The Pitfalls of Fractionalized Deeds of Trust

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By Edward Brown

Many investors like the alternative lending space where they can invest in mortgages, otherwise known as, Trust Deed investing, whereby they become the lender on real estate. The two major ways to invest in these mortgages is either in some kind of pooled investment [a Fund], similar to a mutual fund or owning the deed of trust on a specific piece of real estate, similar to owning an individual stock.

In the case of investing in a Fund, the investor invests in the Fund, and the manager chooses which loans to make to borrowers. In the situation of owning an individual deed of trust, the investor chooses which specific loan to invest in and is recorded on title. It is the latter that is the focus of this article, and specifically fractionalized deeds of trust where the investor shares ownership in the investment with on or more other parties.


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Most note brokers [in California; other states may vary] are licensed to fractionalize a deed of trust [notes] with up to 10 owners [beneficiaries]. Other brokers have licenses from the Department of Corporations to have more than 10 beneficiaries. The reason brokers fractionalize notes is usually because they are too big for one investor. A $40,000 note may be able to find a home with one investor, but a $700,000 note may need more than one investor in order to be funded. Each investor receives a recorded deed of trust [for their protection as evidence for their loan]. When the borrower pays the loan off, each investor is required to reconvey their interest in the loan [notarized signature] in a timely manner [California requires this be done within 21 days of the request]. The reconveyances are deposited in escrow, and each lender is paid off in escrow as well.

If everything goes smoothly, no one complains; however, what happens if things don’t go according to plan? What if a lender is unavailable to sign off in a timely manner? What if a lender refuses to sign? What happens if the borrower defaults on a fractionalized loan? What happens if you have a minority interest [less than 50% ownership] in a fractionalized loan? These are just a few instances where a fractionalized lender faces challenges, and these challenges can be monumental.

First, let’s look at a simple situation where a $900,000 loan has been fractionalized into 9 different lenders [each having $100,000 ownership in the loan] and 8 of the 9 lenders signs the reconveyance paperwork in a timely manner but one chooses not to sign [in time, or not at all]. Why would the lone lender choose not sign? What if the loan was very well secured and the note was yielding a higher than market rate of interest? A naïve lender may think that they can enjoy the higher interest for longer than allowed [not signing in a timely manner]. This situation is not as far fetched as one might think. In the 1990s, first deed of trust notes yielding 12% were not uncommon. When rates dropped dramatically, borrowers were quick to refinance. One investor tells the story of how a 12%, $1.2M loan was trying to be refinanced by the borrower at 9% with a new lender. The fractionalized note had 5 owners. Four of the 5 had their reconveyances notarized and delivered to the escrow company in a timely manner. The last investor had $500,000 in the note and did not want to lose his 12% rate; he was under the misconception that he could just keep coming up with excuses as to why he was not able to get to a notary [he was a busy surgeon]. After more than a month went by, the borrower sued all of the lenders for the difference in the rates [3%] plus attorney fees. Although the lone holdout was ultimately responsible, all of the other lenders had to defend themselves, which put undue burdens upon the innocent 4 lenders.


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Next, let’s look at a situation where a majority [over 50%] lender chooses to extend a loan when it matures, and a minority lender does not. Unless the minority lender requests a partition action so as to separate himself from the majority lender, the majority lender is in control of the fate of that loan.

Dealing with foreclosures by the lenders introduces an entirely new set of challenges; first, who is going to front the money to pay the trustee fees for the filing and publishing of the foreclosure notices? What if there are no majority owners of the note? Even where there is a majority owner, most title companies are not only requiring every beneficiary to sign; powers of attorneys [POAs] may not be useful, as many title companies are stating that POAs are not valid unless they are signed within a small window of time that the reconveyance is to be signed [you might as well have the beneficiary sign the reconveyances in front of a notary if you can get them to sign a POA in front of a notary]. In fact, many title companies are not accepting service agreements that were set up at the time of issuing the note and deed of trust. Too many title companies have been sued by beneficiaries and, the only way to protect themselves, in their opinion, is to have beneficiaries sign their reconveyances; even to the extent that the title companies will choose which notaries are acceptable for signatory verification.

