feel free to reach out to us. But wanted to give you a quick visualization of the states that have actual prohibitions in some shape or form. Most states do not have actual prohibitions in place. They are simply guidance from the state regulators stating we recommend you do not proceed with foreclosure. So many, many state regulators are reaching out to licensed lenders stating we recommend that you defer payments and we recommend that you do not foreclose. They are recommendations. They are not state prohibitions or mandates. Kevin.
Kevin Kim, Esq.:
Alright, thank you Nema. For those of you don't know me, my name is Kevin Kim. I manage Geraci's corporate and securities department. I'm also the certified fund manager instructor for AAPL. Today we're going to be talking primarily about how this is impacting mortgage funds and the best practices associated with, so the primary question that we're getting when it comes to from fund managers across the country have to do with their authorities associated with redemption requests and suspending those redemption requests and also potentially suspending distributions. Based on what we're discussing with most fund managers, the first thing we're going to be doing is going out, going and looking at their fund documents. We have to ask a fundamental question. A lot of documentation out there does not have the necessary tools in place for a fund manager to institute a complete suspension on redemptions or withdrawals of capital.
It's very important that you have that capability. In certain fact patterns right now the most useful explanation is the inability to reasonably or practically value the assets, which is very true. The same thing goes for distributions. We are getting a lot of questions about that whether you have the authority to or should you be suspending with distributions. And these two are things that are questions that are coming up associated with investors. So people are asking about how do they do this, should they do this and what is the market doing associated with this? But in line with this, we're also balancing the conversation by asking the fund manager to take a look inside the fund documents about terms and powers to protect themselves. So indemnification, does the fund manager have the necessary authority to pursue indemnification from the fund to reimburse legal costs? Can the fund manager force arbitration?
What counties are they in? These things are important because they protect the fund manager but they also protect the fund itself. They protect the funds capital because you don't want to overextend the fund in lengthy investor disputes or partnership disputes. One of the most important things here is to look at the documents, evaluate them. If you're not sure, contact us. We can walk you through the situation, we can talk, you talk to you about illegally and also talk to you about it from a market perspective and also practically from a market perspective. What we are seeing, and a lot of people are asking us this is we are not seeing a massive rush to halt business operations or halt fund distributions. Most of our fund managers that we're speaking with as clients and as contacts are saying things are business as usual to a limited degree, they're tightening their belts from a credit perspective and they are entertaining the idea of spending withdrawals and redemptions primarily because of the volatility in the market, not because of any concerns on performance.
Most fund managers that we're speaking to are actually just taking the stance that we are going to be more conservative, we're going to tighten up operations, go back to repeat borrowers, so on and so forth. Think about revising your docs if they don't have these powers. One of the worst things that we can see out there is a best effort style kind of language in there. We'll use our best efforts to redeem you. There's a lot of room for error there. So one of the things that we recommend is definitely contact us if you're thinking about kind of beefing up your docs right now, NEMA can go to the next slide please. So even if you have the authority and the rights and the powers to do all the things we just discussed, the most important thing is how you execute on that decision. So ultimately the decision to suspend redemptions, to suspend distributions, to suspend anything.
Business operations even will land on the fund manager and his team. But how do you deploy that information? Oh, I forgot one thing. Also, building reserves. What kind of language do you have in your documents of building reserves? Same logic applies. It's probably prudent to start increasing your reserves. We're working with accountants, fund accountants to come up with new methodologies to increase the reserve available. Now, back to this practical aspects to notifying investors of your decision to actually do these things. We're going to suspend redemptions or withdrawals or we're going to suspend distributions. It's important that you take your investor relations game to another level basically taking it very seriously, communicating regularly, being responsive and of course operating with integrity. We strongly recommend any fund manager that's debating whether they should or deciding whether they should suspend withdrawals or distributions or any kind of major decision that's going to affect investors.
Have a two-pronged approach. One is written, making sure that you have a very clear well-written both legally and practically a statement to your investors associated with your decision to do so, but also have a very strong campaign associated with fielding questions, getting in front of it personally with investors, so on and so forth because the last thing you want is for investors to write bum rush you via phone call an email in Zoom and you put your head in the sand, right? That's a lawsuit waiting to happen. And the last thing we want to see is fund managers get obsessed about one thing and not thinking about what to do right with their investors because that will lead to significant liability. Another thing that you should also be thinking about is adding a disclosure to your investors both in your doc set and also with your just personally maybe by email or actually or mail about basically this COVID-19 crisis or a more broader pandemic worldwide outbreak type of disclosure.
This is different than most of the act of God or government action type disclosure that funds usually have. The ppms out there probably aren't equipped to manage this. So we strongly recommend fund managers talk to securities council and craft an updated disclosure or risk factor associated with a worldwide pandemic and the impact it's going to have on the economy and to the business. What you as a fund manager should plan to be doing in all of this when it comes to anything we just discussed and more is one of the things that you should be stressing is that your goal is to protect the investors' capital, do right by them to protect their capital, protect your investors that way, but also give them a plan, an explanation of how you plan to be successful. One of the things that we are telling our fund managers and one thing they're also agreeing with us greatly is that they are well positioned to succeed in today's market because they have discretionary capital. And so what we are recommending folks not only explain to their investors why you're making the decisions that you're making, but explain to them how you plan to be successful during and after this crisis is over.
