Whats aheadfor

2013

P r i vat e L e n d e rO f f i c i a l E z i n e o f A . A . P. L .

The Journal of the American

Association of Private Lenders

Volume 3 - Issue 5

Private Lenders Beware!- Bob Cox

Are Private Lenders Managing their Risk?- Steve Clark

Is it Time to Close Your Fund?- Robin Aldridge & Mike Driscoll

Contents:

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I n T h I s I s s u e :

Whatever Happened to 2012?- Larry Muck (pg.3)

V I e w p o I n T

Private Lenders Beware!- Bob Cox (pg.26)

I n d u s T r y

Member Directory-2013 membership directory-Board of Advisors and Founders-Active Lender Directory-Member Service Provider Directory

(pg.39-44)

M e M b e r s h I p

Economy & Private Lending- Larry Muck interview’s Peter Ricchiuti (pg.6)

I n T e r V I e w

Intro to CFPB- James C. Warmbrodt (pg.30)

Are Private Lenders Managing their Risk?- Steve Clark (pg.36)

Lessons From the U.S. Elections- Paul Harmon (pg.15)

b u s I n e s s

Is it Time to Close Your Fund?- Robin Aldridge & Mike Driscoll (pg.20)

Tips to Stop Theft & Property Damage- Mike Wrenn (pg.24)

aaPL VieWPoint:

Member Directory

3

Yes, it is that time of year for us to engage in a review of the past year as we look forward to the new. This exercise can either be a hackneyed ritual, or it can be a moment to truly pause and reflect on the accomplishments of the past year while committing to undertake bold steps to press forward.

One year ago, the Private Lending industry was resurging and finding its way out of the firestorm that occurred with the housing crisis. Ample evidence supports this conclusion, the most compelling of which is that multiple sources of funding for portfolio leveraging emerged. So, having positioned itself as the “voice of the industry,” AAPL found itself in transition and in need of a fresh burst of energy to keep up with the rapidly changing landscape.

A plan was laid out and here is a short list of accomplishments:

• ABoardofAdvisorswasformedthathelpedset thecourseoftheAssociation.TheBoardis

Whatever Happened to 2012?

- Larry Muck

A yeAr In reVIew And LookIng For wArd To 2013

Intro to CFPB

Are Private Lenders Managing their Risk?

comprised of industry veterans geographically dispersed with a great deal of experience and wisdom to impart.

• Fulltimestaffwashiredandengagedto accelerate the build-out of the organization.

• Membershipintheassociationwasincreased.

• Dueinnosmallparttotheeffortsofthe Advisors, we held our most successful annual conference ever.

•

We ended 2012 with positive momentum and a clear indication of our constituents’ expectations. Those expectations were clearly established through a survey of the conference attendees. You can read the survey results in detail in an article in this edition of PL, but to summarize,

And finally, we rebuilt our web platform, creating a true membership engagement area and a place to continue to grow our educational assets. This new site will serve as the center of engagement for our members and, as it grows, will become that central resource desired by all.

(pg.36)(pg.36)

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we found the following:

In terms of reasons why people joined us at our conference, the top five most important factors were:

1.Developanetworkofindustryassociates

2.Receive education on lending

3.Brainstormnewideas

4.Learn about high quality industry solutions

5.Receive education on fund management

Basedonmanycommentsreceived,wecansafelysay that each of these objectives was met at the conference.

We also asked for feedback on the preferred areas of focus for the association. We received strong indications of support for many initiatives, but found the strongest support in each of the

following:

1. Education of lenders

2. Creating additional networking opportunities

3. Influencing national legislation

4.Facilitatingdiscussiongroups

5. Attracting investors to its members

Additionally, we received a high degree of support for facilitating regional meetings and subgroups.

We have our sights set on some ambitious goals for 2013…all revolving around meeting your ex-pectations and building an association that truly represents the industry.

We will be working this year to expand our edu-cational and networking opportunities. Although weexpecttoofferonlinecourseslaterintheyear,the focus will be on live events hosted on the web

to allow for interaction and audience participa-tion. To start, we will re-conduct the educational offeringsfromourlastconference.Thesewillbeofferedfreeofchargetothosewhoprevious-ly paid to attend. In so doing, we will be able to record these presentations for future review and to allow you an opportunity to ask questions that remained unanswered.

As previously noted our new membership site is “complete” and ready for use. Your engagement in posting questions and comments will build momentum and add to the knowledge base that is being aggregated. We will be encouraging use by monitoring posts and assisting in finding an-swers to your questions.

In order to expand our “in-person” networking opportunities, we are planning regional “meet and greets” in a variety of areas of the country. OurBoardofAdvisorshascommittedtohostingthese events and scheduling and planning are underway.

Your association will be represented at numerous events this year as we work to provide a link be-tween investors, financial advisors, and you, our members. The schedule is being filled now, but I want to draw your attention to a couple of eventsinparticular.First,wewillbemakingapresentation at an investor conference in San Jose inlateFebruary.Inaddition,wewillbeappear-ing as a vendor at a conference in Washington DCinearlyMay.Helpingusraisebrandaware-ness is an integral part of our strategy to build this industry and your participation will be of great significance.

We are also committed to returning to Caesar’s Palace in November for our annual conference and have signed our contract for space and

5

rooms. We’ve had a lot of positive feedback in support of returning there and will look forward to building an even bigger and better event in 2013.

Yoursupportofoureffortsiscrucialtosuccess-fully building this association. We need your help to identify and encourage new members to join. Your assistance will be greatly appreciat-ed…more to follow.

On behalf of our founders:TimBricker,AnthonyGeraci,WallaceGrovesand Jack Rollins

AndourBoardofAdvisors:JoshFischer,DavidOwen,DavidWilliams,BillWorsley,MikeWrenn,andRobertWallace

We say thank you for your continued support. I look forward to building this association with you and for you.

P.S.As an aside, there were some truly notable things that did not happen in 2012. The top one is that my 24 year old daughter didnotflyoffintospaceinacataclysmicendtotheworldasweknowitonDecember21st.Althoughextraordinarilybright,shefixatedontheMayancalendardebacleeversinceshebecameaware of it in her sophomore year of college. No amount of coaching or preaching or comforting kept her from a sleepless night waiting for the world to end.Gofigure.

We’ll talk soon.

LarryMuckExecutiveDirector

LarryMuckExecutiveDirectorIf you are interested in becoming an AAPL Partner please contact Larry Muck at 913-888-1250 or lmuck@aaplonline.com or visitwww.aaplonline.com

interVieW:

6

Larry: I noticed on your website that youdon’t share the view of many who are fearful of the future.

Peter: Yes, I’ve been pretty optimistic for the last three or four years in terms of the economy and stock market. It’s been a phenomenal run. SinceMarchof’09,thisisthebestrallysinceWorld War II. We’re up 130% in the S&P 500, yet everybody’s still walking around thinking the world’s coming to an end. Yet corporate earnings are at record levels. Corporate balance sheets are better than they’ve ever been in his-tory. There’s three trillion dollars sitting in the coffersofcompanies.There’sanothersixtrillionsitting in money market funds.

I know that we think the housing market has bottomed, and I don’t know what the recovery is going to look like, but I think the big thing is

thatit’sgoingtostoptakingachunkoutofGDP,which is what it’s done for several years. They are projected to come in around two, but I think they’ll come in higher than that -- probably around three. I think the stock market is pretty cheap. You know, historically the market in the last fifty years has sold 16.5 times earnings, and we’re selling at about 14 times earnings right now.

I just think it’s a tremendous amount of fear. You know you can still see all of the mutual fund money flowing into the bond market, and a lot of it still out of equities. You know, what we always say is, “If the majority of the people are right, the majority of the people would be rich -- and they’re not.” I think the stock market has, even though it has been the best rally since World War II, it still has a lot of oomph to it.

Economy & Private LendingPeter Ricchiuti (Ri-Shooty) is the school professor you wish you had had back in college. He teaches courses on the financial markets at Tulane University’s A.B. Freeman School of Business and has twice been named the school’s top professor. In 1983 he founded Tulane’s highly acclaimed BURKENROAD REPORTS stock research program. He has been featured on CNN and CNBC, as well as the New York Times. Mr. Ricchiuti is a featured speaker throughout the United States.

He recently spoke with AAPL Executive Director Larry Muck about the economy and private lending.

7

I think in the bond market, where you hear these people all the time saying, “I’m too scared to be in the stockmarket.MyhusbandandIareputtingallourmoney in long-term bonds”—these are the people that are going to call their advisors in a year and ask them what these parentheses in their accounts are. If you get a little bit of pick-up in the economy, a little bit of inflation, and interest rates come up ...they’ll be destroyed. I think the next bubble for us is the bond market.

You know, people have forgotten. I got in the busi-ness 34 years ago, in ’79, so I was there for the Carter administration.Thatwasprettydramatic.Butitsohappens that when interest rates go up, bonds get destroyed. It’s been so long since it happened I don’t think anybody remembers that. That’s pretty much where I’m coming from.