Thus, foreclosing may not even be possible if the note holders cannot agree to their destiny or come up with the funds needed to file the paperwork to foreclose [which can be many thousands, depending on the size of the loan].


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Other issues arise even if foreclosure has been started; one lender tells the story of how the borrower stopped making payments to both the 1st and 2nd mortgage. This particular lender was one of many in the 2nd mortgage. The 1st started the foreclosure process. Nobody in the 2nd mortgage wanted to cure the 1st. There was an offer by an independent 3rd party to purchase the property for the $100,000 over the1st mortgage, which would have been given to the 2nd [which would have paid its loan down but not off]. There were 25 beneficiaries on the 2nd DOT.  Twenty-four of them chose to allow the sale and take the $100,000, which would have amounted to a short sale; however, the one lone holdout, who represented only 4% of the 2nd, refused to sign off on the sale. His reasoning? He stated that he believed that, at the foreclosure sale, someone would bid the property up more than $100,000 over the 1st. Not only was this illogical [based upon the value of the property], but it went against his previously signed documents stating that he would go along with the majority, opening himself up to a lawsuit by the other lenders. The title company refused to give title insurance to the potential buyer, and the sale never went through. At the trustee sale, one bidder bid just over the 1st’s credit bid, and the 2nd walked away with zero.

Many individual trust deed investors believe they are protected from many perils if they own over 50% of the note, as most states have a rule that the majority holder makes the rules; however, title companies are not bound by such laws. If they refuse to give title insurance, any prudent would be buyer of the property will walk away.

Another issue is that an investor in a note does not have to come up with his fair share of the money it takes to file foreclosure, and there is no provision that states that other investors who come up with more money get a preference, so it is difficult to maneuver a foreclosure unless each person comes up with his percentage required.

Other not infrequent situations come up where the borrower wants to do a loan workout or re-write the note. Unless all parties agree, everything is at a standstill. Some unethical fractionalize note holders with sometimes hold this over on the rest of the note holders by demanding a larger share than they are entitled to or demand that the other investors buy them out.

fund manager

Image by Gerd Altmann from Pixabay

For these reasons, many investors have turned to Funds where the Fund manager handles the foreclosure paperwork, pays the fees, and sees the entire process through.

The takeaway here is that one needs to be extremely careful if one wants to invest in a fractionalized note – not only do you want to own more than 50% of the note, but make sure you know every other owner and have like minds, which, in today’s world, is more than a daunting task.


Edward Brown currently hosts two radio shows, The Best of Investing and Sports Econ 101. He is also in the Investor Relations department for Pacific Private Money, a private real estate lending company. Edward has published many articles in various financial magazines as well as been an expert on CNN, in addition to appearing as an expert witness and consultant in cases involving investments and analysis of financial statements and tax returns.

Edward Brown, Host
The Best of Investing on KTRB 860AM
The Answer on Saturdays at 8pm
and Sports Econ 101 on Saturdays
at 1pm on SiriusXM channel 217
21 Pepper Way
San Rafael, CA 94901


Trust Deeds: The Investment You May Be Missing

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As an investor, having many different investment opportunities at your fingertips is both a blessing and a curse. It means more opportunities to make money but can make choosing which one to pursue tedious and difficult. With the stock market so often erratic and unpredictable, now more than ever people are looking for other ways to intelligently invest their money and diversify their investment portfolio. Real estate is one of those investment vehicles that investors are turning to for those high returns. You may be thinking to yourself that real estate is not a realistic investment for you. Rental properties and fix-and-flips are time intensive and require a hefty amount of available cash, and many real estate “crowdfunders” have high minimums and financial requirements you have to meet to invest with them. If this is you, then you may want to consider investing in Trust Deeds. Investing in Trust Deeds with a company like Ignite Funding can help you break down those barriers to real estate investing, and help you earn the returns you deserve.