You hand it off. Now next up is Beeta.
Nema Daghbandan, Esq.:
Alright, Beeta. You are next here.
Can you guys hear me? So I'm Beeta Lecha from Spiegel Accountancy Corp. I'm the principal in charge of our tax and fund administration practices and we'll be talking a little bit with you guys today about specifically on REITs because we did see a surge of private lenders converting to REITs last year and that was driven by the tax Cuts and Jobs Act and the 20% qualifying business income deduction. So we just wanted to make sure that we can cover a recap of what the qualifications, because right now with the current state of the industry that we're in, if we're seeing an increase in certain items like foreclosures or loan modifications, it may have an impact and definitely put your REIT status at risk if you're not being very careful and diligent to make sure that you're not crossing any lines which could be risky to you.
So just bearing in mind that if a REITs status is put at risk because a REIT is a REIT election, the REIT itself would actually revert back to a C corporation and that C corp would actually lose its dividends income deduction, which means that income earned within the REIT would actually be taxed first at a 21% rate within the reit, and then any dividends flowing out to the investor would be taxed again at the investor's income tax rate. And that could range anywhere from 22 to 35%. So it's a pretty significant hit if the REIT status is lost just quickly covering their requalification.
To maintain a REIT status, you have to make sure that there's a minimum of 100 beneficial owners. It can't be closely held, which means that it has to meet a five and 50 person rule. The REIT has to invest at least 75% of their assets in real estate and meet a 75% gross income test and the REIT itself does have to pay out 90% of the income annually to a shareholder in the form of dividends. So in this scenario with what's going on today, liquidity is going to be a huge factor. Just listening to the folks at GII talk earlier, liquidity is very important because if you have any members that are trying to redeem their investments out of the fund, if you are on that cusp of having just around a hundred shareholders, you could be suddenly finding yourself in a position that you're not needing the 100 beneficial owner test.
There are some leads out there that when they made the conversions were actually pretty close on the five and 50 rule for who their owners were and making sure to be pretty diligent not to cross that any of five people owning more than 50% of the reach shares. But if you were close and you suddenly have members redeeming from the fund, you may find yourself in a position that you're no longer meeting that test and just have to be very careful If there's any situations which impact you losing a line of credit or members withdrawing or you can't fund your loan commitments, you may not be able to the dividend distribution test to distribute out 90% of the taxable income for the year. Again, on the income and asset test, if you're foreclosing on properties or doing loan modifications, you'll just want to make sure that you're very careful about those tests so that you can still meet them and not do anything to put your status at risk.
So just very important to be very, very cautious on all of these different things and you'll want to make sure in this market and these situations that if you are seeing defaults coming down the line that may result into foreclosures, what are the steps that you would take? Make sure that you're talking to your attorneys, make sure you're talking to Kevin and his team about what is it that you can do. One of the trends that we saw last year was instead of private lending companies converting just into a straight REIT and taking that entity itself and converting to a reit, they actually set up a lot of REIT subsidiaries. So fortunately, any of the folks that have a REIT subsidiary may be able to just easily transfer loan that they're seeing enter into a default out of the REIT and then foreclose or do the loan modification outside of the REIT entity itself.
Maybe just bump that back up to the LLC and make sure that you're not putting your REIT status at risk. If your entity is actually just a REIT and you don't have that, just make sure you talk through with your attorneys about what are the options to get that loan and default out of the reit. And there are actually are some safe harbor rules. So if you do find yourself in a situation where foreclosure does need to occur or has already occurred and maybe you didn't realize you weren't supposed to do this within the reit, there actually are some safe harbor rules around that. A lot of it would involve holding the property to the producing rental income for at least two years. There's a seven year test where you may not be able to sell any more than seven properties out of the reap, no more than seven within a taxable year.
There's going to be some limitations on the adjusted basis of any properties that you do sell and just keep in mind that if you do have a transaction that results into a prohibited transaction surrounding your foreclosures or loan laws, prohibited transactions within REITs are actually taxed at a 100% rate. So it's a pretty significant financial impact through the REIT and just very detrimental. If there's any questions about those things, feel free to reach out to me. Feel free to reach out to Kevin and his team and I'm sure that we'll all be able to walk you through it.
Nema Daghbandan, Esq.:
Great, thank you so much Beeta. And the next speaker we've got here is Josh, CEO with Alfred Tech.
Thanks Nema. Thanks Beeta. So as Nema mentioned, I'm CEO of Alfred Tech. We make a loan origination, software loan servicing as well as investor and fund management. We also do some work kind of a CTO and a box type offering for some of our existing lending customers. And in that work we get really a broad view of technology as lenders are using it today. And so we thought it might be useful to just talk about what we're seeing in terms of technology to enable folks that are operating obviously all remote today. And what we're seeing is really each lender is different because it kind of depends on how prepared you were from a disaster recovery perspective because that's really what we're implementing now when we're all going at home, we're not in the office anymore. So you're really executing those disaster recovery plans that you hopefully had in place.
