AN OFFERING STATEMENT PURSUANT TO REGULATION A RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. INFORMATION CONTAINED IN THIS PRELIMINARY OFFERING CIRCULAR IS SUBJECT TO COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED BEFORE THE OFFERING STATEMENT FILED WITH THE COMMISSION IS QUALIFIED. THIS PRELIMINARY OFFERING CIRCULAR SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR MAY THERE BE ANY SALES OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL BEFORE REGISTRATION OR QUALIFICATION UNDER THE LAWS OF ANY SUCH STATE. WE MAY ELECT TO SATISFY OUR OBLIGATION TO DELIVER A FINAL OFFERING CIRCULAR BY SENDING YOU A NOTICE WITHIN TWO BUSINESS DAYS AFTER THE COMPLETION OF OUR SALE TO YOU THAT CONTAINS THE URL WHERE THE FINAL OFFERING CIRCULAR OR THE OFFERING STATEMENT IN WHICH SUCH FINAL OFFERING CIRCULAR WAS FILED MAY BE OBTAINED.

FORM 1-A

Regulation A Offering Statement

Part II – Offering Circular

AF 2018 NPL A LLC

228 Park Avenue South #67157

New York, NY 10003

(844) 736-6027

www.automationfinance.com 

March 6, 2019 

This Offering Circular Follows the Form 1-A Disclosure Format

AF 2018 NPL A LLC is a limited liability company organized under the laws of Delaware, which we refer to as the “Company.” The Company is offering to sell up to $50,000,000.00 of Series A Preferred Stock to the public. You can read a complete description of these securities in the “Securities Being Offered” section starting on page 20. 

We are selling these securities directly to the public at the website, www.AutomationFinance.com. We are not using a placement agent or a broker and we are not paying commissions to anyone. All of the money we raise goes directly to the Company. The price of the Series A Preferred Stock is $10.00 per share and the minimum initial investment is $5,000.00. 

This Offering will begin as soon as our Offering Statement is “qualified” by the U.S. Securities and Exchange Commission (“SEC”), and will end upon the earlier of (1) the date we have sold $50,000,000 of Series A Preferred Stock, (2) the second anniversary of the date our Offering Statement is qualified by the SEC, or (3) the date the Company terminates this Offering. 

The purchase of these securities involves a high degree of risk. Before investing, you should read this whole Offering Circular, including the “Risks of Investing” section starting on page 2. 

THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS JUDGEMENT UPON THE MERITS OF OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED OR THE TERM OF THE OFFERING. NOR DOES IT PASS JUDGEMENT UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SELLING LITERATURE. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED HEREUNDER ARE EXEMPT FROM REGISTRATION. 

GENERALLY, NO SALE MAY BE MADE TO YOU IN THIS OFFERING IF THE AGGREGATE PURCHASE PRICE YOU PAY IS MORE THAN 10% OF THE GREATER OF YOUR ANNUAL INCOME OR NET WORTH. DIFFERENT RULES APPLY TO ACCREDITED INVESTORS AND NON-NATURAL PERSONS. BEFORE MAKING ANY REPRESENTATION THAT YOUR INVESTMENT DOES NOT EXCEED APPLICABLE THRESHOLDS, WE ENCOURAGE YOU TO REVIEW RULE 251(d)(2)(i)(C) OF REGULATION A. FOR GENERAL INFORMATION ON INVESTING, WE ENCOURAGE YOU TO REFER TO WWW.INVESTOR.GOV. FOR MORE INFORMATION, SEE THE “Limits on How Much Non-Accredited Investors Can Invest” SECTION STARTING ON PAGE 23. 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 

NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION UNIFORM LEGEND: 

YOU SHOULD MAKE YOUR OWN DECISION AS TO WHETHER THIS OFFERING MEETS YOUR INVESTMENT OBJECTIVES AND RISK TOLERANCE LEVEL. NO FEDERAL OR STATE SECURITIES COMMISSION HAS APPROVED, DISAPPROVED, ENDORSED, OR RECOMMENDED THIS OFFERING. NO INDEPENDENT PERSON HAS CONFIRMED THE ACCURACY OR TRUTHFULNESS OF THIS DISCLOSURE, NOR WHETHER IT IS COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS ILLEGAL.  

THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. YOU SHOULD BE AWARE THAT YOU WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. 

Table of Contents

SUMMARY OF OUR BUSINESS AND THE OFFERING

Summary of Our Business

AF 2018 NPL A LLC, which we refer to as the “Company,” was formed to invest in (buy) performing, sub-performing and non-performing debt instruments (typically first and second-position residential mortgages) where the debt is secured by a physical asset, typically a house. We refer to these loans as “Mortgages.”

After we buy a Mortgage, we contact the borrower to understand the situation (e.g., why the loan is in default) and try to reach a mutually-acceptable resolution. One of five things typically happens:

We make a profit if:

Summary of the Offering

The Company is offering to sell its securities to the public in what we refer to as the “Offering.” Specifically, the Company is offering to sell up to $50,000,000.00 of Series A Preferred Stock in the Company. We refer to anyone who purchases Series A Preferred Stock as an “Investor” or a “Series A Stockholder.”

The Company is required to distribute its available cash (i.e., any cash available after paying all expenses) in the following order of priority:

NOTE: There is no guaranty that we will earn enough profit to distribute any return to any class of Investor, or even to return their capital.

The Company will try to return to Investors all of their capital no later than the fifth anniversary of the purchase date, assuming there is sufficient cash flow. However, Investors might receive their capital sooner, later, or not at all.

THAT WAS ONLY A SUMMARY

PLEASE READ THE OTHER SECTIONS OF THIS OFFERING CIRCULAR
CAREFULLY FOR MORE INFORMATION

RISKS OF INVESTING

Buying Series A Preferred Stock is speculative and involves significant risk, including the risk that you could lose some or all of your money. This section describes some of the most significant factors that make the investment risky. The order in which these factors are discussed is not intended to suggest that some factors are more significant than others. All investments carry some level of risk. Even cash has an associated risk; inflation over time will reduce the purchasing power of that cash. There are no safe investments and there are no safe stores of wealth.

Our Auditor Has Raised Questions About Our Ability to Survive As A Going Concern: In the audited financial statements attached to this Offering Circular, our auditor has noted that the Company has not yet commenced planned principal operations and has not generated revenues or profits since inception, and that these factors, among others, raise substantial doubt about the Company’s ability to continue as a “going concern.” As further noted by our auditor, the Company’s ability to continue as a going concern in the next twelve months is dependent upon its ability to obtain capital financing from investors sufficient to meet current and future obligations, and to deploy that capital effectively to produce profits. No assurance can be given that the Company will be successful in these efforts.

Speculative Nature Of Real Estate And Distressed Debt Investing: Real estate and distressed debt is notoriously speculative and unpredictable. Many, very experienced, well-informed professional investors, banks, insurance companies and others lost money when the real estate, stock and debt markets declined in 2007-8. When the markets are healthy, as they were from 2003 through 2006, it appears that they would be healthy forever. The reality is that markets are highly cyclical and unpredictable. History has shown that the real estate and debt markets can collapse without warning and that can result in devastating losses. The assets purchased by the Company will be backed by real estate. If the real estate market or the economy declines, the Company might not be able to pay the return you expect or even repay your investment.

No Guaranty of Distributions: When you buy a certificate of deposit from a bank, the federal government (through the FDIC) guarantees (subject to certain limits) you will get your money back. Buying Series A Preferred Stock in the Company is very different. The ability of the Company to make the distributions you expect, and ultimately to repay your investment, depends on a number of factors. Some of these factors are beyond our control. There is no guarantee that you will receive any distributions.

Speculative Nature of Real Estate Mortgages: Investments in mortgages backed by real estate are highly speculative. Among the risks are the following:

Pricing of Assets: The success of the Company, and its ability to make distributions to Investors, depends on our ability to calculate the value of mortgages that are in default. Although the Company and its advisors rely on various objective criteria, ultimately the value of these assets is as much an art as a science, and there is no guaranty that the Company and its advisors will be successful in accurately calculating the value of the assets.

Our Business Is Heavily Regulated: Our business is subject to extensive licensing requirements, consumer protection laws, foreclosure laws, and regulatory oversight by federal, state and local governmental authorities. If we fail to operate our business in compliance with the law, our business, reputation, financial condition and results of operations could be materially and adversely affected, leading to (among other things) (i) loss of our right to invest in residential mortgages, (ii) government investigations and enforcement actions against us, (iii) fines, penalties and judgments against us, (iv) civil lawsuits, including class actions, (v) criminal liability, and (vi) breaches of covenants and representations under our servicing agreements, debt agreements, or other agreements.

Licensing Requirements: Many states impose certain licensing requirements on investors who buy and sell mortgage loans secured by 1-4 family residential properties. The Company has engaged regulatory counsel to ensure that it complies with all applicable laws and regulations, but has not yet decided on or implemented a compliant structure. Complying with all applicable laws and regulations could be expensive and burdensome. On the other hand, if the Company does not comply, we could face fines, lawsuits, investigations, fines, penalties – even the termination of our business.

We Rely Extensively on Third Parties: After the Company buys a loan, we rely on third parties to service the loan, to work out an acceptable arrangement with the homeowner (if possible), to foreclose on the real estate (if necessary), and to handle every other aspect of the Company’s business. These third parties provide services to the Company pursuant to written agreements which could, under some circumstances, be terminated, and through employees that the Company does not control directly. A disruption of any of these third party relationships could damage the Company.

Risks Relating To Technology: We depend on the effective implementation and operation of our technology systems. Technology failures, defects or inadequacies, development delays, installation difficulties or security breaches could hurt our operations and increase our costs. Disruptions, failures, defects or inadequacies in our technology, delays in the development of, or installation difficulties with, our technology, or security breaches to our technology could delay or disrupt our ability to provide services to our customers and result in significant financial and reputational harm.

Risks Relating To Personally Identifiable Information: We will collect, process, store, use and disclose personal information of borrowers, including names, addresses, social security numbers, bank account numbers, credit card numbers and credit history information. Such information is subject to various federal, state and other laws regarding data privacy and protection, which are always changing. We might be required to expend significant time, money and other resources towards compliance with such laws, and we may be subject to orders, fines, penalties or other adverse consequences from governmental authorities, as well as lawsuits from consumers, if we fail to comply with them, not to mention the possible damage to our reputation (e.g., Target).

The Company Does Not Have A Credit Rating from Moody’s or Standard & Poor’s: Credit rating agencies, notably Moody’s and Standard & Poor’s, assign credit ratings to debt issuers, which are intended to help Investors gauge the ability of the issuer to repay the mortgage. The Company has not been rated by Moody’s or Standard & Poor’s and, as a result, Investors have no objective measure by which to judge the creditworthiness of the Company.