What is Trust Deed Investing?


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Investing in Trust Deeds essentially means you are loaning your money against real collateral. The collateral is real estate, in this case, which serves to protect the lender’s investment. This leads us to one of the most important considerations in Trust Deed investing: the true value of the collateral. It’s very important that Trust Deed investors consider the size of the loan they are making in relationship to the real estate collateralizing the loan. This is one reason why Ignite Funding uses a detailed underwriting process to help justify the value of the property, evaluate each piece of collateral at hand and ensure the borrower is accountable for what they are borrowing.

Who is Ignite Funding?

Founded in 1995, Ignite Funding has evolved with the changing real estate landscape. Our original business model began as a traditional home mortgage lender providing lending to home buyers. The demand for lending from homebuilders and developers reshaped our business in 2011. Since that time, Ignite Funding has funded over half a billion dollars in loans with investor capital.

Ignite Funding is well respected throughout the western United States as a reliable resource for lending. When banks are not lending, Ignite Funding is. We pride ourselves in working with a handful of borrowers with a proven track record. We follow a strict underwriting process when evaluating our loans before they are presented to our investors on a matrix that includes, but is not limited to; location, market conditions, various valuation methodologies, borrower track record and financial condition, and exit strategy. These projects can include the acquisition of land, development, construction of residential and commercial properties, and the refinancing of the aforementioned.


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At Ignite Funding, we work as a team to ensure you experience the same level of professionalism throughout the entire process. We do not believe in outsourcing. The loan underwriting and origination, capital fundraising, loan servicing, investor relations, tax reporting and statements, foreclosure process (if required), property management and sale of property are all conducted by us. You will never be passed on to someone else.

Do I Qualify to Be an Investor?

You do not have to be an accredited investor to invest with Ignite Funding. Ignite Funding is licensed with the Mortgage Lending Division of Nevada, which requires investors to meet the following suitability requirements; the investor’s household net worth is more than $250,000, excluding their primary residence; and/or their household net annual income was more than $70,000 for the previous two years with the expectation they will continue to earn that income.

How Are the Projects Funded?


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Companies like ours (Ignite Funding) use a type of “crowdfunding” method to aggregate capital from multiple smaller investors and pool the investor’s capital to directly fund real estate projects. This allows Ignite Funding to implement a minimum of $10,000 to invest on a single loan. The loans are also short term, ranging from 6 to 18 months in duration. During that time, you are earning a monthly fixed income of 10% to 12% annualized interest.

What’s the Risk?

Depending on which company you invest with and the structure of the investment, the risk you take on as an investor can be crucial to your capital investment. For example, if the borrower defaults on the loan, the servicer could pass the loss directly to you as an investor. At Ignite Funding, that is NOT the case. Ignite Funding will work on the behalf of the investor with the borrower to resolve any default issues that may occur. In some cases, a foreclosure may be the best option in order to help mitigate the loss of capital to investors. To learn more about how Ignite Funding handles default situations, click here.

I’m Ready to Invest, How Do I Become an Investor?

The first step to make real estate investing a reality is by contacting one of our Investment Representatives. Our expert staff will fill you in on our investment options, the type of projects our borrowers need financing for, on our rigorous underwriting standards, and how we mitigate risk. Our Investment Representatives can be contacted via phone, email or in person at our office.


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The next step is to fill out an application online to create your free account. Without an account to facilitate transactions and paperwork, you cannot make any investments. After your account application is submitted, our Loan Processing Department will ensure all required paperwork is completed. Lastly, you will be provided with the information necessary to make a confident decision about which one of our many available investment projects best suits you.

Now that you have decided which project to invest in, you’re probably thinking, “When will I start to see a return on my investment and how often will I receive payments?” You start accruing interest on your investment the day the loan is funded. Interest payments are paid in the arrears and disbursed directly to you on the 15th of each month. Once the loan is paid off, your capital is returned to you. It’s common to see an annual double digit return on your investment.