So first with file management, depending on how you were set up, if you were all cloud to begin with or if you had a hybrid environment, maybe you had some file server in your office to handle all the large amount of files, you're probably in a VPN type setup and hopefully your IT provider set up something like that ahead of time for you. However, we are seeing some issues and limitations around VPN because people may be set up one way when everybody's in an office, but then when you go home, your internet connection at the office is what everybody is funneling through when you use A VPN. So you may not actually have the right bandwidth to have everybody at home all the time, and so you may have a lot of slowness that happens on your file server, you may not be able to access the files regularly and easily, and so what you end up doing is just emailing everything around, which is not really a great solution.
And so I know we've helped folks move to cloud solutions kind of in a very quick fashion over the past couple of weeks. So things like OneDrive and SharePoint and Dropbox, Microsoft Teams is a great solution for file management where it's an integrated kind of a chat offering as well as file and storage management. I would encourage you guys to make sure that whatever you're doing around file management right now, make sure you're documenting or at least tracking any files that you're moving from, say your in-office file server up to the cloud or vice versa. One of the challenges that I foresee is when everybody comes back into the office, we're really going to have an issue around what is the latest file and did we keep good file tracking when we were all remote? And so make sure you have someone that's kind of tracking that.
And also within file management there's integrated lending solutions out there. Alfred is one of the offerings that kind of gives you a file repository. There are other ones, but per loan you get a nice bundle of your loan data plus your files. The other aspect is virtual loan committee. I mean everybody is working virtually. Everybody is using one of the many different platforms. Zoom seems to be the most popular. We personally internally have used Zoom for many years prior to this, and so I know that Zoom is extremely reliable. It does cost a little bit more, but it is the most reliable and the video recording and the functions and features with Zoom is definitely the best. So if you have the ability or if you're already using Zoom, that's great. The other two options, Microsoft teams, if you're an Office 365 type of lending shop, Microsoft Teams comes with what you guys are using, that's a great option.
There are some limitations around video, so I know as everybody moves to video, there are some limitations that Teams has on video. You can only have up to four people that you can see at one time. As you can see in Zoom today, you can see all of the panelists and so that's one of the limitations in teams. Google Hangouts is free. We see people use teams for everything within their business, but then sometimes they're using Google Hangouts to just do video and chat a virtual loan committee where they can see each other and really talk through different deals. The next piece is scanning versus e-signature. I mean this is kind of a very practical option, but if you have the ability, I would just encourage folks to take scanners home. I know that in some cases it's difficult to work at home depending on what your environment is, but literally just offer your employees to take the scanner.
If you have a desktop scanner, have them take that home and then it just makes it easy to capture the loan docs when they come back. If you're not able to do that, certainly moving to E-signature around term sheets or just basic loan applications is a good option if it's integrated with your loan LOS solution, Alfred offers that. There are a couple others as well. That's a great option so you guys can just have that integrated into your document flow. Also, some people may not know, but you can also take pictures of your loan docs and of your individual documents with your iPhone. You can upload those into the cloud. You can actually stitch those together in a pdf so you actually don't need a physical scanner to do some of the scanning because Adobe will allow you to convert those into PDFs off of the images.
Next is remote security. This is actually one of the biggest risks I see with everybody working at home just from a strictly IT perspective. The biggest protection companies have is inside the office you have a firewall, you're protecting against people downloading stuff or clicking on random links and emails. And this is really the biggest risk because at home we don't have the same firewalls and wifi protection that we do in the office. One thing that I would definitely recommend and you can reach out to either myself or your IT providers, Cisco umbrella, they actually are offering a bunch of free trials and extensions on free usage of that product. Right now it's basically firewall in the cloud that you can have on everybody's laptop at home. So you get a lot of the same protection that you had in the office, but by default on everybody's home wifi, that's a great great protection option.
There's other things out there like Microsoft Intune, Bitdefender and Patch Manager. These are more kind of advanced things than your IT stack that you may be using and hopefully your IT providers aware of, but they can make sure that your laptops are up to date and using all the latest stuff so that you don't end up getting infected with ransomware or malware, which is way more rampant now than it had been because people are trying to take advantage of the virus and really bad actors out there. And then finally, depending on what you're using around LOS and servicing and fund management, if you're using a cloud-based offering today, that's great. That allows you to stay in business anywhere, whether you're at home in a coffee shop or whatnot. If you're not using a cloud-based option, I encourage you to check out one of the many that are out there, alpha being one of them, some lenders.
We're finding it's a good time for you to take a step back in this kind of lull period as you prepare for the growth that we expect to happen later this year. As everybody comes back into the office and the markets open up, they're taking this time to really streamline their operations, figuring out where can I improve on technology and process and we're happy to help you through that. And lastly, this may sound strange coming from a tech guy, but don't forget to be human as you're going through this. This is one of the big things as we're all just kind of rushing around, especially if you're not using video, it's not face-to-face. Make sure you're asking people how they're doing. Everyone knows or will know somebody affected by covid, so just please be aware of that and just be understanding of tech challenges at home, kids, aNemals and just general wifi and technology at home is not like what we have in the office. We see people doing virtual beers. Have as much fun as you can in an environment like this. I know it's hard. The technology is not a replacement for being in the office, but hopefully we can make the best of it. So thank you. I'll pass it over to Dina now.