Incomplete Due Diligence: We perform “due diligence” on the mortgages we purchase, meaning we review the available information about the assets and the underlying collateral. As a practical matter, however, it is simply impossible to review all of the information about a given mortgage or any asset and there is no assurance that all of the information we have reviewed is accurate. For example, sometimes important information is hidden or unavailable, or a third party might have an incentive to conceal information or provide inaccurate information, and we cannot verify all of the information we receive independently. It is also possible that we have reached inaccurate conclusions concerning the information we have reviewed.

Reliance on Management: You will not have a right to vote or otherwise participate in managing the Company, except on very limited matters. Instead, the Investment Manager will make all investment and trading decisions and the Managing Member of the Company will make all other business decisions. As a result, the success of the Company – and its ability to make payments with respect to your Series A Preferred Stock – will depend almost exclusively on the skills of the principals of our Investment Manager and Managing Member, Messrs. Paul Birkett and Abbas Jessa. If the principals resigned, became ill, or died, the Company and its Investors could suffer.

Competition: Many companies and individuals compete to invest in the same kinds of mortgages the Company seeks to buy. Our competitors may have a lower cost of capital, better access to leverage, or other advantages compared to the Company. The more competition there is, the more the Company may be required to pay for mortgages and the more risk the Company may be required to assume to obtain a given return (yield) on its investments.

Risks Associated with Leverage: The Company might borrow money from banks or other lenders to purchase mortgages or other assets. Borrowing money to purchase assets is sometimes referred to as “leverage.” While using leverage can increase the total return on the Company’s equity, it also increases risk because the amount borrowed has to be repaid in accordance with a schedule. For example, the Company might have to sell assets at a time when values are low simply to make scheduled interest payments to a lender.

The Company is a Startup Business: Although the principals of the Managing Member have been engaged in the real estate and distressed mortgage debt industries for years, the Company itself is a new business with a new and unproven business model, i.e., investing in non-performing loans using capital raised on the Internet. Like any new business, the Company faces challenges on a number of fronts, including attracting and retaining qualified employees (of its Managing Member), designing and implementing new business systems, technology systems, marketing, and capital formation. If the Company failed in any of these or other key areas, the whole business could fail.

Competing Objectives: The Company has financial objectives – generating current income and capital appreciation – but it also has non-financial objectives. The Company does not try to extract the maximum possible financial value from every loan. Our objective is to find an affordable payment for every borrower. We do not seek the maximum possible payment. Experience has taught us that stretched borrowers are inconsistent payers. Our choice to find affordable payments for our borrowers could hamper the Company’s ability to make distributions to Investors.

Limitation on Rights in Operating Agreement: The Company is governed by an Limited Liability Company Agreement dated October 16, 2018, which we refer to as the “Operating Agreement.” The Operating Agreement limits your rights in several important ways, including these:

Limitations on Rights in Investment Management Agreement: The Company’s investments are managed by Automation Capital Management, LLC, an affiliate of the Managing Member, which we refer to as the “Investment Manager,” pursuant an agreement captioned “Investment Advisory and Management Services Agreement” and dated November 1, 2018, which we refer to as the “Investment Management Agreement.” The Investment Management Agreement limits the right of the Company or an Investor to bring legal claims against the Investment Manager. For example, the fact that the Investment Manager overpaid for a mortgage or a pool of mortgages would not, in itself, give the Company or an Investor the right to sue.

Limitations on Rights in Investment Agreement: To purchase our Series A Preferred Stock, you are required to sign our Investment Agreement. The Investment Agreement would limit your rights in several important ways if you believe you have claims against us arising from the purchase of your Series A Preferred Stock:

Forum Selection Provision: Our Operating Agreement and Investment Agreement each provide that any dispute arising from such agreement (including, but not limited to, any dispute arising from the purchase of Series A Preferred Stock pursuant to the Investment Agreement) will be handled solely in the state or federal courts located in Delaware. We included this provision primarily because (i) the Company is organized under Delaware law, (ii) Delaware courts have developed significant expertise and experience in corporate and commercial law matters and investment-related disputes (which typically involve very complex legal questions), particularly with respect to alternative entities (such as LLCs), and have developed a reputation for resolving disputes in these areas in an efficient manner, and (iii) Delaware has a large and well-developed body of case law in the areas of corporate and alternative entities law and investment-related disputes, providing predictability and stability for the Company and its Investors. This provision could be unfavorable to an Investor to the extent a court in a different jurisdiction would be more likely to find in favor of an Investor, or be more geographically convenient to an Investor. It is possible that a judge would find this provision unenforceable and allow an Investor to file a lawsuit in a different jurisdiction.

Conflicts of Interest: Our interests could conflict with your interests in a number of important ways, including these:

Management Fees: The fees payable to our Managing Member will reduce, perhaps significantly, the amount of cash the Company has available to make distributions to Investors.

Uninsured Losses: We intend to maintain insurance policies that provide coverage within limits that are sufficient, in our Managing Member’s judgment, to protect us from legal claims and other liabilities arising from the conduct of our businesses. There can be no assurance that adequate insurance coverage will be available to the Company, that losses incurred by the Company will not exceed the limits of our available insurance coverage, or that coverage will be provided on terms that will not have a material adverse impact on our financial condition and operating results.

No Market for the Series A Preferred Stock; Limits on Transferability: There are several obstacles to selling or otherwise transferring your Series A Preferred Stock:

Taking all of that into account, you should prepare for the possible need to hold your Series A Preferred Stock indefinitely.

Early Payment: The Company expects to pay back your capital by the fifth anniversary of the contribution of capital. Therefore, you should not expect to receive a return for the entire five-year period.

Tax Cost: Some of the Company’s income will be in the form of interest or short-term capital gain, rather than long-term capital gain.

Our Track Record Does not Guaranty Future Performance: The section captioned “Past Performance: Our Track Record So Far,” starting on page 18, illustrates the performance of certain affiliates of the Company, engaged in the same or similar business in which the Company plans to engage. However, there is no guaranty that the Company will do as well as its affiliates have done. The economy as a whole and the real estate market in particular have been very favorable to date; as surely as night follows day, economic conditions will change and we might not be able to adapt.

Risk of Failure to Comply with Securities Laws: The current Offering by the Company relies on an exemption under Regulation A of the SEC code. We have relied on the advice of securities lawyers and believe we qualify for the exemption. If we did not qualify, we could be liable to penalties imposed by the federal government and state regulators, as well as to lawsuits from investors.

Investors Can’t See Our Actual Investments Before Investing: As of the date of this Offering Circular, the Company doesn’t own any mortgages or other real estate assets. As a result, Investors cannot see or evaluate our assets before making an investment decision. Instead, investors are asked to invest first, then trust that their money will be invested wisely.

The Company Stands On Its Own: The Company will either succeed or fail on its own account. Although certain affiliates of the Company have been successful, there is no guaranty that the Company will be successful. Further, neither the Managing Member, the Investment Manager, nor any other person or entity has committed to provide financial assistance to the Company should such assistance become necessary.

Regulation As An Investment Company: If the Company were treated as an “investment company” under the Investment Company Act of 1940, we would be required to comply with a number of special rules and regulations and incur significant cost in doing so, which would impair our ability to make payments with respect to the Series A Preferred Stock. If we failed to comply with these special rules and regulations, we could be prohibited from operating our business and become subject to civil and criminal liability, and any contracts we were a party to might be unenforceable. We intend to conduct our business so that we are not treated as an investment company. See the “Investment Company Act Limitations” section starting on page 26. However, we might not be successful.

Asset-Backed Securities: The securities laws include two definitions of the term “asset-backed security.” If the Series A Preferred Stock were treated as “asset-backed securities” within the meaning of the first of these definitions, we would not be allowed to sell them in this Offering. If the Series A Preferred Stock were treated as “asset-backed securities” within the meaning of the second of these definitions, the Company would be subject to substantial and onerous reporting obligations. For the reasons described in the “Asset-Backed Securities” section starting on page 27, we do not believe that the Series A Preferred Stock constitute asset-backed securities under either definition. If the Securities and Exchange Commission or another regulatory body were to conclude otherwise, however, we might be unable to complete the Offering, or we might be subject to onerous reporting obligations.

Breaches of Security: It is possible that our systems could be “hacked,” leading to the theft or disclosure of confidential information you have provided to us. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched, we and our vendors may be unable to anticipate these techniques or to implement adequate defensive measures.

The Foregoing Are Not Necessarily The Only Risks Of Investing
Please Consult With Your Professional Advisors

OUR COMPANY AND BUSINESS

Overview

AF 2018 NPL A LLC, which we refer to as the “Company,” is a limited liability company organized under the laws of Delaware. The Company pursues a single goal: to generate income for its owners and Investors in an ethical and socially-responsible manner.

The Company was formed to invest in (buy) primarily non-performing mortgages, meaning mortgages that are secured by a mortgage on a private residence (i.e., somebody’s home) for which payments on the mortgage are not being made by the borrower (the mortgagee). We refer to these as “Mortgages”.

The Mortgages we intend to buy were often originated or previously owned by financial institutions that are now defunct or in financial difficulty, like Countrywide Financial, Lehman Brothers, Associates Financial Services and a variety of banks and insurance companies.

The Company will typically buy Mortgages through an open bidding process and has developed a proprietary model for calculating the appropriate amount to bid. We focus on:

The originator of the loan (usually a bank or mortgage company) is generally unable or unwilling to modify the original terms of the loan. Instead, the originator sells the non-performing loans to a third party – a company like ours. After we buy a Mortgage, a third-party mortgage servicing company we have retained contacts the borrower on our behalf. We try to achieve a quick resolution that is acceptable both to the borrower and to us.

Depending on a number of factors, including the income of the borrower, the local market, and the value of the asset, one of five outcomes is likely:

In general, our revenues can come from these sources:

We will make a profit if the sum of these revenues exceeds the price we paid for the Mortgages in the first place, after subtracting all our expenses (e.g., management and legal fees).

Management

Business Management

The Company is managed by Automation Holdings, LLC, which we refer to as the “Managing Member.” The Managing Member has exclusive control over all aspects of the Company’s business. Other members of the Company, including Investors who purchase Series A Preferred Stock in the Offering, have no right to participate in the management of the Company.

Investment Management

The Managing Member has delegated responsibility and authority for making investment and trading decisions to Automation Capital Management LLC, which we refer to as the “Investment Manager,” pursuant to an Investment Advisory and Management Services Agreement dated November 1, 2018 which we refer to as the “Investment Management Agreement.” A copy of the Investment Management Agreement is attached as Exhibit 1A-6A. The Investment Manager is currently exempt from registration as an investment advisor with both the Securities and Exchange Commission and the State of New York.

Management Fees

The Managing Member will charge certain fees to the Company, as described in “Compensation of Management” starting on page 43.