What I do at the university is I run a program I start-ed19yearsagocalledBurkenroadReports.Ihave200 students and I break them into teams of five. I assign each team to one of 40 small cap companies

headquarteredfromTexasovertoFlorida.Theygoout and visit with the CEOs and sites, and they devel-op these models. They put together these 20-page in-vestment research reports on these companies. They are companies that even Wall Street doesn’t really know about yet and are kind of obscure. We call them “Stocks under Rocks.” That’s what the students do. About11yearsagoalocalbankcreatedtheBurken-roadMutualFundusingthestudents’research.Ithasoutperformed 99% of the 7,000 equity mutual funds in the United States over the last 11 years.

We really think that there are still huge opportunities out there. In the stock market we think the real op-portunities are in the companies that just aren’t followed so much. You know, academics usually believe that the markets are totally efficient. I think they’re very efficient with big companies -- the Microsoft’softheworld—butwhenyougetdowntothe smaller companies, I think there is value in doing primary research.

I know when I go to places, Larry … When I go to

Continue on pg. 9

http://www.themortgageoffice.com

In my opinion the private lenders and the private lending industry have facilitated the absorption of a lot of these loans and are much more helpful in re-building America than those that financed the bubble economy.

Peter: Oh, yes. I think you’re right. The other thing that’s really weird is I sit on the board of a publicly traded company—a home healthcare com-pany. What I’m getting at is that on the corporate side, once you get to be a big corporation, the banks throw money at you. They’re in there with pitchforks every week trying to get you to borrow a great deal of money to buy another organization. On the other end of the spectrum, the guy who is trying to finance the purchase, rehab, and re-use of investment prop-erties is being shut out. I’m not sure how this system has been created.

Larry: We’ve seen a great decline in what we like to call community lending. The way we characterize what private lenders do is peer-to-peer lending. In general terms, our industry is represented by indi-viduals generally that have created a fund and they’re lending to individuals that really have nowhere else to go. They have a legitimate borrowing need, but ei-ther the banks don’t feel like they can charge enough tocarrytherisk,ortheyhavetotallywritten-offthatpart of the business. It’s up to all of us to help rebuild our communities, and I just think the banks have taken a backseat to participating in those markets.

Peter: I think you’re absolutely right. The other thing I’m hearing that’s funny is when I talk to small companies, their complaint is the same thing. What they’ve moved to is an old, old financing option, but they’ve been shut out of the banks. I’m hearing more aboutfactoringandsellingoffaccountsreceivable,because they feel like the banks have dropped them.

Larry: I don’t have any facts to back that up, but I do know that while the banks will say that they’re interested in helping small business, I think as you noted they have so much liquidity now that they’re

barbeques, or wherever I go … Nobody in the last three, four, five years has come up to me and said, “I’m putting my money in equities … good quality equities.” Everybody’s buying gold and burying it under the swing set in the backyard somewhere. We just kind of see it always go the other way.

I think what you guys are doing is making a lot of sense, because as much as the underpinnings seem to be getting a lot better, the banks have still been very reluctant to loan. If you look at the weekly lending numbers, they’re getting better, but only at a glacial pace. Private Lenders have supplemented the credit markets in a terrific way.

Larry: Yes, it’s interesting relative to the bankers. I wonder if it’s the regulatory environment that they live under, or if it’s just the memories that they have of having loaned into investment properties and they having gotten hammered.

Peter: Isn’t that interesting? That’s the same thing I wonder. Which is which? And how do you divide itout?Becausethebankersthemselveswilltellyouthat we’re just so hamstrung. Yet the government—and I don’t think they do this on purpose—but the government is trying to promote more lending but is putting new restrictions on traditional financing that’s really hampering it.

Larry: I referred a guy that is trying to build a Real EstateInvestorsAssociationinmid-Missouri,toan old friend of mine that’s at a bank in Columbia, Missouri.Whenmyfriendcalledthisbankerandsaid,“Hey,we’regoingtoformthisinvestorsasso-ciation and Larry thought you might be able to help me,” he responded by saying, “I don’t know what you and Larry are up to, but I don’t want a single thing to do with it. You said ‘investment property’. Thanks for calling; I appreciate it. Talk to you later.” That was the end of the conversation. I’ve got to tell you, that is typical of the response to investment property lending opportunities by the majority of traditional lending sources.

9Continue on pg. 11

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Formed in 2009, the American Association of Private Lenders (AAPL) is the national organization represent-ing the private real estate and peer to peer lending industry. Our membership includes private money lenders, hard money lenders, mortgage fund managers, brokers, and service providers from around the United States. We believe our principles – excellence, ethics, and education – are the cornerstone for success in the industry. AAPL members are leaders in the industry and embody the character, dedication, and experience critical for success.Our vision is a national industry of private lenders that is clearly defined and well organized around the shared principles of cooperation, education, ethics, and accountability. AAPL operates as a codifying force and an unbi-ased knowledge custodian for lenders, investors, borrowers, media, and general public.

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Peter: People disagree on the numbers, but we’re basically about 15 trillion in debt, and have about a 16 trillion dollar economy, so we’re at about 90, 95%--which is too high. We’ve been worse than this before. If you go back to World War II, it was at about 120%. Of course that makes sense because we were borrowing money to fund the war, and there wasn’talotofprivatemanufacturing.Butoncethewar ended, it dropped and dropped and dropped. Then we started rising and we have been trickling up.

The two points I always like to bring up is that just getting rid of the debt itself isn’t necessarily a pana-cea. If you look back since World War II, the lowest periodofnationaldebtdividedbyGDPwasattheend of the Carter administration, and that was a horrendous economy.

Larry: Yes, that was a disaster.

Peter: Oh, yes. Another mistake people make is hearing, “You know, when President Carter left office there was a surplus” and thinking that was a posi-tive. There was a budget surplus, and that was pretty amazing, but it wasn’t what most people think it was. It was a revenue surplus. The Treasury brought in more money than they had anticipated—which was pretty terrific—but it didn’t mean we didn’t have debt.Wehadatonofdebt.MorerecentlyunderPresidentBushandPresidentObamaournationaldebt has soared.

I think if you look at it, we can get the number down. I think what they should have done was pass Simpson-Bowles.Ifyoulookatit,peoplejustkeptarguing.Butyou’regoingtohavetoseesomehighertaxes, you’re going to have to see more budget cuts, and you’re going to have to see some sort of—at a minimum—some tweaking to entitlement pro-grams. Whether it’s moving Social Security to 70, or whatever it is. We’ve got to take all those steps and stop fighting about them. If you could get leverage number back into the 70% range, I think you’d get past the fear factor. You could get the stock market to

trying to place it in large blocks. It’s expensive to make small business loans, and a lot of them, I think, have cut-back operationally in their ability to actu-ally meet what they were originally envisioned as—meeting the needs of their local communities.

Peter: Yes, I think you’re absolutely right. All I can keep thinking of is that private lending is really in a perfect position. You’ve got the banks not wanting to lend, and then you’ve got all kinds of investors that need to find yield. You couldn’t write this book any better.

Larry:YouknowDonaldTrumpsixorsevenmonths ago said, “Everybody needs to buy a piece of real estate. They need to get out of the markets and go buy real estate.”

Peter:WarrenBuffettwasaskedaboutayearagowhat he would do, and he said, “It’s logistically diffi-cult, but if you gave me a choice, I’d go out and buy millions of single-family homes.”

Larry: Yes. The private lenders in our industry offerabroadscopeofservices,butmanyofthemareinvolved in the single-family homes, and helping to facilitate the rehab and repurposing of a lot of those foreclosures.

I’m interested in the stock market analysis. Where do you see us going with the federal debt bubble, and what do your tealeaves say that we’re going to do to get out from under the mess that we’re in?

Peter: I tend to not view our national debt as an absolutenumber.Mygoalistodeterminehowlev-eraged we are. I usually use the equation that a lot of economistsuse,whichistotaldebtdividedbyGDP,to give you an idea of just how leveraged you are.

Larry: Right.

11

yesterday. I thought it was pretty objective actually. I don’t know, when I talk to people, it’s so extreme. You get one group showing that you can light your water on fire. Then you’ve got the oil industry saying thatit’snoproblematall.Butitseemslikesome-thing they can address, because the shale they’re getting is down around 15,000 feet, and the aquifer if like at six feet, so I think they can get there. It would be a huge boost. It’s clean-burning, and it’s domesti-cally-produced.

The only people that are really against it, not the fracking but natural gas, is the coal industry. I said at a conference—the guys from Kentucky got mad at me—but I said, “The last place you’ll see coal is in the stockings of bad children.” (Laughs) So we’ve got a couple of big game-changers that could really help the whole thing out.

I think two things are happening. This build-up of cash in the economy can’t last forever. On the pri-vate side, if you’re an individual and you’re afraid of the future, you can surround yourself with cash and all. If you’re a private company, you can fill sandbags fullofcashandallthat.Butifyou’reapubliccom-pany, you can’t do it forever. And this is what I think is the next big thing to happen with the economy—is there’s so much cash on these balance sheets that thesecompaniesarejustgoingtoallgetLBO’d.

