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Novice question RE borrower Communications

Hello,

Novice question: Does the investor ever correspond or negotiate directly with the borrower at any point during the lifecycle of the note? I've read some rules and regulations around this, so my question is, are all communications handled via a loan servicer and attorney? Is this ever not the case?

 

I had a mentor years ago that gave me the advice: "imagine yourself explaining what you are doing/saying in court".

Distressed scenarios especially can run high with emotions. When I negotiated with distressed borrowers on behalf of lenders they valued being heard and knowing that someone (even an institution) cared and was taking action. They did not care who was taking the action, just that someone was. Communication, even of bad news, was key.

Having a third party do this on your behalf gives you a shield and gives the one doing the negotiation more options (they can need to go ask someone). If the decision maker is in direct contact, then raw emotion might turn hostile when it would otherwise be productive.

Just some thoughts.

Great question Ari and thank you for your insights Ray!

A few more thoughts:

There is a debate among investors about how state-level debt collection licenses are interpreted. Some investors maintain the stance that they don't need a debt collection license to communicate with borrowers because they aren't a third party debt collector, they are the lender and thus have the right to communicate with their borrowers. Other investors err on the side of caution and make sure to buy notes in an exempt entity or maintain all licenses in the states they operate in. Discuss with legal counsel in the states you will be investing in.

In my opinion (confirm with your attorney of course), the best way to go is with a "client managed" servicing contract. You'll have a licensed servicer handling the administration & accounting on the loan and you as the lender have the responsibility of contacting & negotiating a resolution with the borrower. Once an agreement is reached, hand the borrower off to the loan servicer to make their payment(s) and bring the account current.

To echo Ray's sentiment, communication & compassion are critical. At the end of the day, if you approach these non-performing note situations with the goal of helping borrowers get back on track, you'll have a much more defensible position than a lender who is operating with the goal of taking back properties & displacing homeowners. And in my experience, an entrepreneur note investor is much better suited at resolving a tough situation than a debt collector.

Hope that helps!

This is helpful for sure; thank you both!