For investors who want control over their own real estate portfolio, Trust Deeds are a great option. Investors can browse and pick individual opportunities based on location (including across state lines), project type, risk and return profiles. They can manage and track investments through an online client portal on the Ignite Funding website, automate incoming or monthly income and access investment financial records.

For more information about Trust Deed investments or if you wish to schedule a FREE consultation with an Investment Representative, please click here.

Ignite Funding, LLC | 2140 E. Pebble Road, Suite 160, Las Vegas, NV 89123 | P 702.739.9053 | T 877.739.9094 | F 702.922.6700 | NVMBL #311 | AZ CMB-0932150 | Money invested through a mortgage broker is not guaranteed to earn any interest and is not insured. Prior to investing, investors must be provided applicable disclosure documents.


Trust Deeds vs Mortgages: What’s the Big Difference?

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If you are planning to invest in turnkey real estate development collateralized by real property, one of the top items on your due diligence check list should be to determine which mortgage theory the state follows per the location of the subject property. This understanding can be detrimental to your recovery strategy if your borrower is unable to uphold their end of the deal and defaults on the loan. Each state adheres to either title theory or lien theory, though there are a few states that follow both. In title theory states, Deeds of Trust are the binding agreements utilized between lenders and borrowers, and Mortgages are the agreements utilized in lien theory states. Both documents serve the same purpose in a real estate deal between a lender and borrower, but how they affect the relationship between the parties involved and the subject property is what makes the big difference.

What are some similarities between Trust Deeds and Mortgages?

Mortgages and Trust Deeds both secure repayment of the loan by placing a lien on the property, and are considered, by law, evidence of the debt as they are generally recorded in the county where the property is located. If the borrower defaults on the loan and the lien is in first position, the lien gives the lender the right to take the property back through foreclosure and sell it. In other words, both Mortgage and Trust Deed documents are used as leverage to ensure the borrower pays back the loan in full. The ability to sell the property gives real estate investors and lenders the potential to recoup the original principle lent on the loan. Depending on the value of the property, there is the potential for the recovery of back due interest, late fees, and even capital gain.


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What are the main differences between Trust Deeds and Mortgages?

Number of Parties

A Mortgage involves two parties: a borrower (the Mortgagor) and a lender or investor (the Mortgagee). A Trust Deed involves three parties: a borrower (the Trustor), a lender or investor (the Beneficiary), and the title company or escrow company (the Trustee). The Trustees main functions are to hold the title to the lien for the benefit of the Beneficiary and to initiate and complete the foreclosure process for the Beneficiary in the case of default by the Trustor.

Property Title & Foreclosure Processes

The main difference between Trust Deed and Mortgages is who holds the title to the property encumbered by the loan for the duration of the loan term. In a Mortgage State, the borrower holds the title of the property. Therefore, if the borrower defaults on the loan, the lender must go through the courts to take back the property through foreclosure. This is known as judicial foreclosure and this process involves the lender filing a lawsuit against the borrower. This can be a costly and time-consuming process for both parties involved.

In a Trust Deed State, court can be bypassed because the Trustee holds the title to the property. You would follow the non-judicial foreclosure process, which almost always results in faster execution and resolution for all parties involved, especially for the lender. The speed of foreclosure can be detrimental to minimizing carrying costs and getting the property on the market quickly to sell in what may be a more promising market than one met at a later date.

What are First Trust Deeds?


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A First Trust Deed is as it implies, is recorded first before any other financial liens on the subject property, whether they be secondary mortgages, trust deeds or even mechanics liens placed by subcontractors. This means the First Trust Deed holds a priority or “senior” position, making all other liens encumbered by the loan subordinate or “junior” to the senior loan. Obtaining first position is important because in a foreclosure scenario, all outstanding subordinate liens are eliminated. This makes it so the lender does not have to worry about reconciling those other debts on top of their own.

Why invest in First Trust Deeds?