Nema Daghbandan, Esq.:
Great. Dina with SBA Complete here.
Thank you. So my name is Dina Kroshkin, I'm with SBA, Complete SBA. Complete is one of the largest SBA service providers. We have about 300 institutions in our networks. Our services for them are loan sourcing of SBA transactions, processing servicing, and then the sale of the SBA guarantee. We're headquartered in Los Angeles and have about 70 people on staff. I think for the most part people are familiar with the general 7(a) program. So I think what I would like to do is cover a little bit of information as to what's available there right now with the disaster relief programs because that is the primary item task today. So SBA has released an SBA economic injury disaster loan, which was a direct application with the SBA. That was the first option that was released. Borrowers were to apply directly with the SBA administration for that loan.
That loan was limited to $2 million and it had a component of a grant associated with it, which was a $10,000 advance that didn't need to be repaid back. That advance was to be coming in into the borrower's hands within three to five business days and then the rest of the application was to be processed. Clearly all of that has been now delayed and the SBA is truly backed up. They're probably over four weeks backed up on those applications, so it didn't go as fast or as planned last week. The SBA has opened up the doors for the application for the CARES Act 7(a) loan as of Friday. Lenders were supposed to be receiving those applications, but we've received a delay there as well. The promise was that there is going to be 350 billion in loans that is going to be available through Lender Network through June of 2020.
And I'm sorry, my slide has a typo there. And that SBA Cares Act included the Paychecks protection program as well as application for items that are outside of the paycheck. So rent payments, interest payments and the mortgages, utility payments, those are to be qualified and included. The SBA provided an interim guidance to the lenders last Thursday for us to be able to take those applications and then start the processing as a Friday. However, that guidance wasn't full and it wasn't complete. So that's out of stall. A lot of lenders are now taking in the applications, but they're not able to process those applications because we don't have full guidance from the SBA. Some lenders are trying to decide how are they going to proceed? Are they going to take the risk based on the interim guidance? And typically those are the non-institutional lenders that have been approved by SBA before they are considering to move forward on those.
As of this morning, there were a number of lenders that have stated, we're only going to consider these applications for current depository clients. And others said, we're just going to be out of this game and we're just going to wait for additional guidance and reconsider at a later point. Certainly this is a very attractive program for a borrower. As a business owner, it would provide a hundred percent guarantee by the SBA, which is supposed to incentivize the lenders to grandees for the borrower. The loan interest rate is attractive, it's 1%. And then the repayment plan at this point is two years. When the program was relationally announced, it was stated to be at a 4% rate for a 10 year repayment with a forgiveness factor to it. When the program actually rolled out, it was decreased to 1% interest rate and then the loan repayment is now two years.
So the program itself continues on changing for lenders, which is creating a delay in us to be able to process these transactions. Lenders are limited to what they are charging on. These are standard rates to the borrowers. Every lender is going to offer essentially the same loan structure. Lenders are compensated for the processing by the SBA, they're not able to take any additional fees on that. And then the SBA regulates as to how much are they going to be receiving and processing. So for loans that are under 350,000 SBA is to pay 5% of the loan amount for processing. And then anything between three 50 to 2 million goes at 3% and over 2 million, it's a 1% processing fee from SBA. There are also limitations set as to what can be paid to the brokers that are referring these transactions. And that was set by the SBA as well.
The broker fees are going to be at 1% up to three 50, half a percent between three 50 and 2 million. And anything that is over 2 million is at a quarter. So that gives really a one type fit of transaction and then the referral and the processing. But the issue comes into lenders to decide to get moving on. This is liquidity. Are they only servicing their current clients? How much of it can they delegate out of their liquidity funds and where does this capital go? SBA has been adjusting rules, has been adjusting, the application process has been adjusting the documentation that is needed. So all of this is really creating a backup for the lenders at this point as to, yes, we're now taking applications, we're trying to get you into a qe, but when can we actually start the processing is a little bit of an uncertainty right now.
There's a lot of rumors on the internet that the loans have been funded and then that there are lenders that are already lending. But as of what we know as of this morning, lenders have not been able to proceed. The SBA has indicated that any business is able to apply for these PPP loans or the paycheck protection program even if they were not a qualified business for Standard 7(a) loan before. So I think one of the questions in the chats was coming in, are the private lenders able to apply? As of what we've seen last week when we did some research, we have been taking an application for a lender that is a lender themselves, the borrower that is lending as far as the employees and the 10 90 nines when the rule came out. Originally the PPP program was inclusive of the 10 99 employees. When the interim rule came out last Thursday, it indicated that 10 99 employees are now supposed to be applying individually and that is to be opened up later this week. So again, it continues on to shift as to what the final guidance will be at, but as of today, any business that has a payroll is eligible for application and then any 10 99 contractor R to be applying themselves through their own entity at a later point.