Investment Strategy

The Investment Manager believes the Company can buy distressed residential mortgages at significant discounts to their unpaid principal balances and, more importantly, to the value of the underlying houses. Many depository institutions and other holders of sub-performing or non-performing mortgages in the United States continue to be under financial duress and may be motivated to sell these mortgages at attractive prices. In addition, government-related agencies acting as receivers, such as the Federal Deposit Insurance Corporation, have acquired and are expected to continue to acquire significant portfolios of troubled mortgages from failed depository institutions. Many sellers look to sell the smallest, most distressed mortgages in their portfolios to companies like ours, that are willing to take on the work required to reach a resolution with the borrower.

The size of the non-performing and sub-performing residential mortgage market has grown considerably in the last few years, and the Investment Manager believes that it will continue to grow. Based upon research concerning those markets, including the public statements and/or reports issued by leading lenders, servicers, and data aggregators and analysts, the Investment Manager believes that close to $100 billion of residential mortgage mortgages are troubled or at significant risk of default.

The principals of our Investment Manager have significant experience with lower-dollar-value distressed mortgages, generally on residential properties worth less than $100,000. Our Investment Manager’s principals believe they are one of only a few national, institutional-quality buyers for these lower-dollar-value assets. Consequently, we seek to acquire assets that are too small and too distressed to be a high priority for larger banks, hedge funds, or other large buyers.

The Company intends to invest primarily in U.S. single-family residential mortgages, secured by one-to-four-family assets. On occasion, if the Investment Manager believes it would be a good idea based on market conditions, the Company might also acquire (i) direct interests in real estate, (ii) mortgages secured by more than four family assets, and/or (iii) and commercial mortgages. Despite these occasional purchases, the Company expects that mortgage mortgages secured by one-to-four-family assets will comprise no less than 95% of its total portfolio, although the Investment Manager is not bound by that figure.

The Bidding Process

Bidding on mortgages and mortgage portfolios (groups of mortgages) is both an art and a science.

Typically, the process begins when a seller provides the Company and other potential buyers with a list of mortgages being offered for sale. The seller might provide such information as:

Based on that information, which is rarely complete, we and other potential buyers make an initial bid. If we win the initial bid, we order at least two more documents: a title report and a broker’s price opinion.

If the title report is acceptable and the broker’s price opinion is in the right range, we conduct a thorough due diligence review, including considerations such as: (i) whether the borrower is still the owner of the property, (ii) whether the mortgage is still on title, (iii) whether the property is occupied or vacant, (iv) the amount of delinquent taxes and other liens; and (v) the bankruptcy history of the borrower, if any.

We may adjust our original bid up or down based on these and other factors. Sometimes we will retract our initial bid altogether.

Revised bids are then submitted to the seller. The seller may counter with a higher price or drop some mortgages from the sale if the seller judges the bid to be too low. If we are able to reach terms with the seller, we proceed to a binding contract and closing.

Mortgage Loan Servicing

Collecting payments on loans is referred to as loan “servicing.” The Company itself will not service the loans that it acquires. Instead, it will engage Land Home Financial Services, Inc., a national loan servicer (“Land Home”) to service the loans, pursuant to a Special Loan Servicing Agreement (the “Servicing Agreement”). A copy of the Servicing Agreement is attached as Exhibit 1A-6B.

The services of Land Home will include: 

Key Positions

The following are the key positions in the operations of the Company:

The Company itself will have no employees. All of these roles will filled by employees of the Managing Member or a third-party mortgage loan servicer.

Leverage

The Company might borrow money to buy Mortgages or other assets, which is referred to as “leverage.” The Company will also incur liabilities in the nature of trade debt in the ordinary course of its business. Where we borrow money to buy Mortgages, the amount of the borrowing typically does not exceed 50% of the price of the Mortgages.

Factors Likely to Impact the Performance of the Company

The ability of the Company to conduct its business successfully depends on several critical factors:

Any internal systems are the intellectual property of the Managing Member and any such employees are employees of the Managing Member, not the Company.

Offices and Employees

The Company’s offices are located at 228 Park Avenue South #67157, New York, NY 10003. The Investment Manager’s address is the same, as is the address of the Managing Member.

The Company has no employees. The Managing Member currently employs eight people on a full-time basis. The Managing Member’s total payroll during its most recent fiscal year was approximately $1,000,000.00.

Our Revenue

The revenue of the Company will include:

Our Operating Costs and Expenses

The Company will incur a variety of costs and expenses, including:

State Licensing Laws

A number of states regulate entities that invest in residential mortgages. The Company has engaged regulatory counsel to ensure that it complies with all applicable laws and regulations.

PAST PERFORMANCE: OUR TRACK RECORD SO FAR

Summary and Narrative Description

Automation Holdings, LLC and its affiliates have been investing in distressed mortgages for profit for approximately four years. During that time, it has purchased approximately 1257 mortgages for an aggregate price of approximately $14,925,946 in three different offerings of securities. We refer to each of these as a “Program”

All of these Programs are similar to the Company in the following respects:

Because of these similarities, investors who are considering purchasing Series A Preferred Stock from the Company might find it useful to review information about the Programs. Of course, prospective investors should bear in mind that prior performance does not guarantee future results. The fact that a prior Program has been successful (or unsuccessful) does not mean the Company will experience the same results in the future.

There have been no major adverse business developments or conditions experienced by any Program that would be material to purchasers of the Company’s Series A Preferred Stock.

None of the Programs:

The following table summarizes the three Programs through December 20, 2018. All figures are presented on a federal income tax basis.

The operating results for the Programs since inception are set forth on Exhibit 1A-15.1.

SECURITIES BEING OFFERED

Description of Securities

We are offering to the public up to $50,000,000 of our Series A Preferred Stock. The price of the Series A Preferred Stock is $10.00 per share.

Voting Rights

Owners of the Series A Preferred Stock – that is, Investors – will have no right to vote or otherwise participate in the management of the Company. Instead, the Company is managed by the Managing Member exclusively. However, the Managing Member may not change the terms of the Series A Preferred Stock in a manner that would be adverse to Investors without the consent of holders of a majority of the shares of Series A Preferred Stock.

Distributions

We intend to make distributions every calendar quarter. The order of distributions will be governed by the Company’s Operating Agreement as well as the Authorizing Resolution establishing the Series A Preferred Stock.

Section 3.1 of the Authorizing Resolution provides for the following order of priority:

The Operating Agreement is attached as Exhibit 1A-2B. The Authorizing Resolution is attached as Exhibit 1A-2C.

IMPORTANT NOTE: There is no guaranty that we will have enough money to pay Investors a 10% return, or even to return their capital.

Term of Series A Preferred Stock

Under the Authorizing Resolution, the Managing Member must try to return all of the money invested by each Series A Stockholder no later than the fifth (5th) anniversary following the investment. If the Company doesn’t have enough money, Series A Stockholders might receive a return of their investment later than five years, or not at all. If the Company is profitable, as we expect it to be, it is likely that investors will receive a return of their investment sooner than five years.

How We Decide How Much To Distribute

To decide how much to distribute during any calendar quarter, we start with our revenues, which include the proceeds of sale and refinancing transactions as well as payments we receive from borrowers with respect to their mortgage mortgages. We then subtract our actual expenses, which include management fees, bank fees, appraisal costs, insurance, commissions, marketing costs, taxes, and legal and accounting fees. Finally, depending on the circumstances at the time, we decide how much should be held in reserve against future contingencies. The amount we distribute is therefore our revenue, minus our expenses, minus the reserve amount.

Withholding

In some situations, we might be required by law to withhold taxes and/or other amounts from distributions made to Investors. The amount we withhold will still be treated as part of the distribution. For example, if we distribute $100 to you and are required to withhold $10 in taxes, for our purposes you will be treated as having received a distribution of $100 even though you received a check for only $90.

No Guaranty

We can only distribute as much money as we have. There is no guaranty that we will have enough money, after paying expenses, to distribute enough to pay a 10% annual return to Investors or even to return all of the invested capital.

Transfers

No Investor may sell, transfer, or encumber (place a lien on) its Series A Preferred Stock unless (i) the Managing Member, in its sole and absolute discretion, approves the transfer; or (ii) in the case of an Investor that is a natural person, such Investor dies or a court finds that he or she is legally incompetent, in which case the Series A Preferred Stock shall be transferred automatically to the heirs or personal representative of the Investor.

Before the Managing Member consents to a transfer of Series A Preferred Stock, it may impose reasonable conditions, including but not limited to written assurance that (i) the transfer is not required to be registered under the Securities Act of 1933; (ii) the transferor or the transferee will reimburse the Company for expenses incurred in connection with the transfer; and (iii) the transfer will not cause the termination of the Company as a partnership under section 708 of the Internal Revenue Code or cause the Company to be treated as a “publicly traded partnership” under section 7704 of the Internal Revenue Code.

Mandatory Withdrawals

The Managing Member may require an Investor to sell back to the Company all or a portion of his, her, or its Series A Preferred Stock under certain circumstances, including if:

The purchase price would be the capital account associated with the shares.

Limited Right of Liquidity

At any time after purchasing Series A Preferred Stock, an Investor may request that the Company purchase all or a portion of the Investor’s Series A Preferred Stock. Upon receipt of such a request, the Managing Member must use commercially reasonable efforts to arrange for the purchase, although there is no guaranty that the necessary funds will be available. If the Company is not able to purchase the Series A Preferred Stock, the Investor may either rescind or maintain the request.

In seeking to accommodate a request from an Investor, the Company is not required to (i) borrow money or dispose of assets; or (ii) take any other action the Managing Member believes would be averse to the interests of the Company or its other Members.

During any given calendar year, the Company shall (i) not be obligated to purchase of shares of Series A Preferred Stock representing more than 25% of the total number of shares of Series A Preferred Stock owned by a Series A Stockholder, and (ii) not purchase shares of Series A Preferred Stock representing more than 25% of the total number of shares of Series A Preferred Stock issued and outstanding.

If all or a portion of an Investor’s Series A Preferred Stock is purchased pursuant to the Investor’s request, the Investor’s rate of return could be reduced below 10%. Specifically, if the purchase occurs within six months following the date the Investor acquired its Series A Preferred Stock, then the return will be reduced from 10% to 8%, while if the purchase occurs more than six months but less than 12 months following the date the Investor acquired its Series A Preferred Stock, then the return will be reduced from 10% to 9%.

If more than one Investor asks the Managing Member to purchase or arrange for the purchase of Series A Preferred Stock, the Managing Member will consider the requests in the order received.

LIMIT ON AMOUNT A NON-ACCREDITED INVESTOR CAN INVEST

As long as you’re at least 18 years old, you can invest in this Offering. But if you’re not an “accredited” investor, the amount you can invest is limited by law.