Hard money lenders like Ignite Funding, tend to operate more in Trust Deed states. First Trust Deed investments offer an attractive yield with relatively low risk to Ignite Funding investors due to their senior lien position on the property and the foreclosure process that is more conducive to the investors who are the Beneficiaries on the loan. This allows investors to earn double digit annualized returns paid as a monthly fixed income with REAL property as their collateral.

If you are interested in becoming a Trust Deed investor or want to learn more, you can schedule a FREE consultation with an Investment Representative, please click here.

Ignite Funding, LLC | 2140 E. Pebble Road, Suite 160, Las Vegas, NV 89123 | P 702.739.9053 | T 877.739.9094 | F 702.922.6700 | NVMBL #311 | AZ CMB-0932150 | Money invested through a mortgage broker is not guaranteed to earn any interest and is not insured. Prior to investing, investors must be provided applicable disclosure documents.


Underwriting a Loan Transaction where the Borrower is a Family Trust

By Dan Harkey

A property owner may choose to hold title to a property by creating a family trust. The “JQSmith” Trust dated February 31, 2020 will become a separate entity similar in nature to any other entity, Corp, LLC, or partnership, but with different rules, regulations, and standards of care.  “John Quincy Smith, as trustee” will sign loan documents on behalf of the family trust. The body of law that governs family trust is the California Probate Code, Division 9, Trust law (15000-19403), and Division 11, Construction of Wills, Trust, and other Instruments (21101-21700). States in the USA treat issues relating to family trust somewhat differently.

Establishing a family trust creates entity that is beneficial for estate & tax planning purposes, including distribution of assets to designated Heirs/persons/beneficiaries upon death of the trustor/trustee. The existence of a trust was intended to provide certain liability protections, but I have observed judges making the decision that disregard their existence. Many judges interpret the law to achieve their own ideological or political objective(s), rather than to apply the law as written and intended by the applicable legislature.

There is no government agency that requires registration for the activation of a family trust. However, a notarized certification will be required to obtain title insurance for a real property loan transaction.

A family trust usually requires three parties:

  • Trustor(s)– The person(s) who creates the family living trust, either revocable, or irrevocable. There may be one or more trustor(s), such as husband and wife. There are many forms of trusts, for example, a children’s remainder trust or a trust representing some group. The intent of a trust is usually to protect accumulating assets such as cash, real estate, stocks, bonds, businesses, and other valuables, from excessive taxation and perseveration of capital.  The purpose of a trust may also include an attempt to protect assets from certain liens or creditors during life or upon death of the trustor. Although the trustor(s) conveys title into the trust, the trustor(s) will usually reserve some or all the benefits of owning the property placed in the trust during his/her/their life. The added purpose is to preserve some of the benefits for future beneficiaries.
  • Trustee(s)- The person who is authorized by the trust document to perform certain acts and sign the loan documentation for the trust. There may be one or more trustee(s). For, example husband and wife becoming trustees. This person(s) is/are considered the trust manager(s) with rights and obligations that are stated in the trust document. The trust document contains delegated rights, responsibilities and establishes who possess authority to act.
  • Beneficiaries- Are those whom the trustor designates to receive some future benefits of the trust assets as defined in the trust document. There may be one or more beneficiaries. The benefits are usually based upon the investment performance of the trust assets, and the distributions resulting from the trust, now and sometime in the future. Beneficiaries may be the children, relatives, or some designated organization, such as a religious group, foundation, education entity, or benevolent group, such as The American Cancer Society, or The Make A Wish Foundation.

A Trust Deed Document contains 3 Parties:

A deed of trust is a security instrument that a borrower will sign and record which will reflect a lien on a subject property. Terminology in deed of trust has similar words, but entirely different meaning or definitions.  A totally different conversation as a matter of understanding the process is that there is a trustor, trustee, and beneficiary in the language of a deed of trust.   Consider that a property owner who desired to obtain a loan and encumber real property.  Consider that they take title as an individual(s), not a family trust. We can use husband and wife, as joint tenant with right of survivor-ship.

