[NS-DROP] MIP6 Application: New Silver DROP: Real Estate-Backed Loans

Sorry for the delayed response. it’s a quaint comparison but I see DeFI breaking off into fractal like ecosystems, where sophisticated lender/borrowers establish terms, conditions and rates. The sophisticated borrower “ask” can be fulfilled by sophisticated lenders and unsophisticated lenders at rates set by the former. I like what you said about groups and needs will evolve. Agreed.

Cross posting here as we’re currently working with the domain teams on NS-DROP collateral onboarding. We’d like to encourage anyone who has questions or feedback on this application to join our next AMA session about Centrifuge/Tinlake. It’ll take place tomorrow, Oct 15th 7:30pm CET.

It will give an overview of how our tech stack works and will go into detail about Tinlake v3 features. Would be a great opportunity for us to receive direct questions from you. Link to the call is here: https://discourse.centrifuge.io/t/community-call-october-15th-revolving-pools-and-tinlake-v3/291

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Great news. I hope with the new on-boarding process this can speed up the adoption of RWAs.

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I understand this is an old thread but couldn’t see a more recent one applicable - I was sent to this from a recent Coindesk article.

Intro: I am a creditor rights’ and real estate litigation attorney in Nebraska and Iowa, for over 20 years. I own MKR although it’s not locked into the governance contract; I note that so it is understood underlying what I am about to say I have a vested interest in seeing the MKR/DAI lending system work, and part of that should involve RWA collateral lending.

Kirill I would like you to respond to the following concern given what you said about there being no need for licensing. There are people and companies in your industry that specifically do only commercial lending and expressly state they are not a financial institution so as to avoid federal regulation like RESPA. They then do lending in states that as you say do not require licensing. But they then wrongfully conflate not having to be licensed with not being subject to state lending law. The moment a lender avoids being subject to federal lending law, it loses the benefit banks have of not being subject to state lending law. I presently am in litigation with one of your competitors who made a loan to upgrade an apartment complex in Omaha, and they proceeded with interest rates not in accordance with Nebraska law, accepted payments without applying to the principal and interest balance contrary to Nebraska law, and billed the borrower for its attorney’s fees also contrary to Nebraska law. They believed they could do all this because Nebraska did not have licensing requirements for commercial lending - which all that means is anyone can do commercial lending without advance permission from the State. There are still rules.

These loans you are making would be subject to state law. Analyzing for a just a few minutes as to Nebraska, the 13% liquidation fee likely violates Nebraska law because our nonjudicial foreclosure process permits only certain limited fees incurred to sell - publication and reasonable attorney’s fees and recording fees - to be added onto the borrower’s balance. If you are unlucky enough to have not done the paperwork correctly to qualify to do a nonjudicial foreclosure, the judicial foreclosure process can take 18 months or more and you do not recover attorney’s fees. Nebraska law forbids an interest rate of greater than 16% to an individual for any purpose and fees charged up front (stabilization fees perhaps?) and compounding are factored in to determine if more than 16% is actually being charged. The latter usury issue can be solved by always lending to a corporate entity and never an individual - a Nebraska lawyer that works in this field knows that but would the DeFi community? I think not, and rather that they would be relying on you to make sure that each loan made fully complies with the applicable state law.

So my questions are is there an understanding that your loans need to comply with applicable state lending law, and what efforts are you making to make sure of that - e.g., retention of local attorneys to advise on loan structures and draft loans?

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Hello and thanks for your feedback. Lets me start by saying I do not believe we have originated any loans in Nebraska. But I get your point about being subject to state law. We are well aware of usury limits and our loans are well under those. We use a 3rd party servicer (FCI) which is licensed as a loan servicer in all of the states and they are responsible for making sure payments are processed correctly and servicing is done according to law. We utilize two different law firms for closings and doc prep, who in turn have local partners, whether a law firm or a settlement agent of the title company, to review docs and close. We only lend to other corporate entities, for business purpose only.

I believe the chances of wrongdoing on our part are very small, though one can never be 100% protected against a litigious borrower. We are certainly intending to be law abiding and good corporate citizens wherever we operate.

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Your website specifically lists Nebraska.

Also, I’d really like more clarity on what the terms of the enforcement action settlement were.

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On urging of @PaperImperium and some previous discussion with others and reviewing the above post by @Howard_Krieger

I want to reiterate a basic question because I have seen this come up in reference to whether a Token is classified as a security or not. Exactly who is the legal party that has the property lien that can take legal action if a loan goes into default?