Nema, could you move to the next slide for me please? This is a bit of an overview as to what is available right now based on Relief Act that came out for the 7(a) loan, the PPP loan program, the SBA Express loan that has been increased to 1 million and then the SBA Express Bridge loans. This information was put together by the Coleman report. That's what we were able to put together as an overview. So that stays with you guys as a slide, but the challenge right now is that things continue on developing and changing and until SBA issues a final guidance, lenders are really relying on their best practices and best knowledge as to what they know about the 7(a) process and how they were moving forward on it before. And then what the interim guidance says anything that is in question will likely just remain as a paused application until there is a final rule that has been issued. I've seen a number of questions there in chat. And then the Q&A, I think I'll try to address those when we're ready for those. But as far as an overview for my piece, that would be it. And next is Seth.
Hey, thank you very much. Oh, go ahead Nema.
Nema Daghbandan, Esq.:
No, that was great. Thank you Dean. And likely I suspect that the law of these questions will be when we go to the Q&A section. I'm sure you will be a hot commodity, Dina, but yes, go ahead Seth and lead us here.
Great. Alright, thanks Nema. Hey, good afternoon everybody. So yes, so I want to speak a little bit about what we're seeing in the capital markets. We've seen a fair bit of systematic shutdowns across multiple asset classes in the secondary loan market really spread from jumbo and non QM loans into the 30 year rental and to fix and flip as well, really where the bid as spreads have widened to the point where buyers and sellers do not or cannot execute. In addition to that, we've seen securitization CLOs for the time being are pretty much shut down. We have seen that there might be some rating agencies looking at potentially doing some securitizations in May, but that's pretty preliminary at best right now. We sort of expect the entire secondary market to be shut down for at least the next few months unless you're settling to a government backed kind of entity.
In terms of funds, regardless of size, we're seeing meaningful remar calls from repo lines or having lines actually being pulled from repo facilities. Buyers of loan papers. So this is not just the originators but the large multi-billion dollar funds, they're seeing massive liquidity issues due to levered investments needing to sell assets at a discount. Similarly, originators with repo lines are losing access to leverage, having to rely on balance sheet equity to sustain business expectation is these markets will come back, but honestly maybe close to a year before the overall market is looking normal. Nema, if you don't mind going to the next slide please.
In terms of committed lines, there's really two different buckets here. All the repo lenders, we feel like they're pretty much out of it right now or at least have had major remar calls commit alliance, continue to fund regional banks such as ours. It's about as business as usual as it could be right now. However, most banks are on pause for new business over the next few months to assess market conditions and to see how the dislocation in the markets are evolving over the next few months. I mean, tracking delinquencies will be key. The remaining non-bank lenders who have strong balance sheets and liquidity, they're open for business and they're seeing more opportunistic deal flow weaning down their pipeline. And overall we think pipelines will slow over the next quarter or so. Liquidity is still at a premium. Lenders will need to make sure portfolios continue to generate liquidity payoff.
While we've seen a pretty large dislocation with the lenders that were wholly relying on the secondary markets, even lenders who are relying on their own balance sheet will need to watch liquidity closely over the coming months. Depending on velocity of loan payoffs, we expect to see yield compression stall and reverse not only the remaining non-bank lenders in the space, but also for the warehouse lines as well. While L IOR has dropped significantly in the past 30 days, financial institutions we've seen are holding their ground on floors above the floating rates. So expectation is floors are going to be held pretty strongly over the next few months as credit spreads widen as we come out of the current environment. While we expect fewer participants both with non-bank lenders as well as other financial institutions providing warehouse lines, we feel like the remaining players will take a larger market share in a smaller market. We think deal flow will be better with a better quality borrowers lower LTVs and higher spreads at fees yield compression. Again, we're going to be seeing that reverse. And then finally, I think opportunities to purchase notes at discounts will emerge as a viable business model in as continues to. And with that, I'll hand it over to Rocky.
Thank you, Seth. So I'm Rocky Butani, CEO of Private Lender Link. Our website, privatelenderlink.com is an online marketplace, mainly a directory of private mortgage lenders throughout the country for residential and commercial properties. And we have other directories of investments service providers. So we try to connect a lot of parties in the industry and help them generate leads. So I've been serving a lot of lenders on our platform and trying to figure out who's still lending and the ones that are lending, what are the new guidelines. And what I'm finding is the lenders that are still lender, like Seth mentioned, a lot of them are debt funds and they have liquidity and there's also lenders that are backed by individual investors or what you might call beneficiaries, and they still have the ability to lend and everyone's being more selective. So specifically in terms of loan to value, what I found is a lot of lenders are dropping their maximum loan to value down to 60% and some even at 50%.
And loan or fix and flip loans are a little tough these days. There are some lenders that do focus on fix and flip and some of them are still lending, but they're being very selective and they're even picking up borrowers that are fallouts from other lenders and they're being really selective. So if a borrower doesn't have more than five or 10 successful loans under their belt, they're likely not to be considered. So pricing's also going up. I found that some lenders are increasing their pricing by at least a hundred basis points and some even so California rates are likely in the range of nine to 10%. Other states are going up to 11 or 12%. And that's even with low LTV loans. I found a couple of lenders that are still doing ground construction loans and even for larger projects, larger commercial projects. So there are a few options for construction, and again, it's really strong borrowers with really good credit and liquidity.