Under 17 CFR §230.501, a regulation issued by the Securities and Exchange Commission, the term “accredited investor” means:

If you fall within any of those categories, then you can invest as much as you want. If you don’t fall within any of those categories, then the most you can invest in this Offering is the greater of:

These limits are imposed by law, not by us.

When you go to our website, www.AutomationFinance.com, we will ask whether you’re an accredited investor. If you aren’t, then we’ll ask about your annual income and net worth.

SALE AND DISTRIBUTION OF SECURITIES

In the Offering, we are offering up to $50,000,000 of our Series A Preferred Stock, which we refer to as the “Series A Preferred Stock.” The price of the Series A Preferred Stock is $10.00 per share and the minimum initial investment is $5,000.00

The Offering will begin as soon as our registration statement is “qualified” by the Securities and Exchange Commission. It will end upon the earlier of (1) the date we have sold $50,000,000 of Series A Preferred Stock (i.e., all the securities we are offering), (2) the date two years after it begins, or (3) the date we decide to end it.

Only the Company is selling securities in this Offering. None of our existing Members is selling any securities.

There is no “minimum” in this offering. Although we are trying to raise as much as $50,000,000, we will accept and deploy all the money we raise, no matter how little. If we raise less money, it just means we will buy fewer Mortgages and other assets.

We are not using an underwriter or broker to sell the Series A Preferred Stock. Instead, we are selling Series A Preferred Stock only through our website, located at www.AutomationFinance.com, which we refer to as the “Site.” If you are reading this Offering Circular, you probably visited the Site and clicked through.

We are not paying commissions to anybody for selling the Series A Preferred Stock.

We reserve the right to reject any subscription in whole or in part for any reason. If we reject your subscription, we will return all your money without interest or deduction.

After the Offering has been “qualified” by the Securities and Exchange Commission, we intend to advertise the Offering using the Site and through other means, including public advertisements and audio-visual materials, in each case only as we authorize. Although these materials will not contain information that conflicts with the information in this Offering Circular and will be prepared with a view to presenting a balanced discussion of risk and reward with respect to the Series A Preferred Stock, our advertising materials will not give a complete understanding of this Offering, the Company, or the Series A Preferred Stock and are not to be considered part of this Offering Circular. The Offering is made only by means of this Offering Circular and prospective Investors must read and rely on the information provided in this Offering Circular in connection with their decision to invest in the Series A Preferred Stock.

For instructions how to invest, see the “How To Invest” section, starting immediately below.

HOW TO INVEST

To buy Series A Preferred Stock, go to our website, www.AutomationFinance.com, which we refer to as the “Site,” and follow the instructions. We will ask for certain information about you, including:

We will also ask you to sign our Investment Agreement, a copy of which is attached as Exhibit 1A-4.

You will pay for your Series A Preferred Stock using one of the options described on the Site.

The information you submit, including your signed Investment Agreement, is called your “subscription.” We will review your subscription and decide whether to accept it. We have the right to accept or reject subscriptions in our sole discretion, for any reason or for no reason.

When you invest, your money will be held in an escrow account with a third party until we review your subscription and decide whether to accept it. When and if we have confirmed that your subscription is complete and decide to accept your subscription, we will release your money from the escrow account to the Company at a time we select. If we decide not to accept your subscription, we will return your money to you.

Once we have accepted your subscription, we will notify you by email and the investment process will be complete. We will also notify you by email if we do not accept your subscription, although we might not explain why.

We will not issue you a paper certificate representing your Series A Preferred Stock.

Anyone can buy Series A Preferred Stock. We do not intend to limits investment to people with a certain income level or net worth, subject to the limitations described herein.

USE OF PROCEEDS

We expect the Offering itself to cost about $75,000, including legal and accounting fees – principally the cost of preparing this Offering Circular. Otherwise, all of the proceeds of the Offering, no matter how much we raise, will be used to purchase mortgages and other assets for the Company, and to pay its normal operating costs, including the management fee to the Managing Member. The following tables estimates how the proceeds will be used:

NOTE: Those are estimates only. Actual results are likely to be different.

We are not paying commissions to underwriters, brokers, or anybody else for selling or distributing the Series A Preferred Stock. Because we are not paying any commissions, more of your money can go to work for you. In some cases, retirement custodians, investment advisers, and other intermediaries will offer to invest on behalf of their clients. In such cases, the custodian, adviser or intermediary will be paid a fee from their client’s invested funds. In such cases, the client (rather than the Company) is paying those fees.

INVESTMENT COMPANY ACT LIMITATIONS

A company that is treated as an “investment company” under the Investment Company Act of 1940 is subject to stringent and onerous regulation, like a mutual fund. Being an investment company isn’t illegal, but is very expensive. If the Company were treated as an investment company it would be very bad for our business.

All of the Company’s assets will consist of Mortgages and other interests in real estate. As a result, and as discussed in detail below, we believe the Company will not be treated as an investment company because of the exemption under section 3(c)(5)(C) of the Investment Company Act of 1940, which provides that an entity “primarily engaged” in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate” will not be treated as an investment company.

The SEC has taken the position that an issuer qualifies for the section 3(c)(5)(C) exemption if the following three conditions are satisfied:

The SEC has also taken the position that fee interests in real estate, and mortgage that are “fully secured by real property” constitute Qualifying Interests.

Finally, the SEC has taken the position that a mortgage will be treated as “fully secured by real property” where the following two conditions are satisfied:

Section 3.2(b) of the Operating Agreement imposes five requirements directly related to satisfying the Date of Purchase Test and the Date of Origination Test:

If the Company satisfies these five requirements, then it will also satisfy section 3(c)(5)(C) of the Investment Company Act of 1940, and will not be treated as an investment company. The Investment Manager will carefully monitor the Company’s assets for these purposes.

ASSET-BACKED SECURITIES

Definition of “Asset-Backed Security” in Regulation A

The Series A Preferred Stock is being offered pursuant to Regulation A implemented by the SEC. Under 17 CFR §230.261(c), a security that is an “asset-backed security” may not be offered under Regulation A. For these purposes, the term “asset-backed security” has the same meaning as in Item 1101(c) of SEC Regulation AB.

In the opinion of the Company, the Series A Preferred Stock does not satisfy the definition of “asset-backed security” set forth in Item 1101(c) of SEC Regulation AB. Among other things, the Company will invest almost exclusively in non-performing mortgages, and under Item 1101(c)(iii), a security is not an “asset-backed security” if there are any non-performing assets.

As a result, the Company believes that Series A Preferred Stock may be offered and sold under Regulation A in this Offering.

Definition of “Asset-Backed Security” in Exchange Act

Section 3(a)(79) of the Exchange Act defines “asset-backed security” as:

A fixed-income or other security collateralized by any type of self-liquidating financial asset (including a mortgage, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset, including:

There are three reasons why we believe the Series A Preferred Stock should not be treated as “asset-backed securities” within the meaning of section 3(a)(79) of the Exchange Act.

First, the Series A Preferred Stock is not “collateralized” in any way.

Second, payments to the holders of the Series A Preferred Stock do not “depend primarily on cash flow from the asset.” All of the purchased Mortgages are, by definition, non-performing and therefore generating very little cash flow, if any. The Company estimates that less than 10% of its total revenue reflects normal monthly payments made with respect to the purchased mortgages. Instead, the Company’s revenue, and the cash flow to holders of the Series A Preferred Stock, consists mainly of (i) the proceeds of sales of real estate acquired through cooperative resolutions (i.e., deeds in lieu of foreclosure) or through foreclosure; (ii) proceeds from reselling purchased mortgages which have been modified; and (iii) payments made in settlement of purchased mortgages. The Company does not passively collect cash flow, but actively manages a portfolio, turning non-performing mortgages into cash.

Third, we believe the Series A Preferred Stock is not the kind of securities that Congress or the SEC had in mind when section 3(a)(79) of the Exchange Act was enacted.

The SEC has described “asset-backed securities” as follows:

Asset-backed securities (ABS) are created by buying and bundling mortgages – such as residential mortgages, commercial mortgages or student mortgages – and creating securities backed by those assets, which are then sold to investors. Often, a bundle of mortgages is divided into separate securities with different levels of risk and returns. Payments on the mortgages are distributed to the holders of the lower-risk, lower-interest securities first, and then to the holders of the higher-risk securities.

In a basic securitization structure, an entity, often a financial institution and commonly known as a “sponsor,” originates or otherwise acquires a pool of financial assets, such as mortgage mortgages, either directly or through an affiliate. It then sells the financial assets, again either directly or through an affiliate, to a specially created investment vehicle that issues securities “backed” or supported by those financial assets, which securities are “asset-backed securities.” Payment on the asset-backed securities depends primarily on the cash flows generated by the assets in the underlying pool and other rights designed to assure timely payment, such as liquidity facilities, guarantees or other features generally known as credit enhancements. The structure of asset-backed securities is intended, among other things, to insulate ABS investors from the corporate credit risk of the sponsor that originated or acquired the financial assets [. . . .] Because the issuing entity is designed to be a passive entity, one or more “servicers,” often affiliated with the sponsor, are generally necessary to collect payments from obligors of the pool assets, carry out the other important functions involved in administering the assets and to calculate and pay the amounts net of fees due to the investors that hold the asset-backed securities to the trustee, which actually makes the payments to investors.

See https://www.sec.gov/spotlight/dodd-frank/assetbackedsecurities.shtml; and SEC Release Nos. 33-8518; 34-50905; File No. S7-21-04 (Effective March 8, 2005), available at: http://www.sec.gov/rules/final/33-8518.htm.

In contrast to this description:

For all of these reasons, the Company believes that the Series A Preferred Stock should not be treated as “asset-backed securities” under section 3(a)(79) of the Exchange Act and, accordingly, that the Company will not be subject to the onerous reporting obligations that would otherwise apply.

SUMMARY OF OPERATING AGREEMENT AND AUTHORIZING RESOLUTION

The Company is governed by an agreement captioned “Limited Liability Company Agreement” dated October 16, 2018, which we refer to as the “Operating Agreement.” The following summarizes some of the key provisions of the Operating Agreement. This summary is qualified in its entirety by the Operating Agreement itself, which is included as Exhibit 1A-2B.

Formation and Ownership

The Company was formed on July 13, 2018 pursuant to the Delaware Limited Liability Company Act. As of the date of this Offering Circular, the Managing Member is the only owner of the Company.

Classes of Ownership

Under the Operating Agreement, ownership interests in the Company are referred to as “Stock,” while the owners are referred to as “Stockholders.”

The Operating Agreement creates two “classes” of Stock in the Company, “Common Stock” and “Preferred Stock.” The Preferred Stock may be divided into various “series” established by the Managing Member from time to time.

The Series A Preferred Stock was created by a resolution adopted by the Managing Member on November 1, 2018, which we refer to as the “Authorizing Resolution.” A copy of the Authorizing Resolution is attached as Exhibit 1A-2C.