  • Trustor(s) – Is the person(s) or entity who owns the property. The trustor is sometimes referred to as the grantor. The owner/trustor/grantor decides to borrow money and use the property as collateral for a loan. An encumbrance called a deed of trust will be drawn, signed and recorded against the property at the county recorder’s office. A deed of trust is also referred to as a security instrument. Public records will then reflect notice of that lien.
  • Trustee (s) – A deed of trust requires a third-party entity, generally a title company, to hold what is referred to as a bare equitable title on behalf of the beneficiaries, or investors in the loan transaction. The trustee is given three powers; 1) to foreclose 2) to re-convey and 3) to modify the trust deed per agreement. The trustee cannot benefit from the ownership but is hired only as a place holder in states that use trust deeds as recordable security instrument. The trustee is an intermediary that has a fiduciary responsibility to the stated beneficiaries. His/her job is to protect the beneficiary’s rights, and in the event of default, act in their best interest. Also, when a borrower/trustor pays off the loan, the trustee will re-convey, meaning remove the lien from public records, and return full ownership back to the borrower/trustor.

Some states use a security instrument called a mortgage, rather than a deed of trust.  A mortgage document only requires 2 parties.  One is the borrower/trustor, and the other is the lender/beneficiary.  There is no trustee required.

  • Beneficiaries – Are the investor/lenders/bankers who invest capital and receive a recorded deed of trust or mortgage document and promissory note signed by the borrower/trustor to hold as collateral for the consideration of the loan.

One family trust who owns the property may decide to borrow money using their property as collateral.  Another unrelated family trust may decide to become an investor/lender and use their capital to lend out to the property owner.

The investor/ lender family trust will become the beneficiary of the deed of trust. If the beneficiary of the trust deed also demanded to become the trustee under the deed of trust, would the person sign as an individual, or would the person sign as trustee on behalf of the family trust?

I would personally discourage this because this may alter the servicing relationship between the parties. The trustee of the deed of trust and the trustee of the family trust would have to sign the servicing agreement or an addendum wherein trustee under the deed of trust will take no actions that will alter the terms of the servicing agreement. The complexity here is not worth the bother.

In a court of law, either of the above parties will claim that they did not understand the ramifications. The tight-rope action should only be undertaken with the advice of their counsel and paid for by them.

The only practical solution is to have the title company who issued the policy of title insurance for the closed loan transaction to become the trustee under the deed of trust.

I chose to deviate of explaining the differences between the parties, property owners, and the lenders in a different context, but the underwriter must be aware of the separate-ness and the ramifications of dealing with each.

All the following conversation relates to the property owner as a family trust.

Loan Origination – Loan Application Process

The application package sent to the borrower/trustor/trustee will contain forms related to an individual or an entity depending upon whether the loan is for consumer purpose, or for business purpose. In most cases the individual(s) who create the trust is both the trustor and the trustee of the family trust. Your underwriting is almost like a hybrid of the two.

The question about consumer purpose vs business purpose arises.  If the occupant is a home owner who is the trustor and trustee, consumer laws prevails. The above is a broad statement.  Each circumstance is different.  Also, when a trustor creates a family trust and conveys/transfers title of the property into the trust, there is are California Revenue & Taxation Code, Transfer Tax Exemptions, R&T 11911 to 11930 relates to documentary transfer fees.  The code relating to transferring into or out of a trust is 11930. The exemption to avoid property tax reassessment for related parties is R&T Code 62(d), and 61(h). Consult your accountant or attorney for advice of this issue. Do not rely on this article for making your final decision.