I have 600 former students working on Wall Street from my program, and that’s what they tell me all the time. Even if they’re not pulling the trigger, they’re all young guys that are having to work all week-end-long doing merger numbers to see what would happen if you bought. And of course you’re going to buy the other company with their own cash, so I think this is kind of a natural. Then I think the other thing is you have a company and you’ve got most of your assets in money market funds, eventually some shareholders say, “Well, I can’t believe we’re paying the CEO a million dollars a year to put the company on a money market fund. I could do that at home.” So something’s got to break, and I don’t know when.

sell its usual multiple. You could get some normalcy in the economy, and the way that people view the nation.Butwhenyoucan’tgetanythingpassed,thenyou’re going to run into this debt limit again—this circus in Congress.

Larry:Doyouthinkwe’llpassabudgeteveragainor not?

Peter: (Laughs) I don’t know, but if they can really take a chunk out of each time. Right after 9/11 when Bushdidthosetaxcuts,theycostusalotinreve-nues. We now get less in tax receipts as a percentage ofGDPthanwedidinthemid-1950s.That’stoolow, the spending’s too high, and the entitlements are too rich. Somebody’s got to start chipping away at all three, and stop the fighting. I think there’s a chance to get through it.

There are another couple of things that I’m very optimistic about. One is that you’ve got to put a bottom on housing, regardless of what the recovery looks like. The other thing we see down here in Louisiana is that we had this amazing thing happen in the United States. There is a huge proliferation of natural gas, and it’s really changing the whole land-scape for manufacturing and competitiveness. You know, oil is a worldwide commodity. If it sells at $91.00 in West Texas, it sells at $92.00 in Norway. It’s justaglobalcommodity.Butgastendstosellatthelocal price. It’s difficult to move it outside of a con-tinent.Likerightnowyou’reseeing$3.50perMCFnatural gas here. It’s $10.00 in Europe, and it’s $17.00 in Asia. It’s given us this huge competitive advan-tage. I know of at least a half-dozen plants that were scheduled to be built abroad that have been scrapped and are going to be built in the U.S. Even some little labor advantage you might have putting it in China is dwarfed by the feedstock cost advantage here. So there are some real positives underneath all this.

Larry: Are you a big believer in fracking?

Peter: I went to see the movie, Promised Land

12

Larry: Yes. And nobody wants to pay the money to have a high-touch servicing platform to really workwithborrowers.Butthat’swherewe’velostournational way a little bit in, because they’ve taken the “community” out of that aspect of banking.

Peter: I got a call two weeks ago. A guy calls me, one of the newspapers, saying that there was a new bankopeninginBatonRouge,andwhatdoIthink?I said, “Well, I guess there’s room for another bank.” Then they said, “Well, this is an odd bank. The model is it’s all drive-through, and there’s no office to go into.” I said, “Well, I guess that’s kind of odd.” I said,“Sotheyjustdotheaccountsorwhatever?”Hegoes, “No, they said they’ll be doing mortgages.” I said, “They’re going to do a mortgage in a drive-up?” (Laughs) I don’t know if that’s what they’re going to do, but this is what we’re coming to. Nobody wants to touch you, or see you.

The banks were just saying the same thing. I don’t know what’s going to make it break for the banks. I don’t know if at some point they open up their lend-ing, or if you just try to create the growth through consolidation—just buy-up other banks.

Larry: Well, I think you’re going to see a consolida-tion of banks, and I don’t think that’s very good for the country necessarily.

Peter: No, I don’t think so either.

Larry: I mean, we’ve seen what the larger banks did with the mortgage servicing business, and much of the default that we have now is due in part to the mortgage servicing mess. There’s no money in ser-vicing, but there are profits in foreclosure.

Peter: Yes. It’s true. That’s a great sidebar.

14

Larry: No, because if something happens in your life that causes you to skip a beat, then they don’t really want to have anything to do with you.

Peter: Yes, it’s true. I think what you and really, the business you guys are in, on both sides—the inves-tors that would want it, and the people that need this cash to get it going—I think it’s really great. I can see why you guys formed in ’09. I know in the begin-ning it always takes a while to get past the naysayers. I’ll tell you, if you look at investors. Investors seem to be doing things that I think are pretty dumb, like going out and buying 30-year bonds, and things like that. Like they’ll say, “I’m going to buy a 30-year government, or something”, and they’ll say, “Well there’s no risk in that.” Well there’s no default risk, but there’s a ton of interest rate. I think I’d rather be in your fund.

Larry: And we see a lot of people that would like to get in on it and invest in communities and in real estate. We have a new member from New York that wasonWallStreet.Hewaswithoneofthelargestfundmanagersthere.Hemanagedagroupthatinvestedinfunds…afundforfunds.He’sinterest-ingtotalkto.HeistotallydisenchantedwithWallStreetandthemoneygame.Hecametousbecausehe was interested in making a number of diversified investments.Hewantedtofindqualityfundmanag-ers through which he could invest his funds, and he wanted them to be geographically dispersed. Since we’re a national organization, he came to us to try and find those local lenders with a community base.

Peter: I think you’re in the right place after all those years of banking. I think you’ve got a pretty exciting tenure ahead of you. I wish the AAPL all the best.

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15

In the recent Presidential election, President Obama was reelected by an impressive majority, even in those states that were most contested. The results came as a surprise to many—most particularlytheopposition.Here’sacommentfromDavidAxelrod,PresidentObama’schiefstrategist, in response to a question from POLITICO regarding what it takes to win:

POLITICO: “What’s the biggest lesson someone running in 2016 should learn from your campaign?

AXELROD: “You need to understand where the technology is. In 2008, this campaign kind of re-invented campaigns by using the [best] available technology.But,we’relightyearsaheadofwherewe were in 2008. We had to reinvent ourselves and think about all the tools that were available to us—tools that provided much richer data and much more surgical means of talking to voters. I would invest in people—they’re almostinvariably young—who understand where the

technology is going and what the potential will be by 2016 for communications, for targeting, for mining data, to make precision possible in terms of both persuasion and mobilization.”

When I first read this, I thought that it probably applies to any business just as much as it applies to presidential campaigns.

Broadly,Itakethemessagetobeasfollows:-Technology is evolving so rapidly that you need to stay abreast of where it is, where it is going, and how to use it, and the best way to do that is to hire the young and listen to them.

Ultimately, this isn’t an IT issue—it’s an inno-vation or a process improvement issue! You are trying to think about how you ought to be han-dling sales, or marketing or customer service four years from now. You should assume that in four years the technology will let you do things “light years ahead” of what you do now. And you want to be prepared to compete, or better yet,

Business:

Lessons From the US Elections

- Paul Harmon

Continue on pg. 17

We are pleased to announce that the re-design of the Association’s website, aaplon-line.com, is complete. We are very excited about the website and there will be many

new items available in the coming months.

Among the highlights to you as a member of the AAPL are:• Members Only Section• Forums• Ability to send private messages between members• Presentations from previous AAPL Conferences

This is your community, and the more that you as an AAPL Member engage in it, the more valuable it will become to all members. The Association is actively seeking news, white papers, and other information to post both online and here in Private Lender. If you would like to contribute to the knowledge base, we’d love to have you participate.

For more information on the benefits of membership in the American Association of Private Lenders, please visit aaplonline.com orcontactDavidLangatdlang@aaplonline.com

neWm e m B e r s h i P

WeBsite

was an example of just how good the massivecorrelation of information derived from social mediahasbecomeandhowmuchmoreeffectivecampaign workers have become at implementingtargeted marketing campaigns.

Ask yourself just how close your sales organiza-tionistoofferingthiskindofspecificinforma-tion to your field sales people. Or, ask how yourmarketing people are targeting the people they mail those costly promotional pieces to. Or, ask how quickly you could put together a team, with just the right members, to address the new chal-lenges your organization will face in the future.

And another point—it’s mostly the young who bestunderstandthenewopportunities.Mostofthe Obama field people were college undergrad-uates.Mostofthoseintheofficesrunningthesoftware systems weren’t much older. New em-ployees may need help and discipline, but your organization needs them on process redesign teams and brainstorming groups as you try to figure out what new capabilities you will have in the future. In most cases, the young are alreadyconnecting with their friends in ways your more seasoned marketing and sales people only wish theycouldduplicate.Gettheyoungerstaffworking with you, teaching you how to do it.

The most important thing to take away from from this is that technology is NOT a technolog-ical issue—it is a human issue and it’s all aboutbusiness performance. The goal is not to acquire new technology because it is “hot” or “new” or “more powerful.” The goal is to acquire technol-ogy because it will allow you to target and satisfy yourcustomersmorecosteffectivelythanyouwould otherwise be able to do. And, the people best positioned to help you determine this are not pure technologists. They are the people who

dominate your market four years from now.