At of the date of this Offering Circular, the Company has only one series of Preferred Stock outstanding: the Series A Preferred Stock being offered in this Offering. Stockholders who own Series A Preferred Stock are referred to as “Series A Stockholders” while those who own Common Stock are referred to as “Common Stockholders.”

The Managing Member will own all of the Common Stock. The Series A Preferred Stock will be owned by Investors who purchase the Series A Preferred Stock in the Offering. The Managing Member and its affiliates might also acquire Series A Preferred Stock, on the same terms as other Investors.

Management

The Managing Member has complete discretion over all aspects of the business conducted by the Company. For example, the Managing Member may (i) admit new members to the Company; (ii) enter into contracts of any kind; (iii) borrow money; (iv) determine the timing and amount of distributions to Members; (v) determine the information to be provided to the Members; (vi) grant liens and other encumbrances on the assets of the Company; (vii) negotiate with borrowers; (viii) sell or otherwise dispose of assets; and (ix) dissolve the Company. Investors who purchase Series A Preferred Stock will not have any right to vote on any issue, or to remove the Managing Member.

Exculpation and Indemnification of Managing Member and Investment Manager

The Operating Agreement protects the Managing Member, the Investment Manager, and their employees and affiliates from lawsuits brought by Investors. For example, it provides that the Managing Member will not be responsible to Investors for mistakes, errors in judgment, or other acts or omissions (failures to act) as long as the act or omission was not the result of the Managing Member’s fraud or willful misconduct, and waives any fiduciary obligations that would otherwise apply. This means that Investors would generally be barred from bringing claims for breach of fiduciary duty, misappropriation of business opportunities, or similar claims alleging that the Managing Member or its employees breached some duty or obligation to Investors or the Company (but not claims based on a breach of the terms of the LLC Agreement or Authorizing Resolution). This limitation on the liability of the Managing Member and other parties is referred to as “exculpation.”

The Operating Agreement also requires the Company to indemnify (reimburse) the Managing Member, the Investment Manager, and certain other parties from losses, liabilities, and expenses they incur in performing their duties. For example, if a third party sues the Managing Member on a matter related to the Company’s business, the Company would be required to indemnify the Managing Member for any losses or expenses it incurs in connection with the lawsuit, including attorneys’ fees. However, this indemnification is not available where a court or other juridical or governmental body determines that the Managing Member or other person is not entitled to be exculpated under the standard described in the preceding paragraph.

Notwithstanding the foregoing, no exculpation or indemnification is permitted to the extent such exculpation or indemnification would be inconsistent with the requirements of federal or state securities laws or other applicable law.

The detailed rules for exculpation and indemnification are set forth in section 6 of the Operating Agreement.

Obligation to Contribute Capital

Once an Investor pays for his, her, or its Series A Preferred Stock, the Investor will not be required to make any further contributions to the Company. However, if an Investor has wrongfully received a distribution, then he, she, or it might have to pay it back.

Personal Liability

No Investor will be personally liable for any of the debts or obligations of the Company.

Distributions

Distributions will be made as described in “Securities Being Offered – Distributions,” on page 20.

Transfers

No Series A Stockholder may transfer Series A Preferred Stock without the consent of the Managing Member, except in the case of a natural person who dies or becomes incompetent, and whose Series A Preferred Stock is transferred by operation of law. The Managing Member may impose conditions before allowing a transfer.

Limited Right of Liquidity

Any Series A Stockholder may ask the Company to purchase the Series A Preferred Stock owned by the Series A Stockholder. For more information, see “Securities Being Offered – Limited Right of Liquidity” on page 22.

Mandatory Withdrawal

The Managing Member may require an Investor to withdraw from the Company, in effect kicking the Investor out of the deal. See “Secuirties Being Offered – Mandatory Withdrawals” on page 22.

Death, Disability, Etc.

The death or disability of an Investor who is a natural person will not cause such person to withdraw as a Stockholder of the Company or require the Company to repurchase his or her shares. The Investor (or his or her successors) will continue to own the Series A Preferred Stock.

“Drag-Along” Right

If the Managing Member wants to sell the business conducted by the Company, it may affect the transaction as a sale of the assets owned by the Company or as a sale of all the Stock of the Company. In the latter case, Investors will be required to sell their Series A Preferred Stock as directed by the Managing Member, receiving the same amount they would have received had the transaction been structured as a sale of assets.

Rights to Information

Each quarter (every three months), the Company will provide, via email, a tailored statement of performance for the Company overall and for each Investor’s interest class. Each year, the Company will provide Stockholders with (i) a statement showing in reasonable detail the computation of the amount distributed to the Stockholders; (ii) a balance sheet of the Company; (iii) a statement of the income and expenses of the Company; and (iv) information for Stockholders to prepare their tax returns. The balance sheet and statement of income and expenses do not have to be audited, at least for purposes of the Operating Agreement.

In addition, each year the Company will provide Investors with a detailed statement showing:

In each case, the detailed statement will describe the services performed and the amount of compensation paid.

By law, the Company also will be required to provide Investors with additional information, including annual audited financial statements, annual reports filed on SEC Form 1-K, semiannual reports filed on SEC Form 1-SA, special financial reports filed on SEC Form 1-K, and current reports on SEC Form 1-U. If Series A Preferred Stock are held “of record” by fewer than 300 persons, these reporting obligations could be terminated.

A Member’s right to see additional information or inspect the books and records of the Company is limited by the Operating Agreement.

Electronic Delivery

All documents, including all tax-related documents, will be transmitted by the Company to Investors via electronic delivery.

Amendment

The Manager may amend the Operating Agreement and/or the Authorizing Resolution unilaterally (that is, without the consent of anyone else) for a variety of purposes, including to:

However, the Managing Member may not adopt any amendment that would reasonably be expected to have an adverse effect on the Series A Stockholders, without the consent of Series A Stockholders owning a majority of the Series A Preferred Stock.

FEDERAL INCOME TAX CONSEQUENCES

The following summarizes some of the U.S. federal income tax consequences of acquiring Series A Preferred Stock of the Company. This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), regulations issued by the Internal Revenue Service (“Regulations”), and administrative rulings and court decisions, all as they exist today. The tax laws, and therefore the federal income tax consequences of acquiring Series A Preferred Stock, could change in the future.

This is only a summary, applicable to a generic Investor. Your personal situation could differ. We encourage you to consult with your own tax advisor before investing.

Classification as a Partnership

The Company will be treated as a partnership for federal income tax purposes.

If the Company were treated as a corporation and not as a partnership for federal income tax consequences, any operating profit or gain on sale of assets would generally be subject to two levels of federal income taxation. By making the Company less profitable, this could reduce the economic return to Investors.

Federal Income Taxation of the Company and its Owners

As a partnership, the Company will not itself be subject to federal income taxes. Instead, each Investor will be required to report on his personal federal income tax return his distributive share of income, gains, losses, deductions and credits for the taxable year, whether or not actual distributions of cash or other property are made to him. Each Investor’s distributive share of such items will be determined in accordance with the Operating Agreement.

Deduction of Losses

The Company is not expected to generate significant losses for federal income tax purposes. If it does generate losses, each Investor may deduct his allocable share subject to the basis limitations of Code section 704(d), the “at risk” rules of Code section 465, and the “passive activity loss” rules of Code section 469. Unused losses generally may be carried forward indefinitely. The use of tax losses generated by the Company against other income may not provide a material benefit to Investors who do not have other taxable income passive from passive activities.

Tax Basis

Code section 704(d) limits an Investor’s loss to its tax “basis” in its Series A Preferred Stock. An Investor’s tax basis will initially equal its capital contribution (i.e., the purchase price for its Series A Preferred Stock). Thereafter, its basis generally will be increased by further capital contributions made by the Investor, its allocable share of the taxable and tax-exempt income of the Company, and its share of certain liabilities of the Company. Its basis generally will be decreased by the amount of any distributions it receives, its allocable share of the losses and deductions of the Company, and any decrease in its share of liabilities.

20% Deduction for Pass-Through Entities

In general, the owners of a partnership, or an entity (like the Company) that is treated as a partnership for Federal income tax purposes, may deduct up to 20% of the amount of taxable income and gains allocated to them by the partnership, excluding certain items like interest and capital gains. However, the deduction claimed by any owner may not exceed the greater of:

The Company will not pay wages or own depreciable assets. Consequently, Investors should not expect a deduction against the income of the Company.

Limitations of Losses to Amounts at Risk

In the case of certain taxpayers, Code section 465 limits the deductibility of losses from certain activities to the amount the taxpayer has “at risk” in the activities. An Investor subject to these rules will not be permitted to deduct its allocable share of the losses of the Company to the extent the losses exceed the amount it is considered to have at risk. If an Investor’s at risk amount should fall below zero, it would generally be required to “recapture” such amount by reporting additional income.

An Investor generally will be considered at risk to the extent of its cash contribution (i.e., the purchase price for his Series A Preferred Stock), its basis in other contributed property, and its personal liability for repayments of borrowed amounts. Its amount at risk will generally be increased by further contributions and its allocable share of the income of the Company, and decreased by distributions it receives and its allocable share of the losses of the Company. With respect to amounts borrowed for investment in the Company, an Investor will not be considered to be at risk even if it is personally liable for repayment if the borrowing was from a person who has certain interests in the Company other than an interest as a creditor. In all events, an Investor will not be treated as at risk to the extent its investment is protected against loss through guarantees, stop loss agreements, or other similar arrangements.

Limitations on Losses From Passive Activities

In the case of certain taxpayers, Code section 469 generally provides for a disallowance of any loss attributable to “passive activities” to the extent the aggregate losses from all such passive activities exceed the aggregate income of the taxpayer from such passive activities. Losses that are disallowed under these rules for a given tax year may be carried forward to future years to be offset against passive activity income in such future years. Furthermore, upon the disposition of a taxpayer’s entire interest in any passive activity, if all gain or loss realized on such disposition is recognized, and such disposition is not to a related party, any loss from such activity which was not previously allowed as a deduction and any loss from the activity for the current year is allowable as a deduction in such year, first against income or gain from the passive activity for the taxable year of disposition, including any gain recognized on the disposition, next against net income or gain for the taxable year from all passive activities, and, finally, against any other income or gain.

The Company will be treated as a passive activity to Investors. Hence, Investors generally will not be permitted to deduct their losses from the Company except to the extent they have income from other passive activities. Similarly, tax credits arising from passive activity will be available only to offset tax from passive activity. However, all such losses, to the extent previously disallowed, will generally be deductible in the year an Investor disposes of his entire interest in the Company in a taxable transaction.

Limitation on Capital Losses

An Investor who is an individual may deduct only $3,000 of net capital losses every year (that is, capital losses that exceed capital gains). Net capital losses in excess of $3,000 per year may generally be carried forward indefinitely.