Maker by design basically can’t sign legal documents and so to be able to give loans on property has to have a bound counter party under contract to perform this ‘service’. In the 6s structure the escrow agent basically has this legal component. The escrow agent can’t be the broker or even an affiliated company due to conflict of interest. It has to be a registered and well known 3rd party agent.

Who is this agent that is independent of New Silver that acts on behalf of Token holders to steward over the property escrow (and liquidation if necessary) managing this so that proceeds return to Maker properly?

My problem here is a statement by @Howard_Krieger

There is no such example AFAIK because Tokens are not registered securities. This is why 6s Capital went through such great pains to find and secure agreement of a well known escrow agent (Wilmington) that could manage the liquidation of the collateral if terms and conditions of the loan are not met. In effect Wilmington acts as the legal representative managing the interests of Maker so there is little to no question of how recourse is actioned.

What I don’t see is a proper recourse model for Maker here with the TinLake Tokenized assets. As the @omahalawyer points out there are deeper legal issues here that could easily crop up on these assets should they come under litigation in various states that would require significant legal research to understand much less deal with in a foreclosure process.

Can the team @prankstr25 point me to documentation regarding what legal entity holds the rights to the property that would be foreclosed/liquidated and what their legal obligation is to Token holders to compensate them? My problem here is that each property is its own NFT which basically means that Token Holders could be holding a very empty bag if a particular loan is liquidated or worse needs to be litigated over even if law sides with Token holders having securities rights.

I can’t speak to a lot of this, but these are Reg D offering securities, and are exempt from many regulations. But they are registered securities, for whatever that implies.

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And doesn’t this concern bleed through all the Centrifuge-connected collateral types – NS, Paperchain, the People’s Company and something called “Panda Drop”?

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Yeah was just thinking about this. As RegD offerings they have a number of exemptions that basically leave the investor holding a bag. This is why filers usually go for RegD as they are much higher risk which limits who they can get financing from.

Yep it does, but only if the collateral custody chain lands at New Silver vs. a truly independent auditable and licensed escrow entity that under contractual and licensing obligations is answerable to the RegD security holders (RegD holders who btw have to be entites within jurisdictions that can be represented legally.) 6s solves this for us by using the escrow agent who acts under a Maker Rep/team advisement (this part of the legal structure to connect Maker DAO rep to legal represenative agent in a jurisdiction is what is hard imo).

I had less concern over these if the DCs were small and we could absorb the loss. I spent a lot of time understanding the 6s structure which looked far cleaner in this respect than the very complicated Tin Lake and other Tokenized RWA instruments.

I know 6s (calling @mrabino1 just to be aware of the discussion) went through a lot of complicated effort to set up a clean legal structure in this regard that looked reasonable on my cursory review of his legal documents and structures. New Silver just didn’t look as clean to me in this regard.

This reminds me of the issues with bundled RE tranches that were rebundled over and over again and courts trying to figure out who actually had the legal rights to the underlying collateral. It was so bad that a significant number of breaks in collateral custody chains occurred severing the right to foreclose on borrowers effectively freeing them from debt obligations (creditors held bags). It was a nasty mess both financially and in litigation (because each chain had another State jurisdiction to go through in litigation where the custody chain could sever). I don’t think these Tokenized assets are as complex but as these things go through intermediaries the same chain of collateral rights has to follow legally otherwise it can and will be severed in courts leaving creditors with no collateral to liquidate to recover debt. Maker as a non-legal entity only has rights to anything via intermediaries and contract obligations. The same is true of RegD Token holders and even then it will likely come after litigation not contract execution.

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I would be comfortable with just there being a legal review by someone representing our side of this. We’re not lawyers and don’t have the underlying documents. I’m willing to trust an opinion by a lawyer or law firm that these represent enforceable rights. I don’t think there’s much point in us trying to pretend to be legal experts ourselves.

I’ll just wait for the legal review (of the deals we are already entering into or already in prior to a review). That’s what we really need here.

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Yeah brings up a question regarding Maker legal counsel really.

Who does that for the DAO? Even then more eyes with informed opinions are helpful as even if 3 people catch 90% that doesn’t overlap still leaves that .1% missed which really is worse since no reason to expect pure overlap. (they all could get the same 90% and miss the same 10%).

I wanted to point out, overall centrifuge uses dai and while I agree that it needs to be checked. We also should look at the fact they take a risk by using dai.

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