  1. Business Entity Loan Application-in circumstances where the property is non-owner, and the loan is for business purpose.
  2. Personal loan application-in circumstances where the property is occupied by the trustor/trustee and the loan is for consumer purpose.
  3. Business Credit Authorization for the Trust-In most cases this requirement will be waived-applies as (1) above.
  4. Personal Credit Authorization for the Trustee-applies to (2) above.
  5. Bank Statements of the trust, or as an alternative the trustor/trustee as an individual.
  6. Year to Date Profit & Loss of the trust, or as an alternative the trustor/trustee as an individual.
  7. Current Balance Sheet-same as above.
  8. Disclosure regarding insurance requirement, authorization for the insurance agent or representative to communicate and provide the lender with requested information regarding coverage.
  9. 8821 Tax Information Authorization.
  10. 8821 tax information authorization, if required. This form authorizes the IRS to disclose your confidential tax information to the person that is appointed, usually the lender representative. The completion of the form may be voluntary be the borrower but required by the lender. The completed form with be sent to the IRS, who will in turn send the tax return to the appointed party. Certain lenders may have this requirement.
  11. 4506-T request for copy of tax return. The purpose is to allow the lender to retrieve past tax transcripts. The document must be signed and dated by the taxpayer or managing member that will give a third-party lender permission to retrieve requested data. Certain lenders may have this requirement.

Original Trust document and all related Amendments

  1. There are differing views on whether the complete trust should be obtained and read as part of the loan approval decision, or whether the statutorily authorized Certificate of Trust (discussed below) should be the sole source of information. My view is that the entire trust should be read to determine who are the trustors, trustees and beneficiaries. This gives the lender the contact information for all parties. If the trustor/trustee dies, then the lender can contact the beneficiaries, to continue.
  2. Does the trust give authority for one or more trustees to borrow, submit information on behalf of and sign the related documents encumbering the subject property? The purpose in reading the trust document, and especially the amendments, is that the trustor, trustee, and/or beneficiary might have changed.  The powers may have changed, and successor trustees may have replaced deceased trustees.
  3. Title Page, Trustee Identification Page, Signature Page, Powers Page, Any Amendments Thereto. Some Lenders will only request these three pages. This is suggested by some as incomplete.
  4. Trust certification (Probate Code section 18100.5) A trust certification may be prepared by the lender, the trustee or an independent source such as a title company and can be recorded. It certifies who are the trustor, trustee, and beneficiaries.  It establishes the authority to borrow and encumber, provide information and sign loan documents.  As part of Probate Code section 18100.5, the certification provides protection for lenders who rely on the information it contains.  However, a lender cannot rely on the trust certification if the lender has actual knowledge that the matters set forth in the certification are incorrect.  Therefore, some lenders believe it is best to not even get a copy of the trust itself.  However, the statute itself provides that simple possession of the entire trust document itself without more is not enough to prove that the lender has “actual knowledge”.
  5. The certification itself can, but is not required to, include excerpts from the original trust documents, any amendments thereto, and any other documents evidencing or pertaining to the succession of successor trustees. Dispositive provisions of the trust need not be attached.
  6. A lender may ask for copies of excerpts from the original, any amendments, thereto, and any other documents which designate, evidence, or pertain to the succession of the trustee or confer upon the trustee the power to act in the pending transaction, or both.
  7. Some borrowers are secretive and become irritated about all the contents of their trusts. If a lender requires a copy of a full trust rather than a trust certification there may be some offsetting liability with the lenders gained knowledge of issues within the trust document. Lender parties may be liable for damages, including attorney’s fees, incurred because of the refusal to accept the certification of trust in lieu of the request for full trust documents. The court may determine that the lender acted in bad faith in requesting the full trust documents.
  8. Federal Tax Returns for the trust.
  9. Attorney authority and enforceability letter-some lenders may wave this requirement. An attorney authority and enforceability letter is a letter addressed to the lender assuring the lender that the trustee has the authority he/she claims and has the power to undertake the loan process and obtain the loan. This letter can be obtained in addition to a Trust Certificate but is not necessary if the Trust Certificate is properly obtained and the lender has no actual knowledge contrary to the facts stated in the Trust Certificate.
  10. Some lenders may require that the Trustee as an individual, or another separate party, to sign a personal guarantee when the family trust holds a single or limited amount of assets.
  11. The title insurance company will require the trust document, or portions as explained above to document the authority of the trustee to act on behalf of the trust.

Dan Harkey

Business and Private Money Finance Consultant

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