"My accountant referred me to Investor Loan Services. He explained how they could simplify the process and manage the collection of my notes to ensure that at the end of the year, all my accounting for these notes was in order; I wish I had done this a long time ago."

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551 N. Williams Rd, Suite D,
San Benito, TX 78586
Phone: (956) 399-1199
info@investorloanservices.com

Mechanics of the Custodial Services
September 25, 2011

Mechanics of the Custodial Services
September 25, 2011

The custodial program is a secure process used to help Investors and Banks efficiently manage borrowing relationships and is used for many types of loans.  For example, you may currently have an existing portfolio of notes that you would like to borrow against to take advantage of other investment opportunities, or you may have a piece of property that you intend to subdivide and then sell the individual lots through seller-financed transactions.

A custodial agreement is a three party agreement between Investor Loan Services, Inc. (ILS), a borrower and a third party lender.  The third party lender has made a loan to the borrower which is secured by notes receivable owned by the borrower.   We will refer to the borrower as the “Investor” and to the third party lender as the “Bank”, so as not confuse with the borrowers and lenders under the individual notes that are part of the notes receivable portfolio.

Through a custodial arrangement collateral is easier to manage than the traditional collateral transfers.  Since collateral transfers are hard to keep up with, they tend not to be done timely and often result in the deterioration of the Bank’s collateral position.

Traditionally, the Bank would initially have a master deed of trust on the entire subdivision.  Then as the lots are sold, the Bank would receive a Collateral Transfer of the seller-financed note and deed of trust as its collateral and the Bank would execute a partial release of its master deed of trust as to the lot being sold.  The Investor would deliver the original note and deed of trust, along with the Collateral Transfer to the Bank.  This is a cumbersome process and difficult for most Investors and Banks to manage.

Under the custodial arrangement, the Bank would continue to take a master deed of trust on the entire subdivision.  The Borrower would also execute an Assignment of Income with regard to the income generated from the sale of the lots.  As the lots are sold, the bank would execute a partial release of its master deed of trust, the original note and deed of trust are delivered to ILS as custodian, to hold the documents on behalf of the Bank.  On a quarterly basis, ILS will verify the notes in its possession and provide a certification to the Bank An Assignment of Income is executed and recorded to give notice to others (i.e. title companies) of the Bank’s security interest.  It is a blanket assignment, and in many instances, there is no need to prepare additional assignments for individual sales.

While an Assignment of Income provides notice of the Bank’s security interest, it does not prevent the Investor from managing its portfolio of notes.  Thus, if one of the underlying notes receivable is past due, the Investor can proceed with collection of the note and even foreclosure of the underlying deed of trust.  When the foreclosed property is re-sold, the original note and deed of trust are delivered to ILS as custodian and the new note receivable becomes part of the collateral.

The Bank can establish parameters as part of its loan agreement with the Investor to establish a loan to value ratio and a borrowing base (based on lots in inventory and notes receivable balances).  The Bank can monitor its parameters quarterly using the information in the custodial certification that ILS provides.  If the Investor is over the established borrowing base, the Bank can require that the Investor make a principal payment to reduce the loan balance to meet the established borrowing base.

ILS and its attorney will strive to work with your Bank to provide a program to meet the needs of your particular situation.

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