Perhaps we should qualify the point. It isn’t so important that YOU understand the technology and where it is going, however, it is is criticalthat someone in your organizations does and that your organization pays attention to that someone. What is critical is that YOU under-stand that the technology is changing at a very rapid rate and that you need to be prepared to apply that technology to achieve your organiza-tion’s goals and objectives.

The world population is 7 billion people today. In four years that number will be increased by 100s of millions and all those people will bedemanding goods and services. At the same time, there will be many more scientists and entrepreneurs developing new products and services and hundreds of millions of additional smart phone and iPad owners will be using all the current social media apps as well as the next big thing not yet invented. All this guarantees that social media will continue to proliferate and analytic tools will continue to be developed to track and define all kinds of new market niches.

Let’s be specific. In the 2012 election, the Obama campaign created a huge database that identi-fied those individuals who said they were for, or tending to be for, Obama. They broke that infor-mation down by state, district and then by city block. Campaign field workers tell how theyidentified individuals, block by block—two peo-ple in one block, one in the next, and four in the following block. This wasn’t the campaign of fouryears ago when campaign workers attempted to contact everybody within their district. This year’s campaign workers knew which houses toapproach, what messages to deliver and who needed rides to the polls. The Obama campaign

17

m e m B e r s h i PWeBsite

are already exploring the uses and application of the new technologies.

These people will keep changing and this year’s innovators will step aside making way for the younger generation to move in and explain thenext step. Technologists will help you implement your solution, but deciding on the new ap-proach—deciding how to innovate—is the keyfirst step, and that’s done by having bright, young people who think about how you could better satisfy your customer.

So, yes, you can learn from the US elections. Theyofferinsightintothestateoftheartusesofsocial media, analytic software systems, andtargeted marketing for communication and in-terpersonalaction.Buthurry.Infouryearsitwillall be light years from where it is today.

Till next time,Paul Harmon

18

This article was first published by BPTrends (www.BPTrends.com) on December 11, 2012 by Paul Harmon.

Paul is a Co-Founder, Executive Edi-tor, and Market Analyst at BPTrends (Business Process Trends), the most trusted source of information and analysis on trends, directions, and best practices in business process man-agement, (www.bptrends.com). He is also a Co-Founder, Chief Method-ologist, and Principal Consultant of

BPTrends Associates, a professional services company provid-ing executive education, training, and consulting services for organizations interested in understanding and implementing business process management.

Calendar of Upcoming AAPL Events:January 29, 2013;11:00AMCentral;Webinar;MarketingtoIncreaseDealFlow;DavidOwen&JamesRincon;PrideofAustin Capital Partners.

February19,2013;1:00PMCentral;Webinar;RaisingPrivateCapital–BuildingYourInvestorBase–BasePractices&Strategies;JoshFischer;SterlingPacific.

May5-7,2013;AAPLSpringConference;CrystalGatewayMarriott;Arlington,VA

November 10-12, 2013;AnnualAAPLFallConference;CaesarsPalace;LasVegas,NV

19

•Requirements of your operating

agreement or bylaws

•Marketconditions

•Timing of the closing relative to un

folding events

•Futureexpectations

20

Is it Time to Close Your Fund?

- Robin Aldridge&

- Mike Driscoll

It is quite an understatement to say that real es-tate and lending markets have been volatile over the past decade. The continued onslaught of legislationpouringoutofWashingtonD.C.andstate governments has added to these difficulties. AsaFundManager,areyoupreparedfortheimplementation of changes necessary to comply, or is it time to close your fund?

There could be several different reasons why you would consider closing your fund,

including:

FundManagersmustdecideifitcostsmoretomanage their fund than the cash flow or added liability allows.

In researching whether this is a viable option for your fund, start by consulting with your legal team as it relates to your operating agreement.

What are the voting, meeting, and fund-closing requirements?Mostlikely,youhavenotre-viewed this portion of your operating agreement in years, so a good understanding of the legal documents and requirements will help substan-tially.Forinstance,doesyouragreementcallfora majority vote of all investors, investors’ weight-ed share in the fund, or both? If it is both, in all likelihood it will take longer and require more resources to receive enough ballots back in order todetermineinvestorsupport.Voterapathycancreate a significant delay; therefore, planning ahead can help mitigate investors’ failure to re-spond.Friendlyreminderssentthroughtheuseof email or a recorded message via an auto dialer can be an inexpensive and unobtrusive way to remind your investors of the pending initiative and deadline.

An equally important call is to the fund’s finan-cial and tax accountants. The tax consequences to your investors can be significant. This can be especiallytrueiftheFundhasbookedlargeloanlossreservesinprioryears.GenerallyAcceptedAccountingPrinciples(GAAP)mandatethatanticipated losses must be recognized when it is determined that they are probable; but tax laws, ingeneral,don’tallowtheFundtodeducttheseestimated loss reserves until the loss is actually realized (e.g. short sale, trustee sale, etc.). Upon thesaleoftheassetsanddissolutionoftheFund,these losses will be realized and be able to be

21

takenbytheMembers’ontheirtaxreturns.

AnotherimportanttaxeffectofdissolutionisthatiftheFundincurredlossesduringitsprioroperating years, the IRS typically considers those tobepassivelosses.ThatmeanstheMemberscanonlyusethosetooffsetotherpassivegainsthey may have had. Usually those passive losses have gone unused and were carried forward to subsequentyears.IntheyeartheFundfilesitsfinal tax return, these losses are re-character-izedasordinarylosses,andMemberscanfinally

usethemtooffsetotherordinaryincome.It’simportant to note that in order for a fund to be considered terminated by the IRS and the loss-es to be recognized, a few critical requirements must be met: 1) the fund needs to make final distributiontoMembersonorbeforethelastday of the tax year, and 2) no significant fund business can be transacted in subsequent years.

Ifit’sdeterminedthatclosingtheFundisinthebest interest of the fund and its investors, fig-uring out the communication plan is the next

completed by year-end, there is still more time needed to close the fund in an orderly fashion. As with most funds, the operating agreement requires a CPA Review or Audit. That can only happen after the books are closed for the prior year.

Part of your planning should involve cash set aside for a legal reserve as well as to pay for em-ployees or contractors to close the books, con-duct the audit, issue tax returns, handle inqui-ries, and attend to any remaining fund business. Also, let vendors know of the situation so they can submit all invoices and you can accrue all costs before the close.

A common way to structure a shutdown is to set up a liquidating entity to which you can transfer cash that’s needed for costs to close the fund, plus a legal reserve. The original fund distributes the remaining cash and liquidating corporation stock to its investors as a final distribution. In so doing, the original fund meets the requirement of a final distribution for tax purposes and can also hold back some cash in case of lawsuits. Typically the liquidation entity is kept open for up to two years. It is also important to check withyourinsuranceproviderforD&Otailcoverage should any litigation arise for claims duringthefund’soperatingyears.Hopefully,thetail coverage can be renewed, but the transferred legal reserve will serve as a back up. Check with yourstatetoseewhentheoriginalFundneedstoformally file dissolution documents. In Califor-nia you have 12 months after the final tax return, butotherstatesmaybedifferent.

If your fund is currently structured as an LLC, it may seem logical to create the liquidating entity in the same manner. Consider setting it up as

step.Dependingonthesizeofyourfundandthelocation of its investors, an in-person meeting maybepossiblebutdifficult.Forthefirstmajorcommunication, a hybrid meeting works well. This will mean hosting an in-person meeting for those investors that are able to make it and also simulcast live as a Webinar. This format allows you to focus on a couple of key points: all inves-tors have an open invitation to join in person and if they are not able to, they can still partici-pate in the meeting remotely. It is also valuable that they know that other investors who share their same concerns are there in person.

Becognizantthatyourcommunicationstyleisnot overly complicated: limit use of industry ac-ronyms, use examples and analogies to illustrate a point, and keep it simple. The most critical point in your presentation is to summarize the financial data in an easy-to-understand format. It may be helpful to contact a few of the more engaged and vested investors beforehand to gain feedback on strategy and presentation. This pre-contact with engaged investors can be bene-ficial in many ways.

Additionally, create a flowchart and define the timing of events: asset sales, future meetings/we-binars, mailings, distributions, and tax returns. There is a significant amount of work to close a fund, so setting investor expectations appro-priately can reduce additional response time to their inquiries. Typically, workload and inquiries double, if not triple, during this stage; therefore, you may consider letting your investors know that all of their questions will be addressed during the next webinar or communication.

If all goes as planned, the investors approve to dissolve the fund and the asset sales are

22

Featured Topics: • DifferentInvestmentModels• Where&HowtoSourceNotes• DueDiligence• Legal;Escrow;ImportantDocuments• LoanServicing–Performing• LoanDefaultServicing–Non-Performing• ExitStrategyExecution• IRA–Howto/BenefitsofBuyingwithinanIRA

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a C-Corp primarily for the reduced cost in tax preparation. Investors will receive a 1099 vs. K-1 which takes significantly less time and cost to prepare.Doubletaxationshouldnotbeanissuebecause no income is anticipated.