Limitation on Investment Interest

Interest that is characterized as “investment interest” generally may be deducted only against investment income. Investment interests would include, for example, interest paid by an Investor on a mortgage that was incurred to purchase Series A Preferred Stock and interest paid by the Company to finance investments, while investment income would include dividends and interest but would not generally include long term capital gain. Thus, it is possible that an Investor would not be entitled to deduct all of its investment interest. Any investment interest that could not be deducted may generally be carried forward indefinitely.

Treatment of Liabilities

If the Company borrows money or otherwise incurs indebtedness, the amount of the liability will be allocated among all of the owners of the Company (including Investors) in the manner prescribed by the Regulations. In general (but not for purposes of the “at risk” rules) each owner will be treated as having contributed cash to the Company equal to its allocable share of all such liabilities. Conversely, when an owner’s share of the Company’s liabilities is decreased (for example, if the Company repays mortgages or an owner disposes of Series A Preferred Stock) then such owner will be treated as having received a distribution of cash equal to the amount of such decrease.

Allocations of Profits and Losses

The profits and losses of the Company will be allocated among all of the owners of the Company (including the Investors) by the Managing Member pursuant to the rules set forth in the Operating Agreement. In general, the Managing Member will seek to allocate such profits and losses in a manner that corresponds with the distributions each owner is entitled to receive, i.e., so that tax allocations follow cash distributions. Such allocations will be respected by the IRS if they have “substantial economic effect” within the meaning of Code section 704(b). If they do not, the IRS could re-allocate items of income and loss among the owners.

Sale or Exchange of Series A Preferred Stock

In general, the sale of Series A Preferred Stock by an Investor will be treated as a sale of a capital asset. The amount of gain from such a sale will generally be equal to the difference between the selling price and the Investor’s basis. Such gain will generally be eligible for favorable long-term capital gain treatment if the Series A Preferred Stock were held for at least 12 months. However, to the extent any of the sale proceeds are attributable to substantially appreciated inventory items or unrealized receivables, as defined in Code section 751, the Investor will recognize ordinary income.

If, as a result of a sale of Series A Preferred Stock, an Investor’s share of the liabilities of the Company is reduced, such Investor could recognize a tax liability greater than the amount of cash received in the sale.

Code section 6050K requires any Investor who transfers Series A Preferred Stock at a time when the Company has unrealized receivables or substantially appreciated inventory items to report such transfer to the Company. If so notified, the Company must report the identity of the transferor and transferee to the IRS, together with such other information described in the Regulations. Failure by an Investor to report a transfer covered by this provision may result in penalties.

A gift of Series A Preferred Stock will be taxable if the donor-owner’s share of the Company debt is greater than the donor-owner’s adjusted basis in the gifted interest. The gift could also give rise to federal gift tax liability. If the gift is made as a charitable contribution, the donor-owner is likely to realize gain greater than would be realized with respect to a non-charitable gift, since in general the owner will not be able to offset the entire amount of its adjusted basis in the donated Series A Preferred Stock against the amount considered to be realized as a result of the gift (i.e., the debt of the Company).

Transfer of Series A Preferred Stock by reason of death would not in general be a taxable event, although it is possible that the IRS would treat such a transfer as taxable where the decedent-owner’s share of debt exceeds the pre-death basis of its interest. The decedent-owner’s transferee will take a basis in the Series A Preferred Stock equal to the stock’s fair market value at death (or, in certain circumstances, on the date six (6) months after death), increased by the transferee’s share of debt. For this purpose, the fair market value will not include the decedent’s share of taxable income to the extent attributable to the pre-death portion of the taxable year.

Treatment of Distributions

Upon the receipt of any distribution of cash or other property, including a distribution in liquidation of the Company, an Investor generally will recognize income only to the extent that the amount of cash and marketable securities it receives exceed the basis of its Series A Preferred Stock. Any such gain generally will be considered as gain from the sale of its Series A Preferred Stock.

Alternative Minimum Tax

The Code imposes an alternative minimum tax on individuals and corporations. Certain items of the Company’s income and loss may be required to be taken into account in determining the alternative minimum tax liability of Investors.

Taxable Year

The Company will report its income and losses using the calendar year. In general, each Investor will report his share of Company’s income and losses for the taxable year of such owner that includes December 31^st, i.e., the calendar year for individuals and other owners using the calendar year.

Section 754 Election

The Company may, but is not required to, make an election under Code section 754 on the sale of Series A Preferred Stock or the death of an Investor. The result of such an election is to increase or decrease the tax basis of the assets of the Company for purposes of allocations made to the buyer or beneficiary which would, in turn, affect depreciation deductions and gain or loss on sale, among other items.

Unrelated Business Taxable Income for Tax-Exempt Investors

A church, charity, pension fund, or other entity that is otherwise exempt from federal income tax must nevertheless pay tax on “unrelated business taxable income.” In general, interest and gains from the sale of property (other than inventory) are not treated as unrelated business taxable income. However, interest and gains from property that was acquired in whole or in part with the proceeds of indebtedness may be treated as unrelated business taxable income. Because the Company might borrow money to buy Mortgages or other assets, some of the income of the Company could be subject to tax in the hands of tax-exempt entities.

Tax Returns and Tax Information; Audits; Penalties; Interest

The Company will furnish each Investor with the information needed to be included in its federal income tax returns. Each Investor is personally responsible for preparing and filing all personal tax returns that may be required as a result of its purchase of Series A Preferred Stock. The tax returns of the Company will be prepared by accountants selected by the Company.

If the tax returns of the Company are audited, it is possible that substantial legal and accounting fees will have to be paid to substantiate our position and such fees would reduce the cash otherwise distributable to Investors. Such an audit may also result in adjustments to our tax returns, which adjustments, in turn, would require an adjustment to each Investor’s personal tax returns. An audit of our tax returns may also result in an audit of non-Company items on each Investor’s personal tax returns, which in turn could result in adjustments to such items. The Company is not obligated to contest adjustments proposed by the IRS.

Each Investor must either report Company items on its tax return consistent with the treatment on the information return of the Company or file a statement with its tax return identifying and explaining the inconsistency. Otherwise the IRS may treat such inconsistency as a computational error and re-compute and assess the tax without the usual procedural protections applicable to federal income tax deficiency proceedings.

The Managing Member will appoint a person to act as the “company representative” as provided in Code section 6223(a). Such person will generally control all proceedings with the IRS.

The Code imposes interest and a variety of potential penalties on underpayments of tax.

Other Tax Consequences

The foregoing discussion addresses only selected issues involving federal income taxes, and does not address the impact of other taxes on an investment in the Company, including federal estate, gift, or generation-skipping taxes, or state and local income or inheritance taxes. Prospective Investors should consult their own tax advisors with respect to such matters. 

MANAGEMENT DISCUSSION

Operating Results

The Company was created on July 13, 2018. The Company has not conducted any business and therefore has no operating results.

Liquidity and Capital Resources

The Company is seeking to raise up to $50,000,000 of capital in this Offering by selling Series A Preferred Stock to Investors.

To provide more “liquidity” – meaning cash – we might borrow money from banks or other lenders, secured by the Mortgages and other property owned by the Company. Typically, we are able to borrow approximately 75.0% of the purchase price of Mortgages, although our Investment Manager does not intend to typically exceed 50.0% of the price of the Mortgages.

The Company does not currently have any capital commitments. We expect to deploy most of the capital we raise in the Offering in buying mortgages, as described in the “Use of Proceeds” section on page 25. Should we need more capital for any reason, we could either sell more Series A Preferred Stock or sell other classes of securities. In selling Series A Preferred Stock or other securities, we might be constrained by the securities laws. For example, we are not allowed to sell more than $50,000,000.00 of securities using Regulation A during any period of 12 months.

Plan of Operation

Having raised capital in the Offering, the Company will operate in the manner described in the “Our Company and Business” section starting on page 10.

Whether we raise $50,000,000 in the Offering or some amount less, we believe the proceeds of the Offering will satisfy our cash requirements. If we raise less than $50,000,000, we will simply buy fewer Mortgages. Although we might decide to raise more capital, we know of no reason why we would need to.

PRINCIPALS OF OUR MANAGING MEMBER AND INVESTMENT MANAGER

Names, Ages, Etc.

Ownership of Related Entities

Mr. Birkett and Mr. Jessa each owns 50% of Automation Holdings, LLC, our Managing Member, which in turn owns all of the limited liability company interests of Automation Capital Management LLC, our Investment Adviso. Mr. Birkett and Mr. Jessa thereby control all aspects of the business of the Company.

Automation Holdings, LLC is also the Managing Member of Long Term Capital Partnership, LLC, Long Term Capital Partnership, II LLC, Long Term Capital Partnership III, LLC, People First Fund LLC, and Panatte LLC. Those entities, and the Managing Member on its own behalf, have been engaged in the same business as the Company, i.e., buying distressed mortgages and trying to work out amicable resolutions with borrowers. However, they will not acquire any additional loans after this Offering is qualified by the SEC.

Business Experience

Mr. Birkett

Raised in Dublin Ireland, Paul founded, built and sold one of Ireland’s first mobile phone retail chains while still at college. After college, he move to the UK and joined Procter & Gamble’s graduate trainee program.

In 1996, he joined PepsiCo and spent 18 years in a variety of marketing, sales and general management positions across Europe, Asia and North America – rising to Vice President for PepsiCo’s $3Bn hydration and non-carbonated beverage portfolios. In this role he managed the national marketing of the global Aquafina, SoBe, Propel, Sierra Mist, and Mug Root Beer trademarks before assuming the role of Vice President and General Manager for PepsiCo’s New York market unit.

Disappointed by the low returns on his retirement investments, Paul began to accumulate a portfolio of single family rental-assets. The purchase of a distressed rental property in 2013 ultimately became a mortgage purchase and provided his first insight into the non-performing mortgage business.

He liquidated his portfolio of 40 rental properties and launched Automation Finance (the trade name of our Managing Member, Automation Holdings, LLC) to provide investors with a way to automate their retirement plans

Since launching Automation Finance in 2015, the company and its affiliates have purchased and liquidated approximately 1500 mortgages with a par value of approximately $100 million.

Mr. Jessa

Abbas Jessa joined Automation Finance in 2015 from PricewaterhouseCoopers. After qualifying as a CPA specializing in audit and tax, he worked in PwC’s advisory division on clients like Goldman Sachs, Barclay’s Bank and JP Morgan. He was also nominated by PwC for the Forbes Magazine “30-under-30”. Abbas is responsible for the day-to-day operations of the business including Finance & Accounting.

Nathan Zhang

Nathan Zhang joined in July 2017 from distressed debt investment fund Credigy Solutions Inc – a $5bn debt investor. At Credigy, he served as an analyst for non-performing loan (NPL) purchases and served on the FP&A team. At Automation Finance, he will manage FP&A and accounting functions.

