Summary:

What is a Lien?

A lien is a legal right or claim against real property, a security interest.  A debtor (Borrower) agrees to convey the security interest as consideration for the loan.  A lien is a charge or claim against property. It remains in place until the loan is satisfied, meaning the property cannot be sold or transferred without first settling the debt.

A lien refers to a monetary (money) claim that will be attached to a property by a recorded instrument and becomes an encumbrance on one or more properties.  The instrument s is typically a deed of trust n or a mortgage.

What is an encumbrance?

An encumbrance refers to a legal claim or agreement to enforce rights and obligations relating to a property.  The claim is against the property by an independent party, such as a mutual property association, a court-ordered lien, a municipal notification for substandard conditions, or a government agency.  The claims restrict the property’s unrestricted use until the deficiencies are satisfied or negotiated into an equitable agreement regarding future actions.  An encumbrance can be eliminated, reconveyed, or modified.

Hundreds of instruments, agreements, and actions are recorded and become public records.  Each creates a lien or encumbrance on a particular property.

The lending industry sometimes uses the terms “lien” and “encumbrance” interchangeably. However, a lien is generally a recorded monetary charge against a property.  All liens are encumbrances, but not all encumbrances are liens. 

Judgments are decisions from a court of Law regarding the rights and liabilities of parties in a legal action or proceeding.  The judgment will usually explain the court’s reasoning for the court order.

It’s important to note that a judgment decree is not self-enforcing.  Once a judge issues a verdict, the winner must take action.  The legal system requires the winner to collect the money from the opponent, who may choose to pay the judgment voluntarily, object to it, or appeal the ruling to avoid enforcement actions.  The winner must then attempt to enforce the judgment, which involves posting public notice and seeking to freeze assets.  This process can be time-consuming, labor-intensive, and costly.

Article:

The loan request:

My client has several properties with significant equity.  However, he found himself in a difficult situation due to both a divorce and a Partnership's's's dissolution.  He requests an interim loan to settle his outstanding debts, including those to his ex-wife, his ex-business partner, and a corporate tax lien.  We may refer to this as a ‘fresh star loan.’

The lender comments after reviewing the file:

There are several key considerations in the proposed transaction.

• Does the Borrower have a court order about the ex-wife’s payout?
• Paying off an ex-wife is a consumer rather than a business-purpose loan.
• The Borrower’s proactive steps: The Borrower must have an executed agreement with his ex-partner to dissolve the Partnership for a specified consideration.  This proactive step will ensure a smooth loan process and a clear understanding of the financial obligations.
• Paying off an ex-partner is for business purposes.
• If the Borrower has a personal tax lien, that would be for consumer purposes.
• If the Borrower has a corporate tax lien, it would be in the company’s best interest to pay it off.

Business purpose loans:

Business purpose loans are for 1 to 4 units of real property and are used primarily for business purposes, such as purchasing or improving a property for rental income.  The laptop’s primary use is for business purposes.  On the other hand, a consumer-purpose loan is one in which loan proceeds are used primarily for personal, family, or household purposes, such as buying a home for personal residence.

Consumer purpose loans:

On the other hand, a consumer-purpose loan is one in which loan proceeds are used primarily for personal, family, or household purposes.

Understanding the distinction between business and consumer purpose lending is crucial.  Both federal and most state governments have established regulations that necessitate special disclosures and notice/reporting responsibilities for lenders dealing with consumer-purpose borrowers.  Any mistakes or deviations from these requirements can result in severe penalties for the lender(s) and the originating mortgage broker(s), often leading many private money lenders to exit consumer lending altogether.

Industry participants commonly refer to the business purpose exemption.  There is no explicit exemption in the Truth in Lending regulations; instead, it is not covered by consumer laws.  Common practice is that what is not covered and exempt is interchangeable.

The greater the percentage of loan proceeds used for business, the safer it is for the lender and the procuring loan broker in the event of default.  What I mean by “safer” is whether the lender or the procuring loan broker could become entangled in the Borrower’s claim that the loan was a disguised consumer loan, which could lead to legal disputes and financial losses.

Review of the Loan File:

Upon review of the credit file, the Borrower has sufficient equity in four properties to secure individual loans and cross-collateralize all four properties, thereby raising the required $1,400,000.  The payoff to the ex-wife is $400,000; the ex-partner is $500,000, and the Borrower’s portion of the $200,000 of the $400,000 corporate tax lien.  Since the Partnership's dissolution agreement requires both corporate officers to pay off the lien, the ex-partner’s $500,000 will need to cover $200,000 toward the IRS debt.  Any remaining net loan proceeds will help the Borrower reposition his business into future profitability.

The loan fully complies with regulations, with only 28% designated for consumer use and 72% for business purposes.  This adherence to regulations provides a solid foundation for the loan’s approval and execution.

The loan is feasible, but preparing for potential delays is essential.  Obtaining updated demands from the IRS, a third-party appraisal, opening escrow, arranging title coverage, and closing the transaction all contribute to the processing time.  Without the IRS lien, the process would take two weeks.  However, given the IRS lien and its slow processing, closing the loan could take up to 4 months.  It’s crucial for all parties to be aware of these potential delays and to reach a consensus.  This proactive approach will help prevent future conflicts and frustrations.

I recommend that the Borrower hire a tax attorney with experience handling and expediting the IRS’s updated demand.  The expertise of a specialist attorney can significantly expedite the loan process, ensuring a smoother, more efficient transaction.