The information in this article is designed to be used as a framework on what to consider when closing your fund. There are unique situations with each fund and its investors; therefore, the preparation and mapping out of the require-ments is the most critical piece in the execution process. Approaching and implementing the decisiontocloseinaneffectiveandorganizedmanner should create a successful closure with appropriate protections in place for the fund

management and its investors. Remember, good investor communication is just as important duringtheFund’sdissolutionasitwasduringitsoperating years.

ByRobbinAldridge&MikeDriscoll

PREIMAProfessional Real Estate Investors & Managers Association

reaL estate inVestora n d

fund manager summit

24

Secure your doors and windows

1.SafeDoorSystemsHomeSecurityDoor&FrameReinforcementKit- Use 4” screws in all screw holes, both on the hinge side and the door side. -Veryimportantforscrewstobesecurelysetintothestud on both sides of door.

2.SchlageExtraLongDeadBoldLock- Extra long dead bolt lock helps prevent doors from being kicked or pried open.

3.GrishamPp-SpagWindowGuard-UseWindowGuardongroundlevelwindowsnotvisibleto neighbors and passers by.

4.HoneywellEconoSwitch7DayProgramma-ble Timer Switch (Lights & Radio)- Appearance of occupancy deters thieves.

5.BoardupWindowsanddoorsonVacantProperties- Use Star screws, or Torx bit screws to secure plywood to exterior doors and windows.

6.KeepGarageDoorsclosedandlocked-An open garage door is a glaring invitation to burglars. Close and lock your garage door.

Tips to Stop Theft & Property Damage

- Mike Wrenn

TheFT Is A probLeM, And IT MAy rob you oF your AbIL ITy To Insure your InVesTMenTs

Theftclaimsareaffectingalmosteveryrealestate investor nationwide. Your help is vital, be-cause this consistent thievery is threatening the insurance industry’s ability to provide theft cov-erage. Every other day we receive a theft claim large enough to cause headaches for you and the insurance industry at large. If we do not act to protect this program, its coverage and rate sta-bility,thenwewillallsufferabigheadache.Noone is immune from this problem. We highly recommend you take the following precautions to protect your properties immediately.

ThefollowingsecurityitemscanallbepurchasedatHomeDepot.

“ ”rememBer to turn off the Water

Whenyour ProPerty is VaCant!

7. Lock up ladders and tools that could give burglars easy entry to your property.-MasterLock3ftSteelChainandLock

8. Check on your properties at least once each week. Show people you are there.-Pick up mail and newspapers. Keep your property neat and clean.

9.Makesureyouhavetherightinsurancecoverage.-Consult with your insurance agent. The wrong insur-ance coverage may cause you a big headache.

The only way to provide a stable insurance program over the long run is to be proactive in protecting your properties from thieves. While this shameful spike in theft is galling and im-poses itself on your investment goals, insurance coverage of your future investment opportunities may be at stake. Continued widespread theft claims are unsustainable to any insurance carrier and agent. Without your active participation in protecting your property from theft, your op-tions are limited:

1. Increaseyourcoststooffsettheincreasedex-posure, or limit coverage for these occurrences.

OR2.TheBESTsolution—Immediatelyfollowthetips listed above, and do what is needed to pro-tect your properties from theft and avoid claims in the first place.

Thereisapayofftothosewhohelpbringprop-ertytheftundercontrol.Byhelpingtocontrolinsurance claims, overall costs can be brought under control, and lower insurance costs will accruetoyou.Byoutperformingotherproper-ty owners in the marketplace, your insurance

carrier can provide you with lower costs than can be found elsewhere. You help yourself, and you gain long-term coverage that others will not have.Noonecanoffertheftcoveragewithoutthesame investments in loss reduction. Candidly, those who understand loss control will see prof-itable results for their premium contributions.

Insurance was designed to protect against tor-nadoes,suchastheonethathitJoplin,Missouri,anditshouldrespondwithoutdelay.Butthisissue of constant theft is not what insurance was designed to protect. The trend is unmistakable. If your property is not well protected, you should expecttobevictimizedbytheft.Forewarnedisforearmed, as they say. Please help stop these losses.

Mybesttoyou,

MikeWrenn:CEONationalRealEstateInsuranceGroupAffinityGroupManagement7509NWTiffanySpringsParkway,Suite200KansasCity,Missouri64153www.nreinsurance.comwww.affinitygm.com888-741-8454"The right coverage at the right time"

25

industry:

THEREisanewsheriffintown,andtheyaredead-lyserious.ThenewlyformedConsumerFinancialProtectionBureauwillnowbeoverseeingthePri-vate Lending business, but more on that a bit later. Asmostofyouknow,theDoddFrankFinancialReform Act, (hereafter referred to as the “Act”) was signed into law in July of 2010, and part of that leg-islationisTitleXIV,MortgageReform&Anti-Pred-atory Lending Act.

Manyofusprivatelenders,whetherindividualsorbrokers,havebeenmakingthesetypesofloansforquite some time and are pretty much set in our ways. The loans we tend to make are now referred to as“HighCostMortgages”;andalthoughtheseloansarecoveredunderthe“Act,”soareallResidentialMortgageLoanstosomeextentoranother.

Mostofusknowthattheruleschangedacoupleyearsbackthataffecthowwemakeloansonarefinanceofaborrower’sprimaryresidence.ThenewruleswillapplytoALLRESIDENTIALPROPERTIES,saleor refinance, 1-4 units, depending on the type of loan taking place.

n e w L A w s T h A T w I L L h A V e y o u s c r A M b L I n g . . .Private Lenders Beware!

- Bob Cox

26

LATE NEWS UPDATEThe CFPB has deferred implementation of the Dodd Frank Bill. The new implementation date is Jan. 10, 2014. The information contained in the following article is applicable and relevant. However, you now have time to prepare for it. More articles on this important topic will be published in subsequent issues of Private Lender.

industry:Here is a summary of these new rules, which as of now are set to go into effect January

21, 2013.

1.Balloonloanson“HighCostMortgages”willbe illegal! In the case of adjustable rate mort-gages, borrowers must be qualified on “Ability to Repay”basedonthehighestindexedrate.(Moreon that below.)

2.Although,sincetheHomeOwnerEquityProtectionActor“HOEPA”Lawswentintoeffect,wehavenotbeenallowedtomakeloansbased strictly on collateral (you do know that, right?!) without taking into consideration the borrower’sabilitytorepay…inregardsto“HighCostMortgages,”thoseruleshavebeenreallyamped up!

3.On“HighCostMortgages”you,thelender,will now be responsible to verify and document (from reliable 3rd party information) the bor-rower’s ability to repay the loan and make the payments, including taxes and insurance.

Consumer’sCreditHistory

Current Income

Expected Income

Current Obligations

Debt-to-IncomeRatioorResidualIncomeafter

non-mortgage related debt and mortgage related debt.

Employment Status

And other financial resources other than the

consumers equity in the dwelling

Determination must include consideration of:

May5-7,2013; CrystalGatewayMarriott;Arlington,VA

FeaturedTopics:• DifferentInvestmentModels• Where&HowtoSourceNotes• DueDiligence• Legal;Escrow;ImportantDocuments• LoanServicing–Performing• LoanDefaultServicing–Non-Performing• ExitStrategyExecution• IRA–Howto/BenefitsofBuyingwithinanIRA

Sponsored by the Professional Real Estate Investors

& Managers Association

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In cooperation with LoanMLS and the American Association of Private Lenders

28

SO WHY are they doing all of this to us??? Was it Private Lending that collapsed the real estate market?Well,theFederalGovernmentissickandtiredofforeclosuresanditseffectsonthemarketplace. They don’t want anyone buying a home or borrowing money against their equity that is not in a position to make the payments. (That is a sound idea, and had it been in place earlier, this real estate mess might not have been nearly this bad!)

Butwhypickonus,theprivatelender?Ourloans were not what brought the market down! Well, I think that like the mighty dolphin, we’re just getting caught in the tuna nets. We were notnecessarilythetarget,BUTthegovernmentat this point does not care! That might change down the road, but for now we must beware.

SO FOR THOSE OF US WHO DEPEND ON THE INTEREST WE EARN ON THESE LOANS, WHAT ARE WE GOING TO DO?

Well, for one thing, the things we have been talkingaboutDONOTapplytobareland,con-struction loans, commercial property, or tempo-rary bridge loans for a term of 12 months or less. (That being said, if it is found that you made a “bridge loan just to get around the terms of these laws, lord, help you!)

So, we can change the types of properties we make loans on. Or you can also avoid this by makingloansthatarenot“HighCostMortgages,”butthatwouldmeaninterestratesaround4%andnoorverylowfees.(Mightaswell buy a municipal bond).

