Leveraging your notes to raise capital
September 26, 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.

ILS serves two roles under the custodial agreement. The first is as loan servicer, to collect the note payments for the Investor for each individual note in the note receivable portfolio pledged as collateral for the Bank loan. The note payments, less the servicing fees, are disbursed to the Investor’s bank account on a semi-monthly basis.

The second role for ILS in the custodial arrangement is to serve as custodian of the original notes and deeds of trust for the note receivable portfolio.  ILS keeps the original notes and deeds of trust, in a secure area, segregated from its other files.  The custodial files are available for inspection by the Investor and the Bank or its representatives.

ILS will provide the Bank with an initial certification of the notes and deeds of trust held under the custodial agreement.  Thereafter, ILS will provide reports to the Bank on a quarterly basis, certifying the notes in its possession.  The reports will include additional information pertaining to each note, such as current principal balance, monthly payment amount and next due dates.

Our attorney will work with the Bank’s attorney to document the loan subject to the custodial agreement.  Possession of the notes by the custodian perfects the Bank’s interest in the collateral.  ILS has possession of the notes (collateral) on the Bank’s behalf.

The custodial arrangement 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.  In some instances, after several years of failing to keep up with the collateral transfers and original notes, the Bank has discovered that its collateral position has deteriorated to the point that its loan is under-secured or perhaps unsecured.  With all of the changes and mergers within the banking industry, sometimes the collateral (underlying notes) is lost, which puts both the Bank and the Investor in a precarious situation.

With the custodial agreement, the Bank will no longer be required to hold and manage the portfolio of original notes.  This will be done by ILS and reports are provided to allow the Bank to keep abreast of the loan to value ratios and quantity and quality of its collateral, in accordance with their loan agreement. The process is seamless to the Bank; saves the Bank management and employee time, and allows the bank to know where it stands in reference to their collateral.