The 30 year product is a tough one. I haven't found anyone that's still doing 30 year loans. So the alternative for some of those borrowers is to get maybe a two year bridge loan and find a solution thereafter. So the challenge with that obviously is pricing. There's no short term loan that's going to be in the range of five to 7%, which was what the rates were for the 30 year program. So those are kind of done for now, but I may find someone or some companies that are offering that and we'll find out in the near future for fix and flip loans, the lenders that are still doing fix and flip are requiring 20 to 30% cash down and even some contribution on the rehab costs as well. And the maximum loan to a RV on that is going to be 65% and even 60% for most lenders.
Commercial real estate, there are some commercial real estate bridge lenders that lend in the range of 2 million up to 20 or 30 million. And a lot of them are focused only on multifamily and industrial and some of them office buildings. Retail unfortunately is the least desirable one of the asset classes as well as hotels. So those are going to be a little tough for lenders to fund. And then I've been hearing from a bunch of companies that they are looking to purchase loans and at this time it's a bit of a challenge because some of them only want to buy non-performing loans and loans. As of March were still performing. So it may take a couple months for lenders to figure out if the loan's non-performing and then there may be some opportunities there. So all these different note buyers have their different guidelines. Some are non-performing only, someone performing only somewhat standard bridge loans as opposed to fix and flip. So I'm still trying to gather all that information and find out who's buying and we may see a lot of activity in that sector in the next two to three months and beyond. So that's it for now. Thank you very much.
Nema Daghbandan, Esq.:
Alright, and last but not least here is Mike. Mike, you're muted. Lemme try to get you unmuted here, bud.
Is that better?
Nema Daghbandan, Esq.:
Yes, go ahead. Thank you. You got yourself muted all over again here. Try to unmute one more time. Still muted.
Is that better?
Nema Daghbandan, Esq.:
Yes. Good. Okay.
Sorry, everybody. Appraisal Nation, as everyone knows the Nationwide Appraisal Company, we are the number one private lending AMC in the country. We do approximately 65 to 70% of all institutional private lending valuations and looking after valuing those assets is a big part of what's happening and to see what we're doing right now. So right now the present state of Appraisal Nation March was an unbelievable month. Something in the 20 plus years I've been doing it, I've never seen, we started the month at a hundred percent growth. The rates were so low on the conventional side that we couldn't keep up. We were hiring, I think we had 20 plus recs out and looking for employees everywhere and trying to hire. And one day, just like everybody else, a light switch hit and we went from being a hundred percent increase month over month to being a 60% decrease for the month of March.
So that was how Appraisal Nations month kind of went. I'm sure that happened with everybody. That being said, we are still a hundred percent operational. We have made a commitment to our employees and our staff and our team that we will not lay off anybody. And whether that's utilizing resources through the SBA or other resources that we have at our disposal, we will. So we've doing everything in our power to do that. This has also given us an opportunity to find some creative solutions, which I'll touch on in just a second. So appraisal nations alive and well. We're still taking care of all of our lenders who are lending and with the present state of asset valuations, I can tell you who that is here, who release what we're seeing in the private lending space right now, 80% of all of our lenders are either on hold or pause for the present time being, they want to see what's going on.
It's a very large number. People who are getting capital from either tore or rock, whatever the case may be, or other solutions, they're paused right now. They're trying to find alternative solutions and putting together new guidelines to cope with this. And that whole market is paused. The 20% who are still lending, I know Cogo Capital is and Jcap Corevest, we're seeing these orders every day. Constructive loans is on a very limited basis. What we are seeing though, is many lenders, as Rocky pointed out as Seth pointed out, they're tightening their guidelines. What you have to limit your risk is what ends up happening in a volatile market like this. You have to find ways to limit your risk and what they're doing now, they are saying, we'll lower the LTV, we'll raise the F ICO scores. We're going to find different alternatives to say, okay, it's worth us doing this product at this time in the marketplace.
So that's what we're seeing in the private lending. In the conventional lending. And I will just touch on this because there's so many institutional private lenders who do follow conventional guidelines. In a lot of cases in the conventional space, those markets are down about 60% right now is what we're seeing. So most of our conventional lenders are still lending. They're doing the same thing. They're tightening their guidelines. Rocky mentioned he's seeing places that are up about a hundred basis points in conventional lending. We actually have wholesale clients that are actually raised their rates 200 basis points. They said, Hey, if we're going to do this, it's going to be worth the risk. So we're seeing people taking, I don't want to call it advantage, but people are adjusting to the market appropriately and we are seeing that happen servicing that actual volume is up because everyone wants to know, Hey, what's going on with our assets?
And we're seeing a lot of exterior products being ordered right now, BPOs and drive-bys and different products like that. So if anyone is doing any sort of servicing and they want to know what their products are looking like and what's going on, we're obviously able to help you and take care of that. I will say that Appraisal Nation doesn't have a crystal ball and all of our data is historical, like anything else. And we cannot tell you, I've gotten this question probably five to six times a day now, is what is this doing to market values on properties and we just don't have that data yet. Right now, I can tell you, looking at the data that we've had in the North Carolina market, for example, where I am, the market's still doing very well. But again, that's historical data looking typically two weeks back. So we'll see how April changes things and there's a lot of adjustments coming for April.