There is some encouraging news on some fronts. The law is clear that if the loan is not for

You, the lender/creditor, will be responsible for this documentation. Reliable 3rd party informa-tion includes actual tax returns, pay stubs, credit reports. You must document the borrower’s debttoincomeratioandresidualincome.(Goodluck with that, unless you do this for a living). BecauseofTurboTaxandothersuchprogramswhere people can make up a tax return, you must have a 4506T form signed (What?) and pull a copy of their tax return transcript straight from the IRS.

I can hear you now saying, there is no way that you are going to do this, and who would catch you if you did, and who is the government any-way to tell me how I can loan my own money?!

BUT,remembertheNewSherriffinTownwetalked about? These guys are deadly serious, and here are a few of the consequences for failure to comply:

1. Any actual damage sustained by such person (read borrower) as a result of the failure, plus;

2. Twice the amount of any finance charge in connection with the transaction (Twice the amount of interest they paid you so far, plus loan fees if any) and…

3. If you did not properly qualify as the borrow-er, you face a 3YEARRIGHTOFRECISSION, and this goes with the note should you sell it!

So, if you have to go to court for a foreclosure action and the borrower’s attorney is not an idiot, you could find yourself in a tough and very expensive spot.

(Please remember, this is a relatively short article on a very large subject and there is not enough room to list all of the changes to the laws…..but there are others as well)

personal, family, or household purposes, it is not subject to TILA, and therefore not subject to thechangesaffectedbytheDoddFrankAct.Wecontinue to investigate other potential exclusions.

We have faced adversity before and made it through. Knowledge is power, and right now the best weapon we have is to keep up with the rapid changes. There are some in Congress who are seeing the unintended consequences in this legislation and starting to ask questions. Could some of this soften the line, very likely? Could it happen before January 21st? Come on! These guys couldn’t even agree on what to order for lunch right now…….but there is always hope. And there is power in letting your elected offi-cials know your views. (Remember it seems as if their number one priority is getting re-elected, which is tough to do if they anger enough of their constituents!)

ByBobCox

“Bob Cox has specialized in Private Money Lending for over 21 years. He is a recognized expert in Private Lending Law and the Dodd Frank Financial Reform Act, lecturing and teaching through-out the State of Oregon. In his time in the business he has facilitated over 800 private transactions and placed nearly 80 million dollars in private loans.”

BobCox,MLO#254993SeniorMortgageBanker/PrivateLendingSpecialistPacificResidentialMortgage–MedfordBranch502W.MainStreet,Suite103Medford,OR97501(541) 773-3131 x: 222(541)773-4981Fax

bob.cox@pacresmortgage.com

PRIVATELENDER is the official pub-lication of the American Association of Private Lenders. It is published six times a year.

SUBSCRIPTIONS: You can get a free sub-scription to Private Lender at www.aaplonline.com

ARTICLESUBMISSIONS,CONTACT:

ADVERTISINGINFORMATION,CONTACT:lmuck@aaplonline.com

This publication is created to provide information to the private lending indus-try. The American Association of Private Lenders is not engaged in rendering legal, financial, accounting, tax or other profes-sional service. The views expressed herein may not be those of AAPL. No part of this publication may be duplicated in any way without the explicit written authorization of AAPL.

COPYRIGHT©2012American Association of Private Lenders.

P r i vat e L e n d e rO f f i c i a l E z i n e o f A . A . P. L .

29

dlang@aaplonline.com

30

rangements, providing real estate settlement services, and consumer banking-type activities, including deposit-taking activities, transmit-ting or exchanging funds, or otherwise acting as a custodian of funds or any financial instru-ment used by or on behalf of a consumer. As its nameimplies,theCFPB’sreachextendsonlytoconsumer transactions, those products or ser-vices intended primarily for personal, family, or household purposes.i Thus, loans designed for commercial purposes fall outside the ambit of theCFPB.Likewise,acommercialloanguaran-teed by an individual who would otherwise be considered a consumer would not be subject to CFPBauthority.Itisthenatureoftheactivityrather than the status of the participants that triggersCFPBoversight.

The scope of CFPB authority Asstatedattheoutset,theCFPBischargedwithmakingandenforcingFederalconsumerfinanciallaw.“Federalconsumerfinanciallaw”includes a variety of statutes, authority over whichwastransferredtotheCFPBafteritwascreated. There are eighteen such statutes, exam-ples of which include the Consumer Leasing Act of 1976, the Equal Credit Opportunity Act, the FairCreditBillingAct,theFairCreditReportingAct,theHomeOwnersProtectionActof1998,theFairDebtCollectionsPracticesAct,portionsoftheFederalDepositInsuranceAct,portionsoftheGramm-Leach-BlileyAct,theHomeMort-gageDisclosureActof1975,andtheTruthin

Intro to Consumer Financial Protection Bureau

- James Warmbrodt

A prIVATe Lender perspecTIVe

Among the issues facing private lenders as a new year begins is the increasing presence of the FederalBureauofConsumerFinancialProtec-tion,betterknownbytheacronym“CFPB.”TheCFPB,createdbytheDodd-FrankWallStreetReform and Consumer Protection Act (“Act”), is now well into its second year of existence as the Federalagencywithprimaryauthoritytoim-plementandenforceFederalconsumerfinanciallaw.Nevertheless,theimpactthattheCFPB’semergence will have on financial markets is just beginning to be seen. This article will summa-rizethescopeoftheCFPB’sauthorityandhigh-light some recent developments that reflect the agency’s regulatory priorities that may impact private lenders.

Are you “covered”?Any initial discussion of this topic logically begins with an understanding of the extent to whichaprivatelenderissubjecttotheCFPB’sauthority.ThosewhofallwithintheCFPB’sauthority are referred to as “covered persons” in the vernacular of the Act. A covered person is anyentitythatoffersorprovidesa“consumerproduct or service” or is a service provider to suchaperson.“Financialproductorservice”is defined broadly under the Act, and includes transactions such as extending credit and ser-vicing loans, extending or brokering leases of personal or real property that constitute the functional equivalent of purchase finance ar-

Lending Act. In addition to these existing stat-utes, and their respective implementing regula-tions,Federalconsumerfinanciallawalsoin-cludes any rule or order subsequently prescribed bytheCFPB.ii

TheprimaryfunctionsoftheCFPBaretocon-duct financial education programs; to collect, investigate, and respond to consumer com-plaints; to monitor the functioning of markets for consumer financial products and services to identify risks to consumers; to supervise certain enumerated covered persons for compliance withFederalconsumerfinanciallaw;andtoissuerulesandordersthatimplementFederalconsumer financial law.iii In connection with the

CFPB’srulemakingfunction,coveredpersonsmay be required to provide information to the CFPBeitherintermittentlyoratregularinter-vals.TheCFPBmaymakeitsreportsavailabletoprudential regulators, state regulators, or other Federalagencies,andisrequiredtoreportpossi-ble tax law violations to the IRS.iv Similarly, the CFPBmaypartnerwithothergovernmentalen-titiestoenforceFederalconsumerfinanciallawv , as it has done with increasing regularity, most recently along with the state attorneys general inHawaii,NewMexico,NorthCarolina,NorthDakota,andWisconsintostopillegalpracticesassociated with payday loans.viTheCFPBmayrestrict mandatory pre-dispute arbitration.vii It may prescribe rules to prevent unfair,

31

deceptive, or abusive acts or practices.viii In its enforcement capacity, relief available to the CFPBincludesrescissionorreformationofcon-tracts, refund of moneys or return of real prop-erty, restitution, disgorgement or compensation for unjust enrichment, payment of damages, public notification of violation, injunctive relief, and civil penalties.ix

Certain specified nondepository-covered per-sonsfallundertheCFPB’ssupervisoryauthori-ty.xTheseconsistofthoseofferingorprovidingorigination, brokerage, or servicing of consumer mortgage loans; larger participants of certain markets of consumer financial products or services, as defined by rulexi ; covered persons engaging in conduct that poses risks to consum-ers; providers of private education loans; and providers of consumer payday loans.xii “Super-vision”ofthesepersonsconsistsoftheCFPBrequiring reports and conducting examinations. TheCFPBhasproducedamanualdescribingitsexamination process which is available on its website.xiv

Compliance Management SystemAs it ramps up its supervisory and enforcement efforts,theCFPBhasidentifiedseveralareasofconcern that provide guidance to private lend-ersofCFPBprioritiesin2013andbeyond.AnareathatisconsistentlyemphasizedbytheCFPBin its reports is the necessity that all those un-der its supervision and enforcement authority maintainaneffectivecompliancemanagementsystem to manage their compliance responsibil-ities. Examinations of supervised entities will test the components of compliance management systems to ensure that the institution has the ability to detect, prevent, and correct practices thatviolateFederalconsumerfinanciallawandthat risk harm to consumers.xv In its recently

published report highlighting its supervisory ac-tivitythroughSeptember2012,theCFPBnotedcomprehensive deficiencies in compliance man-agement systems. Examples of these deficiencies were compliance management systems lacking across the institution’s entire consumer portfo-lio or the institution failing to adopt and follow comprehensive internal policies and procedures.xviTheCFPBdescribesaneffectivecompliancemanagement system as one that includes the following components: internal management and oversight, which includes clear policy state-ments; policies and procedures, complementary training programs, and internal monitoring and corrective action; consumer complaint response; independent testing and audit; and third-party service provider oversight.xvii

