Measure would mandate requirements for investors

Investors in short-term mortgage loans often called trust deeds will be required to meet minimum financial requirements under a bill that was passed Thursday by the state Senate Commerce and Labor Committee.

Mortgage Lending Commissioner Scott Bice will set the minimum financial requirements by regulation, but it is not clear what those will be under the measure, Assembly Bill 375.

Observers expect that only individuals with more than certain amount of net worth or annual income will be allowed to invest in fractional interests of trust deeds.

Private lenders typically solicit investments from individual investors for these short-term loans, which are secured by real estate, often made to developers and generally pay double-digit interest rates.

Individual investors have lost millions of dollars in the last few years as private lenders, such as USA Capital, have failed. Many retirees, however, continue to rely on trust funds as a key source of income to supplement Social Security benefits.

"I don't think it's the state's place to determine if you're rich enough of too poor to invest (in trust deeds)," said Spencer Judd, an attorney and private mortgage lender.

Leo Davenport, owner of GFD Investments, said the bill may prevent a long-term trust deed investor from buying fractional interests in trust deeds.

He referred to an elderly woman who routinely rolls over $10,000 into a new trust deed. "She says that's her bingo money," Davenport said.

He could be forced to tell her, "You can't do this anymore (with trust deeds). Go put you're money in the bank and earn 3 percent."

Bice, however, pointed to stories about investors who invested all of their assets in trust deeds or borrowed money through a home equity loan in order to invest -- and then lost their money when a private lender failed.

Davenport also complained that small investors would be allowed to continue investing in trust deed funds although the funds also can lose money. USA Capital, which failed with $962 million in assets, operated two funds that lost money.

Bice disagreed, saying minimum requirements are established for the trust deed funds as well.

Jeff Guinn, owner of Aspen Financial, said he does not believe minimum financial requirements will do any harm. But he suspects some investors will misrepresent their financial condition so they may invest.

"I don't know if (the financial requirement) is a good thing, but it's not going to hurt," Guinn said. "I don't think it's anything that's going to hurt the (private lending) industry."

The requirement will make investors more attentive to the potential risk involved in trust deed investing, Guinn said.

Guinn said he may have refused trust deed investments from only a couple of investors, because he believed they were investing too much of their savings in trust deeds.

Another controversial portion of the bill would require private lenders to put loan servicing fees in a trust account, which bears no interest, and hold it there for a year.

Davenport said the state should require monthly bank statements on trust accounts, rather than audits ever six months.

Davenport also objects to potential regulations that would restrict private lenders' ability to lend to themselves or to company officials or employees.

He also does not want Bice establishing 30 hours of educational material and test requirements for brokers who were licensed since October 2005 -- although he notes that the commissioner may waive the requirement.

Assembly Majority Leader John Oceguera, D-Las Vegas, sponsored the bill, Bice said, and Bice said he also supports the measure.