But to touch on what the GSE has done and may give some ideas for some other people, Fannie and Freddie got together, there's some temporary rule changes that they've enacted. For example, instead of doing a 10 0 4 interior appraisal, which is the standard appraisal that most everybody does, they are allowing in situations where appraisers can't get into properties, they're now allowing for desktop appraisals, provided the tax information is correct. They're also allowing for drive by appraisals if the appraiser is allowed to get out and drive. I know in some stay at home order states that may not be the case or shelter in place states. That may not be the case, but where the appraiser is able to get out and the homeowner will let them in and the appraiser is willing to go in. The first and foremost product that everyone still wants is the 10 0 4 interior, if it can be completed, if not Fannie and Freddie have both agreed to do a desktop or a drive-by now what Appraisal Nation has had the ability to do over the last two weeks.
We have worked closely with some great people and we are developing a product that will be released on Wednesday that will actually provide what we're calling a Home Link feature, that we will then send a link to the borrower in the property and they will go through a questionnaire and take photos that are geo stamps and will tell us the location of the photo as well as the time and date the photo was taken. That will then come back to our office. We will review it. We will then download that to the appraiser who will then be able to include that into a desktop or exterior product. As we all know, a picture's worth a thousand words. This gives us the opportunity to get those words into the report and still see it without putting risk to the borrower or to the appraiser. So presently, those are our solutions that should roll into effect, I believe Wednesday afternoon. I would recommend if anyone is on here and works with Appraisal Nation, we are including that into our services, but I would recommend that you reach out to your account executive, which would either be for the private lending space, it's typically going to be Dave Roberts or John Esco. If you have any questions, feel free to reach out to me, but that product is a great way to see in the property and what's going on without having to get the appraiser into the property.
That's where we're at right now.
Nema Daghbandan, Esq.:
Thank you, Mike. I appreciate that. And thank you to all of our panelists here. We did slate this to go for one hour. If the panelists, if you need to drop off, I can appreciate that. We'll upload up the floor here. So a couple kind of housekeeping questions. I've been watching the chat threads pop through here and getting a lot of similar questions being asked. So one is, will these slides be available? And the answer is yes. There will be a follow-up email letting people know how they can access the slides. I do not know whether the actual chat or the content will be available. I do not think that it would be. There will be a follow-up survey going out in the email that goes out to a great degree trying to connect people who are looking for capital to originate loans as well as those who are kind of seeking capital sources.
And so we're going to try to do our best job here of getting people connected after the call. As I know that that's a lot of the chat here. The best thing, if you have a question right now, the best way to do that is there is a Q&A box at the bottom of your screen. So feel free to ask a question in the Q&A box. That's very hard to follow in the other mediums here. So again, there's a Q&A box, so feel free to ask a question in that Q&A box and then we can try to address those to the right. And if you have a person in mind who you'd like to answer that question, that would be even more helpful as we can try to direct the question. I know that I saw a few different SBA ones, and in particular there appears to be questions related to private lenders receiving the PPP loan. Dina, I think you had mentioned earlier on here about whether private lenders can qualify for these loans. I think there was questions that I'm seeing on here, repeat to some degree about whether those loans are forgivable from your understanding.
Sorry, Dina, if you can unmute your line.
Thank you. So for clarification on the private lenders, we would need to wait for the final guidance there to say absolutely yes or absolutely not. There's certain things that have came up in the interim financing that indicates that yes, businesses are open, but then the businesses that are excluded, but then maybe the businesses that will be approved later on. So that as of today, I think what the lenders will be end up doing is saying we're going to have to see that final guidance for the private lenders. So just the correction, I don't want to say that yes, you're absolutely allowed. We're going to see that final guidance and that should be spelled out there. As far as the forgiveness goes, yes, there is a portion of the loan that is to be forgiven. And as it reads, as of right now, it is up to eight weeks of your payroll expenses, either your lease expense or your interest on the mortgage, and then the utility expenses.
What is not clear is how will that be identified as to what is the actual amount that is forgiven. It states that it may come out and say that if 75% of the funds were used towards the payroll and then the remaining of the funds were used to cover additional operational expenses to keep the doors open, that the forgiveness will be there. That is the guidance that lenders are still waiting on. So there will be a piece that will be forgiven of the loan. Whatever is not forgiven is going to roll out into a two year repayment plan and is going to be under 1% interest rate.
That's in a forgiveness piece. And then I think there was another question there that maybe I can address right away here as well. One of the questions was can the application be done for the PPP loan and the EIDL loan? Yes, you could submit two applications. What has to happen though is that the funds are used for different purposes. So if EIDL loan was solely used for payroll for the first five employees and then your PPP loan was used for the other 10, and you show different sources and different uses, then you could apply for both loans. Another option that has been given, at least at this point is that your EIDL loan could be refinanced into the PPP loan. So the way that we are reading the guidance today is that you could apply for both, but there has to be a very crystal clear usage of funds of the loan that you could show and prove for you to be eligible for both Nemar. Are you seeing any other SB related questions that maybe I can,
Nema Daghbandan, Esq.:
I'm sure. I'm sure they'll pop up again here, so we'll keep moving on a little bit. So another question here was whether moving forward are people collecting six to 12 months of prepaid interest and is that acceptable yet for the new originations that we are seeing come across our pipeline? That is pretty commonplace to have prepaid interest as part of the loan. A lot of lenders are demanding it or requiring it just because income streams are not assured right now. So yes, it's pretty common to see the collection of prepaid interest, which is being financed at the loan closing. I did see a question coming here for Mike. Mike, with the new product rolling out with timestamp photos, are you also including videos of the interior?