Fair Lending PracticesA frequent area of concern expressed by the CFPBrelatestofairlendingpractices.Asman-datedundertheAct,theOfficeofFairLendingand Equal Opportunity has been created under theCFPBtoprovideoversightandenforcementofFederallawsintendedtoensurefair,equitable,and nondiscriminatory access to credit, such as theEqualCreditOpportunityActandtheHomeMortgageDisclosureAct.Supervisionhasbeenundertaken to review the lending practices of various bank and nonbank institutions. One particular area of focus involves private stu-dentloans.TheCFPB,inconjunctionwiththeDepartmentofEducation,hasexaminedhowlenders utilize cohort default rates and the per-centage of borrowers who default within two years of entering into repayment status in order to determine if schools are eligible to participate inFederalstudentloanprograms.xviii Service members have received particular attention as a group that is often times subjected to unfair lending practices, particularly in reference to

May5-7,2013;CrystalGatewayMarriott;Arlington,VA

32Continue on pg. 35

reaL estate inVestora n d

Sponsored by the Professional Real Estate Investors and Managers AssociationIn cooperation with LoanMLS and The American Association of Private Lenders

This event will be the Premier Educational Conference on Buying & Selling Notes. It will bring together Investors, Private Lenders, Hard Money Lenders, Fund Managers, Brokers, Attorneys,

CPAs and Leading Service Providers to learn and share where the opportunities are and how potential growth and current yields can help deliver returns to you and your clients.

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student loans and payday loans.

MarketingArecentjointinvestigationbetweentheCFPBandFTChasresultedintheissuanceofwarn-ing letters being issued to a dozen mortgage lenders and mortgage brokers concerning po-tentially misleading advertisements, particularly as directed to the elderly and to veterans. This investigation of advertisements appearing in newspapers, on the Internet, and in direct mail solicitations revealed potential misrepresenta-tions concerning government affiliation, interest rates, costs of reverse mortgages, and the amount of cash or credit available to consumers.xix

ConclusionThis article has discussed the statutory framework forCFPBoversightofnonbankentities,suchaspri-vatelenders.IthasalsosummarizedwhattheCFPBconsiders to be some of the highlights of its regulato-ry activities of the past year, but is not an exhaustive discussionofthoseactivities.TheCFPBisanagencythat is growing rapidly, and has become increasingly prolific in its issuance of rules and policy statements, consistentwithitsauthorityundertheDodd-FrankActtofurtherdefinewhatconstitutesFederalcon-sumer financial law. Accordingly, it would be wise tomonitortheCFPB’sactivitiesonanongoingbasis,astheCFPBcontinuestoengageinitssupervisionofnonbank persons, among them private lenders.

i 12 U.S.C. § 5481.ii Id.iii 12 U.S.C. § 5511.iv 12 U.S.C. §§ 5512, 5514.v 12 U.S.C. § 5562.vi A joint enforcement action with states to stop illegal advance fees,CFPBBlog,January5,2012.vii 12 U.S.C. § 5518.viii 12 U.S.C. § 5531.ix 12 U.S.C. § 5565.xTheCFPBdefinesa“nonbank”asacompanythatoffersorprovides consumer financial products or services but does not haveabank,thrift,orcreditunioncharter.TheCFPBlaunches

itsnonbanksupervisionprogram,CFPBBlog,January5,2012.xiPresently,theCFPBhasdefinedtwosuch“largerpartici-pants”; larger participants of the credit reporting market, and larger participants of the debt collection market.xii 12 U.S.C. § 5514.xiii Id.xvCFPBSupervisionandExaminationManual,October2011(hereinafter“Manual”)..xvManual,Overview,Page3.xviCFPB,SupervisoryHighlights:Fall2012.xviiId.;Manual,CMRPage2xviiiFairLendingReportoftheConsumerFinancialProtec-tionBureau,December2012.xixPressrelease,ConsumerFinancialProtectionBureauWarnsCompaniesAgainstMisleadingConsumersWithFalseMortgageAdvertisements,November19,2012.

ByJamesC.Warmbrodt,EsquireWeltman, Weinberg & Reis Co., LPA

Jim Warmbrodt practices in the Compliance Unit of WWR and is based in the Pittsburgh office. Jim earned a B.S. with high honors in Criminal Justice from Eastern Kentucky University in 1979 and a J.D. from the University of Pittsburgh School of Law in 1984. A member of the Allegheny County Bar Association, Jim is licensed in Pennsylvania and admitted to practice before the U.S. District Court (Western District of Pennsylvania) and the Third Circuit Court of Appeals. Jim’s community involvement includes serving as a Board Member for Pet Connection, Inc.

James C. Warmbrodt, Esquire Weltman, Weinberg & Reis Co., LPAhttp://www.weltman.com/908-756-7073jwarmbrodt@weltman.com

35

36

Are Private Lenders Managing their Risk?- Steve Clark

With signs of the economy rebounding and construction on the rise, it’s a good time to be involved in the private lending industry. Betweennewdevelopments,remodels,andflippingproperties,profitsaretobefoundnationally.

Still, even in the best of times, there are risks; hence, the need for risk management. Even the most sound projects and the most stable business partners, developers, and contractors must be monitored and inspected in order to ensure an investment’s safety. Too often, projects go upside down when comprehensive oversight would have saved the day.

Over the years, Construction Inspection Specialists have personally worked with many knowledge-able,successfullenders.Butevenindustryleadersarevulnerabletoinfluencesoutsideoftheircon-trol—unless they choose to control them. The smart ones search for help in curtailing unforeseen risks beforetheywreakhavocuponinvestments:seekingthehelpofserviceslikethoseofferedbyCIS.

Lenders simply cannot blindly expect every-one on a project’s team to perform their tasks without fail. Their lending relationship with the developer must be clear and strong. And the developer’s contracts with contractors must be ironclad, safe, and protective of the lender as well. It sounds like common sense, but sometimes even the savviest lender can overlook the perils that lurk in the shadows of construc-tion. This is where risk management plays a pivotal role.

For instance, my firm has worked through a broad range of challenges that have

happened to our clientele prior to our en-gagement, such as:

•Contractor’s scope of work not defining the extent of work necessary to complete the project

• Lack of contract language requiring a schedule indicating the intent to complete the project by a certain date…resulting in borrower and lender delays

•Fundsnotsetasideforcontingenciesthatariseduring construction

• Lien waivers not being tracked and cleared can necessitate double payment by the owner, as well as delay or impede sales

•Borrowersadvancingprojectfundspriortowork being completed

• Loaned funds not going into a project at the level of appraised value, or not at all

• Subcontractors being severely under insured—a significant financial threat

• No qualified parties on site during construc-tion, a safety risk

• Unpermitted work completed and discovered after the sale of a property, causing a red tag by city to the new owner

Investing always has its risks, but applying comprehensive risk management oversight can protect a lender and help ensure a successful, profitable investment. Our firm has witnessed too many failures that should have been suc-cesses. That’s why we extol the virtues of risk management to the members of the American Association of Private Lenders and everyone in the construction and lending industries.By,SteveClark

BIO:H. Steve Clark, CEO, and his firm, Construction Inspection Specialists, have been involved in providing risk manage-ment services to both the commercial and private lending industry for the past fifteen years. CIS’s ability to provide their services to projects in any location across the country ensures that a lender’s investment in a project is being pro-fessionally monitored throughout the project’s lifecycle. CIS can be contacted at www.cisinspects.com.

37

Calendar of Upcoming AAPL Events:January 29, 2013;11:00AMCentral;Webinar;MarketingtoIncreaseDealFlow;DavidOwen&JamesRincon;PrideofAustin Capital Partners.

February19,2013;1:00PMCentral;Webinar;RaisingPrivateCapital–BuildingYourInvestorBase–BasePractices&Strategies;JoshFischer;SterlingPacific.

May5-7,2013;AAPLSpringConference;CrystalGatewayMarriott;Arlington,VA

November 10-12, 2013;AnnualAAPLFallConference;CaesarsPalace;LasVegas,NV

memBershiP:

memBershiP:

39

AApL Lenders Are esTAbLIshed, proVen prIVATe Lenders In The prIVATe LendIng IndusTry. They Are AbLe To dIspLAy The AAPL Logo In TheIr

proMoTIonAL MATerIALs As A syMboL oF TheIr coMMITMenT To quALITy And exceLLence. does your Lender beLong To The AAPL And Adhere To A code

oF eThIcs? LeArn More AbouT our MeMbershIp requIreMenTs.

2013 Member Directory

NOT A MEMBER? JOIN NOW! Click here to go directly to the AAPL website directory.

Board of Advisors and Founders

Company Name

AffinityGroupManagment,Inc.

