Last June, reporters Charles Piller and Robert Lewis wrote this story about “hard-money” lending abuses in Nevada County. One might expect that they were writing about high interest rates and harsh loan terms. It turns out that the victims in the story were not borrowers, but people who loaned money to hard-money lenders to fund the hard money loans:
Some of those investors entrusted their entire life savings to brokers who used the money to make high-interest loans to people who either didn’t qualify for a traditional bank loan or who needed money fast.
In reaction, the Senate Committee on Business Professions and Economic Development and the Senate Committee on Banking & Financial Institutions held a joint oversight hearing on hard-money lending in January. Thereafter, the co-chairs of those committees co-authored a bill, SB 978, intended to address these problems. Unfortunately, SB 978 as amended to date imposes significant legal burdens not only on most borrowers but also the entire real estate industry. In effect, the bill requires the building of a haystack of new filings to find some needles of information about hard-money lenders.
First, the bill would amend Section 25102(e) to require a notice-filing for the offer or sale of evidences of indebtedness. This change alone would impact a huge number of borrowers. Section 25019 defines “security” to include any evidence of indebtedness. Currently, borrowers can rely on Section 25102(e) as a self-executing exemption from the qualification provisions of Section 25110 provided the offer and sale does not involve a public offering. Although SB 978 wouldn’t condition the availability of the exemption on filing a notice, issuers would be required to do so. This means that if the bill is enacted in its current form, the Department will be inundated with filings, the vast majority of which will not be made by hard-money lenders.
Second, SB 978 would impose additional informational, recordkeeping and suitability requirements on virtually any real estate related issuer. The bill would add a new Section 25102.2 to require any issuer that relies upon an exemption from Section 25110 with respect to the offer or sale of securities, other than an exemption provided by Section 25102.5, and that is principally engaged in the business of purchasing, selling, financing, or brokering real estate, to provide additional information regarding the nature of the proposed offering on a form prescribed by the Commissioner. These issuers would also be required to make reasonable efforts to ensure all of the following:
- All persons to whom securities are sold can be reasonably assumed to have the capacity to understand the fundamental aspects of the investment, by reason of their educational, business, or financial experience.
- All persons to whom securities are sold can bear the economic risk of the investment.
- The investment in the security is suitable and appropriate for each purchaser, given the purchaser’s investment objectives, portfolio structure, and financial situation.
These issuers would be required to maintain suitability records for at least four years.
SB 978 would affect a wide swath of the real estate industry, including, for example, real estate investment companies that offer and sell equity securities in reliance on Section 25102(f) or real estate brokers implementing stock option plans in reliance on Section 25102(o). These new regulatory burdens will weigh not just on the real estate industry and borrowers generally, but also on the Department of Corporations. If SB 978 is enacted, the Department will be forced to contend with a massive influx of new filings largely unrelated to the problem of hard-money lending.