They won't be videos, no, but it will have a questionnaire very similar to the front page of the 10 0 4 looking at foundations. They'll have front photos, multiple back photos that does give room. If the borrower or whoever's in the property the investor has made certain improvements, they'll be able to mark those improvements and take photos of those improvements.
Nema Daghbandan, Esq.:
Thank you there. Mike, another question for you, Mike, which I'm sure you're going to get a hundred times for the next a few days here, which is have you seen numbers that correlate home prices versus employment numbers in the industry? And do you have any indication of what the home price drop will be?
No. And then again, as I mentioned, we're getting that probably five to six times a day right now. The data just doesn't support it right now, but again, we're going to have unemployment numbers higher than the great recession. I think the Great Recession topped out of 25%. We're looking at unemployment numbers that could hit 40%. So I'm sure there'll be a dip. I agree going all the way back to the beginning of this conversation that I think it's going to take probably a full year to recover and cycle through this and that would probably hold true with market values in homes. So my guess is there's going to be a dip. We have not seen that yet, but I also think that it'll recover as the economy recovers.
Nema Daghbandan, Esq.:
Thanks Mike. Dina, another question for you here, which is an interesting one, which is can you apply for CARES Act loans? Can you apply directly to the SBA or must also be, say, always be done directly through a bank or other lender?
So the CARES Act application for the PPP, the paycheck has to go through a lender and then the only direct application that is done with the SBA is for the EID alone. That's the only one that they're going to take in and process.
Nema Daghbandan, Esq.:
Thank you. The next question here is when lenders are deferring payments, are they also reporting this as a derogatory mark on the borrower's credit note? Generally speaking, we are seeing no derogatory mark being recorded for deferrals during this time period. And so yeah, that's the kind of general wisdom that we're seeing on our end of it. Another appraisal question. How would you know whether mold or poor quality or drug or chem lab, I mean how can you really deal with all these other X factors that an interior appraisal would've been able to identify? What are you doing there and how are you having this dialogue with your lenders? Mike,
That's a great question. So our recommendation as we roll out this new product is there is a spot on there that says are there any defects to the property? Are there any issues with the property? Please take photos and include those. Also, you're putting a lot of trust into someone to do that for you, but that's something we're hoping that they'll do. There's a lot more risk when you don't go inside a property when the appraiser who is completely independent and unbiased of the valuation is not able to go in and give you that information. So that is a risk factor that lenders will be facing in this interim period.
Nema Daghbandan, Esq.:
Great, appreciate that.
Don't a question for, of course, Dina. So a twofold question. One would be if your payroll has increased, it looks like according to the PPP, they're using a 12 month average, but let's say for example, your payroll has increased significantly. I know that my payroll from March over March is about 200,000 a month higher. They're doing it off the 12 month average, not off of the last month. Is that correct?
They're doing it off of the last T 12. So not necessarily your 2019, but you're going to go March to March the average of the last 12 times two and a half.
That's what I saw. Okay. And then the other question would be that the PPP, I know that it is for payroll related expenses and that it can be, if you will, granted back if used for those purposes. Are you able, and you may have answered this, but are you able to, and I saw the 1% interest rate, are you able to borrow more or request more than the payroll amount?
So you could request more than the payroll amount, and that more would include your lease payment, your mortgage interest on your commercial building or your office building and then your utilities, and then anything that is associated with the payroll. So if you've got the healthcare and then you've got the vacation, all that, that could all be added. I will state this though, only going to be one application or one loan allowed under CARES Act. So when a borrower is submitting an application, they should really put in that full dollar amount that they're asking and then allow the lender to go through the underwriting process Once the underwriting is issued to come up to that dollar amount. You don't want to come in short and then go for more funds. You won't have that option. It's one loan per borrower
Right under the PPP. But you're also able to do the EIDL also. You could do two loans if you did
Both. Correct. You could do both and both have different restrictions, but you will have to clearly show that the funds were used for a different purpose. So if your EIDL was covering maybe your utility expenses and maybe a portion of payroll for certain individuals, then your CARES Act has to go towards different funds.
Nema Daghbandan, Esq.:
Great. And I want to just thank all of the panelists here. Eddie, any kind of final parting words to our industry and everyone here on the call?
Yeah, I just want to say thank you for everybody joining us and obviously there's a huge number of guests on here today, and I just want to thank everybody for joining us and just want to encourage everybody to keep helping each other. I know some are finding opportunity and some are struggling, but as an industry boy, we want to make sure we're helping each other out. So Nema, thank you so much to you and your staff to Gisi for really jumping in and making sure that all of our questions are answered from a legal standpoint and so on and so forth. So just thank you so much. I appreciate it. And thank you to everybody that's participated today.
Nema Daghbandan, Esq.:
Thank you everyone. Thank you. Have a great day.
Thank you everyone.
Thank you. Thank you.