BridgeSourceCapital

BridgeSourceCapital

GeraciLawFirm

InvestorsChoiceFunding

Pride of Austin Capital Partners, LLC

RollinsConsultingGroup,LLC

SterlingPacificFinancial

TimBricker

Wallace Capital

Contact Name

MikeWrenn

BillWorsley

WallaceGroves

AnthonyGeraci

DavidWilliams

DavidOwen

Jack Rollins

JoshFischer

TimBricker

Robert Wallace

Membership Level

BoardofAdvisors

BoardofAdvisors

Founder/BoardofAdvisors

Founder

BoardofAdvisors

BoardofAdvisors

Founder/BoardofAdvisors

BoardofAdvisors

Founder

BoardofAdvisors

KansasCity MO

Davidson NC

Raleigh NC

Irvine CA

Louisville CO

Austin TX

PonceInlet FL

Watsonville CA

Philadelphia PA

Boston MA

City State

40

Corporate Active Lender Directory

Company Name

BayMountainCapital

BlueOceanMortgage

Carolina Private Lending, LLC

Carolina Private Lending, LLC

DusekNetwork,Inc

Northfield Capital LLC

Pride of Austin Capital Partners, LLC

SterlingPacificFinancial

Trilion Capital

Wallace Capital

WDBFundingLLC

ZincFinancial,LLC

Contact Name

Phill Sanchez

Jim Sexton

WallaceGroves

BillWorsley

BrendaDusek

Robert Kiley

RobertBuchanan

JoshFischer

Charles Evans

Robert Wallace

Jennifer Watkins

Todd Pigott

Membership Level

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

City

Dallas TX

Roanoke VA

Raleigh NC

Davidson NC

OrchardLake MI

Andover MA

Austin TX

Watsonville CA

SanDiego CA

Boston MA

WestValleyCity UT

Clovis CA

State

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Individual Active Lender Directory

Company Name

Accelerated Assets

AdvanceAmericaProperty&Fin

AJTMFinancial

AlphaFundingSolutions

AssetBasedLending,LLC

BaypointManagement,Inc

BGRealEstate

BuyNow,LLC

CalCapFinancial,LLC

California Private Investors Inc

CelticFundingCorp

Centennial Properties

Charles Tralka

Cirius Capital

ClearCreekFunding,LLC

ClearMortgage,LLC

ConquestFunding,Inc

Crowne Pointe Capital Partners

Custom Capital Strategies

DelRioInvestments,LLC

DelToroLoanServicing,Inc

DirectCommercialCapital

DusekNetwork,Inc

Contact Name

TomBalames

GuyCook

Anthony Tomasi

DavidHansel

DanielLeyden

MarkLatimer

JerryBouchard

AnnBellamy

Edward Aloe

Cina Sandoval

Raymond Loughlin

RobertDodge

Charles Tralka

John Citrigno

BillWorsley

MichaelCoffman

JeffCella

Robert Napolitano

Patrick Truhlar

MikeLain

DrewLouis

StevenMoore

BrendaDusek

Membership Level

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

City

Birmingham MI

Baltimore MD

DelrayBeach FL

Lakehurst NJ

Hoboken NJ

NewportBeach CA

Fairfax VA

Tyngsborough MA

Pasadena CA

SanDimas CA

Plainsville MA

Lee’sSummit MO

Santa Clara CA

San Jose CA

Davidson NC

Tempe AZ

Allentown PA

RedBank NJ

Orlando FL

Mesa AZ

SanDiego CA

Lakeland FL

OrchardLake MI

State

41

Individual Active Lender Directory Cont.

Company Name

Eagle Private Lending

Eastern Cap

ENRFinancialServices

FairwayAmerica,LLC

FidelityNationalInvestmentGroup

FirstCapitalFunding

FirstCapitalRealEstateInvestments

FirstFinancialCapital

FirstRepublicInvestmentCorp

FirstlineMortgage,Inc

ForrestFinancialGroup

GCAEquityPartners

GMAFactor

GraniteInvestmentGroup

Gronewoller&Associates

InvestorsChoiceFunding

IronBridgeLending

JGInvestsLLC

Kearny Capital Partners

LaMaisonProperties

LegacyGroupCapital,LLC

LoanDropBox,LLC

MMGCapital

MortgageInvestmentsArizona,LLC

Contact Name

ChuckMohler

Joseph (JT) Tommasso

GregBernett

DarrisCassidy

DavidJavdan

Ray Walter

Suneet Singal

MichaelSeai

DavidFenoglio

Kathleen Kramer

Charles Townsend

TomBraegelmann

Jacob Sacks

JeffMerrick

PaulGronewoller

DavidWilliams

GerardStascausky

JonathanGould

Joel Westle

Charles Campagnet

BrentEley

MikeAndera

ChrisGleason

MitchellKarren

Membership Level

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

City

LasVegas NV

Atlanta GA

Scottsdale AZ

Portland OR

McLean VA

Austin TX

Sacramento CA

Los Angeles CA

Montague TX

NewportBeach CA

Denver CO

LasVegas NV

Pittsburgh PA

Irvine CA

FortCollins CO

Louisville CO

Portland OR

New York NY

SanFrancisco CA

Alameda CA

Bellevue WA

SanMarcos CA

SimiValley CA

Tempe AZ

State

42

Individual Active Lender Directory Cont.

Company Name

Oasis Loan Advisors

PacificPrivateMoney

PacificResidentialMortgage,LLC

PeakManagement

PointCenterFinancial

PremierMortgageLending

Prime Commercial Lending

PrivateMoneyBank

QuixoteVentures,Inc

RedDirtLending

RevitaLending, LLC

Royal Crest Realty, Inc

Sea Lane Investments

SilveradoFunding,LLC

Source Capital

SpecialtyLendingGroup

StallionFunding

TempoFundingLLC

TheGrossmanCompanies

Trilion Capital

TrustDeedCapital,Inc

Trustee Corps

United Security Investors

Contact Name

Candi Poole

MarkHanf

BobCox

Shane Sauer

PattiMcLoon

Rick Piette

Kris Roglieri

Scott Sherman

GordonMoss

ScottMcLain

William Lansing

AndreBennett

Sandy Peters

DavidScott

SachaFerrandi

JeffreyLevin

VincentBalagia

MikeZlotnik

DavidGrossman

DavidWeiner

KenMeyer

Rande Johnsen

EvanFrank

VincentSpreuwenberg

Membership Level

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

Lender

City

LasVegas NV

Novato CA

Medford OR

Lenexa KS

AlisoViejo CA

LasVegas NV

Albany NY

CoeurD’Alene ID

SolanaBeach CA

Oklahoma City OK

Bethesda MD

Chicago IL

Encinitas CA

Lake Oswego OR

SanDiego CA

Greenbelt MD

Cedar Park TX

SanFrancisco CA

Quincy MA

SanDiego CA

Laguna Niguel CA

Irvine CA

Los Angeles CA

New York NY

State

43

Active Service Provider Directory

Company Name

AppliedBusinessSoftware

ArmaninoMcKenna,LLP

FCILenderServices

Feldman&Roback

GeraciLawFirm

LoanMLS

LoanMLS/ResidentialCapital

LoanCare

NCOFinancialInvestigativeServices

NEXZUSPublishingGroup

Premier Legal Assurance

RollinsConsultingGroup,LLC

SelfDirectedIRAServices

Construction Inspection Specialists

DLMFamilyInvestments,LP

HendersonSystems

NorthBayRealEstateServices

SBSTrustDeedNetwork

Weltman, Weinberg & Reis

Contact Name

A.J. Poulin

Josh Nevarez

GordonAlbrecht

MarcFeldman

AnthonyGeraci

Robin Alridge

MikeDriscoll

Aron Thielen

PaulMorrow

Andrew Waite

LornaHicks

Jack Rollins

Ryan Schneider

Steve Clark

DavidFenoglio

JasonHendersen

Stephen Loomis

Rory Cambra

RobertHanna

Membership Level

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

Service Provider

City

LongBeach CA

San Ramon CA

AnaheimHills CA

Bradenton FL

Irvine CA

SanDiego CA

SanDiego CA

VirginiaBeach VA

Metairie LA

Phoenix AZ

Irvine CA

PonceInlet FL

Austin TX

Windsor CA

Montague TX

LasVegas NV

Santa Rosa CA

WestlakeVillage CA

Warren NJ

State

44

VerticalMail John Nash New York NY Serice Provider

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Real Estate Investors

“ ”The Right Coverage At The Right Time

For a Coverage Proposal, Visit or Call:www.nreinsurance.com888-741-8454

It’s about more than money.

The American Association of Private Lenders

is about the self-reliance and rugged

individualism that built America. Our purpose

is to advance the interests of the entire peer

to peer community. We lend our experience,

enterprise and energy to elevate the standards

of our industry and give you a voice in your

future. Build your future with us.

Join AAPL today.

Private Lending–

9 1 3 - 8 8 8 - 1 2 5 0 l A A P L o n l i n e . c o m