Michael Zimmerman, Esq.

Michael Zimmerman, Esq. is an experienced consumer finance attorney who joined Automation Finance in July 2017. He has spent his career representing financial institutions in mortgage-related litigation and regulatory matters at large national and international law firms as well as in the in-house department of a global Swiss bank. He will oversee our legal recoveries and manage local attorney partners in each state.

Legal Proceedings

Within the last five years, no Executive Officer or Significant Employee has been convicted of, or pleaded guilty or no contest to, any criminal matter, including traffic violations or any other offense.

Within the last five years, no Executive Officer or Significant Employee, no partnership of which an Executive Officer or Significant Employee was a general partner, and no corporation or other business association of which an Executive Officer or Significant Employee was an executive officer, has been a debtor in bankruptcy or any similar proceedings.

COMPENSATION OF MANAGEMENT

Overview

The Company itself does not have any employees or payroll. We are managed by our Managing Member, Automation Holdings, LLC, and our Investment Manager, Automation Capital Management, LLC.

Our Managing Member will receive compensation in two ways:

The Managing Member will pay the compensation of the Investment Manager.

Fees

Management Fee

The Managing Member will receive a management fee equal to 0.1667% of the total capital accounts of all of the Company’s Stockholders as of the last day of each calendar month, or approximately 2% of the capital accounts per year.

The amount of the management fee will therefore depend on how much capital is raised in the Offering and how quickly the capital is returned.

Administration Fee

The Managing Member will receive an administration fee equal to $60 per month for each Mortgage that is still on the Company’s books.

The amount of the administration fee will therefore depend on how many loans the Company purchases and how long they are held on the Company’s books.

Accounting Fee

The Managing Member will receive an accounting fee equal to $5 per month for each Mortgage that is still on the Company’s books.

The amount of the accounting fee will therefore depend on how many loans the Company purchases and how long they are held on the Company’s books.

Legal Oversight Fee

The Managing Member will receive a fee to oversee foreclosure and bankruptcy actions on behalf of the Company. The fee will equal $500 for each bankruptcy filing and foreclosure action, plus an additional $250 for foreclosures actions in the State of New York.

The amount of the legal oversight fee will therefore depend on how many Mortgages become affected by either foreclosure or bankruptcy actions.

Collateral Cure Fee

The Managing Member will receive a fee equal to $100 per Mortgage to cure deficiencies in the Mortgage documentation.

The amount of the collateral cure fee will therefore depend on how many Mortgages are incomplete or deficient and require the Managing Member to search for or create supporting documentation.

Legal Referral Fees

The Company will engage the services of outside law firm to handle foreclosure and other proceedings, when necessary. These law firms will be compensated at rates established by Fannie Mae and Freddie Mac, the Federal mortgage financing corporations. The Managing Member may receive referral fees from these law firms, as permitted by law. The referral fees paid to the Managing Member will not increase the legal fees paid by the Company.

The amount of referral fees the Managing Member receives under this arrangement will therefore depend on the volume of referrals.

Transaction Fees

The Managing Member will receive the following transaction fees:

The amount of these transaction fees will depend the number and size of the transactions the Company enters into.

Servicing Fees

Under an arrangement with the Company’s third-party loan servicer, the Managing Member may perform certain services that would be otherwise be performed by personnel of the servicer (none requiring the Managing Member to be licensed), in which event the Managing Member will be entitled to receive some or all of the compensation paid to the servicer by the Company. This arrangement between the Managing Member and the third-party loan servicer will not increase the total cost to the Company.

The amount of the fees the Managing Member receives under this arrangement will therefore depend on the volume of loans and the services the Managing Member provides.

Ownership Interest of Managing Member

The Managing Member will own 100% of the Company’s Common Stock. As the owner of the Common Stock the Managing Member will have the right to receive 100% of the profits of the Company after Investors receive their annual return and a return of all of their capital. The amount of the profits the Managing Member will receive from owning Common Stock therefore depends on a number of factors, including:

Reports to Investors

No less than once per year, the Company will provide Investors with a detailed statement showing:

In each case, the detailed statement will describe the services performed and the amount of compensation paid.

Stages of Development

The stages of the Company’s organization, development, and operation, and the compensation paid by the Company to the Managing Member during each stage, are as follows:

OWNERSHIP OF SECURITIES

Under the Operating Agreement, the Managing Member has full control over all aspects of the business of the Company. Investors will not be entitled to vote on any matter involving the Company.

The following table sets forth the beneficial ownership of the Company and its voting securities:

INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS

Messrs. Birkett and Jessa together own all of the limited liability company interests of Automation Holdings, LLC, our Managing Member, which in turn owns all of the limited liability company interests of Automation Capital Management, LLC, our Investment Manager.

FINANCIAL STATEMENTS

AF 2018 NPL A LLC

Delaware Limited Liability Company

Financial Statements and Independent Auditor’s Report

July 13, 2018 (inception)

AF 2018 NPL A LLC

TABLE OF CONTENTS

To the Members of

AF 2018 NPL A LLC

Lewes, Delaware

INDEPENDENT AUDITOR’S REPORT

Report on the Financial Statements

We have audited the accompanying balance sheet of AF 2018 NPL A LLC (the “Company”) as of July 13, 2018 and the related notes to the financial statement.

Management’s Responsibility for the Financial Statement

Management is responsible for the preparation and fair presentation of this financial statement in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statement that is free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on the financial statement based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free from material misstatements.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statement. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statement in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of AF 2018 NPL A LLC as of July 13, 2018, in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter Regarding Going Concern

The accompanying financial statement has been prepared assuming that the Company will continue as a going concern. As described in Note 3 to the financial statement, the Company has not yet commenced planned principal operations and has not generated revenues or profits since inception. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statement does not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

/s/ Artesian CPA, LLC

Denver, Colorado

November 1, 2018

Artesian CPA, LLC

1624 Market Street, Suite 202 | Denver, CO 80202

p: 877.968.3330 f: 720.634.0905

info@ArtesianCPA.com | www.ArtesianCPA.com

AF 2018 NPL A LLC

BALANCE SHEET

As of July 13, 2018 (inception)

See accompanying Independent Auditor’s Report and accompanying notes,
which are an integral part of these financial statements.

AF 2018 NPL A LLC

NOTES TO FINANCIAL STATEMENTS

As of July 13, 2018 (inception)

NOTE 1: NATURE OF OPERATIONS

AF 2018 NPL A LLC (the “Company”) is a limited liability company organized July 13, 2018 under the laws of Delaware. The Company was formed to invest in residential housing debt instruments.

As of July 13, 2018, the Company has not commenced planned principal operations nor generated revenue. The Company’s activities since inception have consisted of formation activities and preparations to raise capital. Once the Company commences its planned principal operations, it will incur significant additional expenses. The Company is dependent upon additional capital resources for the commencement of its planned principal operations and is subject to significant risks and uncertainties; including failing to secure funding to operationalize the Company’s planned operations or failing to profitably operate the business.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP).

Use of Estimates

The preparation of the balance sheet in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents and Concentration of Cash Balance

The Company considers all highly liquid securities with an original maturity of less than three months to be cash equivalents. The Company’s cash and cash equivalents in bank deposit accounts, at times, may exceed federally insured limits.

Deferred Offering Costs

The Company complies with the requirements of FASB ASC 340-10-S99-1 with regards to offering costs. Prior to the completion of an offering, offering costs are capitalized. The deferred offering costs are charged to members’ equity upon the completion of an offering or to expense if the offering is not completed.

See accompanying Independent Auditor’s Report

AF 2018 NPL A LLC

NOTES TO FINANCIAL STATEMENTS

As of July 13, 2018 (inception)

Fair Value of Financial Instruments

Financial Accounting Standards Board (“FASB”) guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active).

Level 3 - Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.

The carrying amounts reported in the balance sheets approximate their fair value.

Stock Subscription Receivable

The Company records stock issuances at the effective date. If the subscription is not funded upon issuance, the Company records a stock subscription receivable as an asset on a balance sheet. When stock subscription receivables are not received prior to the issuance of financial statements at a reporting date in satisfaction of the requirements under FASB ASC 505-10-45-2, the stock subscription receivable is reclassified as a contra account to members’ equity (deficit) on the balance sheet.

Revenue Recognition

The Company recognizes revenue when: (1) persuasive evidence exists of an arrangement with the customer reflecting the terms and conditions under which products or services will be provided;

(2) delivery has occurred or services have been provided; (3) the fee is fixed or determinable; and

(4) collection is reasonably assured. No revenue has been earned or recognized as of July 13, 2018.

Organizational Costs

In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 720, organizational costs, including accounting fees, legal fees, and costs of incorporation, are expensed as incurred.

Income Taxes

The Company is a limited liability company. Accordingly, under the Internal Revenue Code, all taxable income or loss flows through to its members. Therefore, no provision for income tax has been recorded in the statements. Income from the Company is reported and taxed to the members on their individual tax returns. The Company complies with FASB ASC 740 for accounting for uncertainty in income taxes recognized in a company’s financial statements, which prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. FASB ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The Company believes that its income tax positions would be sustained on audit and does not anticipate any adjustments that would result in a material change to its financial position.

See accompanying Independent Auditor’s Report

AF 2018 NPL A LLC

NOTES TO FINANCIAL STATEMENTS

As of July 13, 2018 (inception)

The Company may in the future become subject to federal, state and local income taxation though it has not been since its inception. The Company is not presently subject to any income tax audit in any taxing jurisdiction.

Net Earnings or Loss per Unit

Net earnings or loss per unit is computed by dividing net income or loss by the weighted-average number of units outstanding during the period, excluding units subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per unit. Diluted net earnings or loss per unit reflect the actual weighted average of units issued and outstanding during the period, adjusted for potentially dilutive securities outstanding. Potentially dilutive items are excluded from the computation of the diluted net earnings or loss per unit if their inclusion would be anti-dilutive. As no potentially dilutive items exist and no membership units are outstanding as of July 13, 2018 (inception), the Company has not presented basic net loss per unit or diluted net loss per unit.

NOTE 3: GOING CONCERN

The accompanying balance sheet has been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is a business that has not commenced planned principal operations, plans to incur significant costs in pursuit of its capital financing plans, and has not generated any revenues as of July 13, 2018. The Company’s ability to continue as a going concern in the next twelve months is dependent upon its ability to obtain capital financing from investors sufficient to meet current and future obligations and deploy such capital to produce profitable operating results. No assurance can be given that the Company will be successful in these efforts.

