Trust Deed Investments: California SB 978 Suitability Reqs

[Joffrey Long]

I saw earlier posts about the new law, SB 978, investor suitability requirements for trust deed investments.

California now requires that when selling or brokering all of, or an interest in trust deed investments, hard money lenders and other providers have to:

1) obtain information about the investor, some of which was not necessarily required under previous law, including, but not limited to

* net worth
* other investments
* education or investment experience / level of sophistication
* career history
* age
* income
* tolerance for risk

There is a new form from the California Department of Real Estate that can be used to gather some of the information.

The form, although it asks questions some of my investors are not exactly thrilled to answer, is not all that bad.

2) The big part is that we now have to "consider the investor's circumstance and whether or not the investment is suitable for them."

That's where it gets a little more complex. Obviously, the 84 year old with only 100,000 in investable assets should not put 75,000 into a hard money construction loan - but many of the investment choices are not as clear cut.

3) 3rd new requirement: Previously, when we found an investor (1 investor) for a whole loan, there were a lot fewer requirements than when we placed multiple investors into a fractionalized loan, where each investor buys less than a 100% interest in the loan.

Now, investors in whole loans will benefit from a number of the restrictions and protections that previously applied only to investors in fractionalized loans, AND the same requirements (1 and 2 above) apply to whole loan investments.

I'm attending a conference soon, where extensive coverage of the topic will be provided.

I'm working with some attorneys and other trust deed investment providers to come up with procedures to fulfill the requirements, especially the more challenging # 2 above.

I think investments in California trust deeds will now be somewhat safer as a result of this. We (providers of trust deed investments) have a lot to implement here and those of us that do it right will likely face less competition. Some won't, or won't know how to comply......and sooner or later they'll be gone.

Joffrey Long