Technical Question for HML's

3 Replies

Is there an industry standard for serving a notice on a "non-monetary default" in a hard money loan? 

A private hard money lender and I have agreed to business terms on a loan, and our attorneys are on opposite sides with one of the legal terms relating to serving notice on a non-monetary default.

My attorney's concern is that worst case is that we can be foreclosed on if there is a "minor" breach of the contract and lose the property for something that can easily be cured had we known about it.

The Lender's attorney said we will have time to cure a loan even if we are being foreclosed on, and he does not want to be bothered with serving default notices. 

The Lender and I are both okay moving forward with the "industry standard". Can any lenders/borrowers can chime in on their experience?

Thanks in advance.

Actually, the lender's attorney is correct and yours seems a little gun shy.  There is no "industry standard" per se, required notice is state specific, but may be only to monetary default. Custom is to follow the notice required provisions for any default, as "reasonable notice" given for administrative matters.

 The deed of trust or mortgage in the notice of default section gives the time notice is required, 30 days, that is to any default. A time to cure any non-monetary default will be the same as any monetary matter, 30 days. A lender, using a standard deed of trust may advance funds to cure a non-monetary default and that amount is then added to the principal amount to bear interest.

Insurance is a more critical matter than taxes as a tax lien may not be filed for a year, but insurance places the collateral at risk after any statutory or policy grace period, which may be 3 days. A lender will send a request to provide proof of insurance, generally they will wait a few days 3-5 and follow up with a phone call just as they would for collections. If proof isn't provided as demanded,  they may place a forced insurance policy, it only covers their interest.

A HML or private type generally won't have access to forced placed policies, they can simply advance the premium on your policy and add it to the note or make demand for that payment. But they don't have to advance funds.

If they didn't pay it, they would then need to follow up by making a demand just as they would make for a demand for payment.

The reason the lender's attorney doesn't want to be bothered with giving such notices is that they are and administrative servicing action and are usually an issue that is cured quickly and never goes to any legal action. If legal action were taken, it will get the lender no where as a borrower will be given the opportunity to cure the default. The only instance I know of where a private/HML went to foreclosure was over unpaid taxes which were not paid for over a year and the borrower failed to pay after three demands were given, the lender advanced the funds then followed the procedures for the monetary default. That was a non-judicial foreclosure and the borrower did not seek a judicial proceeding.

If any lender simply began foreclosure from a non-monetary matter, call in the note due without making any demand allowing time to cure, that lender would be subject to a wrongful foreclosure and predatory lending suit, they should have more sense than that. Your lender's attorney is probably aware of that and in such event, he would then advise his client, the lender, to make a demand to cure the matter.

No lender will proceed without first making a demand to cure some matter. A note will often state that the borrower waives rights of presentment and demand (just anticipating where your attorney will go next), this is more to notices given but not received, a borrower leaves, can't be located, is incapacitated, died or is in jail. Courts may then accept waivers of certain rights under some circumstance where such may not be applicable in fairness, some rights may not be waived by agreement.

Since you're speaking of non-monetary default, this may not apply to some joint venture where other performance may be required, but even in those cases, any partner/lender can not simply begin foreclosure without making a demand to cure the issue. The demand must be reasonable, there is no.....pay by close of business upon receipt.

I'm  guessing your attorney has little experience in foreclosures or, you never really know all the motivations an attorney may have in giving counsel, but I wouldn't be concerned about this matter. :)