Every time I pick up a newspaper it seems yet another lender is about to go under or has somehow gotten into legal trouble. The most recent victims appear to have been swindled by WexTrust Capital. From the complaint filed by the SEC and local law enforcement agencies (http://www.wextrustreceiver.com/) , it appears that WexTrust had established a ponzi scheme where funds from new investors are used to pay off prior investors. In this scheme there is not substantial collateral from the present loan pool. Money is moved (like a shell game) between various entities to conceal losses. The Wall Street Journal (www.wsj.com) broke the story 8/15/08.
As a result of this scheme investors and borrowers have likely lost over $200 million (according to the various complaints filed by the SEC and local law enforcement. WexTrust is just one of many hard money lenders accused of fraud (see my last blog entry on this topic: https://www.fairviewlending.com/blog/?p=6#more-6 ). With all the fraud out there how do borrowers, brokers and investors protect themselves?
There are multiple ways to protect yourself from fraud as a result of hard money lenders. Below is a list of tips and links to other resources.
1. Ensure you know the lender with whom you are working. Google the company to see what other folks have said about the company and if there are any pending lawsuits.
2. Contact the BBB (www.bbb.org) to see if there are any complaints against the company
3. Be wary of anyone requesting funds prior to issuing a commitment. On a similar note, never send funds to a PO Box or location out of the country (you would be amazed at how many folks still fall for this scam everyday)
4. Before proceeding with a loan, make sure you understand the loan structure. The following are two good resources:
a. Hard Money Frequently Asked Questions: https://www.fairviewlending.com/faq.htm
b. Understanding the total cost of a loan: https://www.fairviewlending.com/resources_prepayment.htm
5. Finally, utilize your common sense: If it looks too good to be true, it likely is. Always err on the side of caution when approaching any financial transaction.