These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. The balance sheet does not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE 4: MEMBERS’ EQUITY

The Company authorized 1,000,000 shares of common stock (no par value) and 5,000,000 shares of Series A Preferred Stock (no par value). Common stockholders have 1 vote per share while preferred stockholders do not have voting rights. Distributions of the Company’s capital are to be made first on the Series A Preferred Stock’s preferred returns (10% compounded annual return on the unreturned balance of their investment), then in returning capital contributions on the Series A Preferred Stock, and finally to common stockholders. Holders of Series A Preferred Stock can request redemption subject to the Company’s approval, which reduces the preferred return rates to 8% or 9% dependent upon the holding period prior to redemption. In the event of a liquidation of the Company, holders of Series A Preferred Stock receive a priority distribution of any available unpaid preferred returns and/or unreturned capital. However, holders of Series A Preferred Stock are guaranteed neither a preferred return nor a return of any capital contribution.

See accompanying Independent Auditor’s Report

AF 2018 NPL A LLC

NOTES TO FINANCIAL STATEMENTS

As of July 13, 2018 (inception)

The Company is managed by a managing member, Automation Holdings, LLC, and the Company’s investment manager is Automation Capital Management, LLC, both related parties. Fees payable to managing member and investment manager are described in Note 5.

As of July 13, 2018 (inception), no shares were issued or outstanding and no capital has been contributed to the Company.

The debts, obligations, and liabilities of the Company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the Company, and no member of the Company is obligated personally for any such debt, obligation, or liability.

NOTE 5: RELATED PARTY

As discussed in Note 4, the managing member will charge the Company a management fee equal to 0.1667% per month of the total capital accounts of all of the Company’s stockholders as of the last day of each calendar month, or approximately 2% of the capital accounts per year. In addition, the managing member will assess a fee of $60.00 monthly per mortgage. The investment manager will be compensated $10,000, which will be paid by the managing member.

NOTE 6: RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606). This ASU supersedes the previous revenue recognition requirements in ASC Topic 605—Revenue Recognition and most industry-specific guidance throughout the ASC. The core principle within this ASU is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration expected to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers”, which deferred the effective date for ASU 2014-09 by one year to fiscal years beginning after December 15, 2017, while providing the option to early adopt for fiscal years beginning after December 15, 2016. Transition methods under ASU 2014-09 must be through either (i) retrospective application to each prior reporting period presented, or (ii) retrospective application with a cumulative effect adjustment at the date of initial application. We are continuing to evaluate the impact of this new standard on our financial reporting and disclosures, including but not limited to a review of accounting policies, internal controls and processes. We expect to complete our evaluation in the second half of 2017 and intend to adopt the new standard effective January 1, 2018.

See accompanying Independent Auditor’s Report

AF 2018 NPL A LLC

NOTES TO FINANCIAL STATEMENTS

As of July 13, 2018 (inception)

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). This ASU requires a lessee to recognize a right-of-use asset and a lease liability under most operating leases in its balance sheet. The ASU is effective for annual and interim periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are continuing to evaluate the impact of this new standard on our financial reporting and disclosures.

Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying balance sheet. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.

NOTE 7: SUBSEQUENT EVENTS

Management has evaluated all subsequent events through November 1, 2018, the date the financial statements were available to be issued. There are no additional material events requiring disclosure or adjustment to the financial statements.

See accompanying Independent Auditor’s Report

GLOSSARY OF DEFINED TERMS

FORM 1-A

Regulation A Offering Statement

Part III – Exhibits

AF 2018 NPL A LLC

228 Park Avenue South #67157

New York, NY 10003

(844) 736-6027

www.automationfinance.com

March 6, 2019

The following Exhibits are filed as part of this Offering Statement:

SIGNATURES

Pursuant to the requirements of Regulation A, the issuer certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 1-A and has duly caused this offering statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on March 6, 2019.

This offering statement has been signed by the following persons in the capacities and on the dates indicated.

Date: March 6, 2019

P a g e | 50

Exhibit 1A-6B

SPECIAL LOAN SERVICING AGREEMENT

This Special Loan Servicing Agreement (the “Agreement”) is dated as of ______________ and is entered into by and between Land Home Financial Services, Inc. a California corporation, as Servicing Agent, (hereafter referred to as “Servicer”), and ______________, (hereafter referred to as “Client” as further defined herein), as such schedule may be amended from time to time. Each of Servicer and Client may be referred to herein as a “Party”, and collectively, “Parties”, to this Agreement.

WHEREAS, Client, as further defined herein, is the controlling owner of certain residential (1 4 family) mortgage loans and/or the holder of certain mortgage servicing rights, and is acting for its own account, or for private and institutional clients, investors or lenders (collectively, “Lenders” or “Investors”), and is licensed as a lender, originator, loan servicer, or other entity; and

WHEREAS, Servicer is in the business of servicing residential real estate mortgage loans, and is licensed in the jurisdictions as periodically updated and set forth in its website, and is willing to service for Client the Mortgage Loans (as defined herein below). In each instance, Client is or will be either (1) the controlling owner of the Mortgage Loans or (2) the owner of the servicing rights to the Mortgage Loans. For ease of reference and to avoid repetition, both the servicing of Mortgage Loans owned by Client and the servicing of Mortgage Loans of which Client is the owner of the Servicing Rights, are referred to herein as “Servicing” by Servicer; and

WHEREAS, Client desires that Servicer service the Mortgage Loans, and Servicer desires to do so, on the terms and conditions hereinafter provided; and

WHEREAS, The Parties acknowledge that Servicer may at its discretion have additional agreements, including sub-servicing or fee arrangements, with other entities related to servicing of the Notes and Security Instruments that comprise the Mortgage Loans subject to this Agreement, with the understanding that any such separate agreements will have no impact on any of the terms and conditions of this Agreement with Client;

NOW THEREFOR in consideration of the mutual agreements below, and intending to be legally bound thereby, the Parties agree, and the Client hereby authorizes and instructs, that Servicer shall service the Mortgage Loans, and in that connection, to do the following:

(1.1) “Affiliate” means, (a) with respect to Client, any entity that controls, is controlled by, or is under common control with Client or any trust sponsored by Client or any of its other Affiliates and (b) with respect to Servicer, any entity that controls, is controlled by, or is under common control with Servicer. For purposes of this Agreement, “control” means possessing, directly or indirectly, the power to direct or cause the direction of the management, policies or operations of an entity, whether through ownership of voting securities, by contract or otherwise.

(1.2) “Agreement” means this Servicing Agreement, the Exhibits hereto, any Transaction Addendum, and any duly executed amendments thereto.

(1.3) “Applicable Requirements” means as of the time of reference, with respect to the Mortgage Loans and the subject matter of this Agreement, all of the following: (i) all contractual obligations of Client in any agreement, including without limitation with any insurer or governmental agency with respect to the Mortgage Loans; (ii) the Mortgage Loan Documents; (ii) all federal, state and local legal and regulatory requirements applicable to the servicing of the Mortgage Loans; and (iv) this Agreement.

(1.4) “ARM” means an adjustable-rate Mortgage Loan that allows the holder of the promissory note secured thereby to periodically adjust the interest rate based on movement in a specified index.

(1.5) “Balloon” refers to a Mortgage Loan the principal of which will not fully amortize before the scheduled maturity of that Mortgage Loan

(1.6) “Business Day” means any day other than (i) a Saturday or Sunday, or (ii) a day on which insured depository institutions in California are authorized or obligated by law to be closed.

(1.7) “Client” means the controlling owner of certain residential (1-4 family) mortgage loans and/or the holder of certain mortgage servicing rights, and is acting for its own account, or on behalf of private and institutional clients, investors or originating lenders (collectively, “Lenders” or “investors”), and is licensed as a lender, originator, loan servicer, or other entity, and having specific authority to contract with, and direct or otherwise authorize, the Servicer to perform the Services as hereinafter defined.

(1.8) “Confidential Information” includes (a) all information, including Intellectual Property, related to the business of Servicer or Client and any of their respective Affiliates, clients and other third parties, to which Servicer or Client has access, whether in written, graphic or machine-readable form, in the course of or in connection with providing the Services; (b) all notes, analyses and studies prepared by Servicer or any of its Representatives, during the term of this Agreement or anytime thereafter, incorporating any of the information described in the Confidentiality and Non-circumvention agreement (“Non-Disclosure”), attached as Exhibit C and incorporated herein, and (c) the terms and conditions of this Agreement.

(1.9) “Cut-Off Date” means the last day of a Client accounting cycle or reporting cycle, as the context indicates.

(1.10) “Effective Date” means generally, the date first stated above and (b) with respect to any Addendum, the date on which Servicer executes such Addendum, as set forth thereon.

(1.11) “Escrow Accounts” means all funds and accounts at the time of reference held under the related Mortgage Loans by or for Client on behalf of the Mortgagors, Investors or others, including but not limited to: (i) Mortgage Loan trust funds and impound accounts maintained, or controlled by or for Client for the purpose of paying, when due, Mortgage Loan related real estate taxes and special assessments, Hazard Insurance premiums, mortgage insurance premiums and ground rents; (ii) P&I collections (including payoff amounts) not yet remitted to the appropriate Investors; (iii) undisbursed loss draft proceeds arising from insured losses to Mortgage Loan collateral, buy-down funds and other unapplied payments; and (iv) all other Mortgage Loan funds held by or for Client in connection with the Mortgage Loans which do not constitute Client’s corporate funds.

(1.12) “Exit Fee” is synonymous with the Deboarding Fee as defined in Exhibit A attached hereto and incorporated herein.

(1.13) “Exit Related Charges” means those expenses related to deboarding a Mortgage Loan for which an Exit Fee is payable in accordance with Exhibit A.

(1.14) “Hazard Insurance” means all policies of property insurance insuring against loss or damage to any Mortgaged Premises by fire and other perils, including without limitation all endorsements and riders thereto, and including so-called fire and extended coverage insurance policies, homeowner’s insurance policies and flood insurance policies.

(1.15) “Intellectual Property” means all (a) patents, patent applications, patent disclosures and inventions (whether patentable or not), (b) trademarks, service marks, trade dress, trade names, logos, corporate names, Internet domain names, and registrations and applications for the registration thereof together with all of the goodwill associated therewith, (c) copyrights and copyrightable works (including computer programs and mask works) and registrations and applications thereof, (d) databases, trade secrets, know-how and other confidential information, (e) waivable or assignable rights of publicity and (vi) waivable or assignable moral rights.

(1.16) “Loan Boarding” means the process by which Client submits new Mortgage Loans to Servicer for the purpose of servicing, and the conditional acceptance of such Mortgage Loans by Servicer, depending on factors including, but not limited to, the completeness of the data submitted with the files. Servicer shall notify Client of the minimum Data Requirements on a Loan Boarding Addendum attached hereto and incorporated herein as Exhibit B.

(1.17) “Loan Documents” means (i) the mortgage note, deed of trust note, security deed note or other form of promissory note executed by a Mortgagor and secured by a Security Instrument evidencing the indebtedness of the Mortgagor under a Mortgage Loan (hereinafter “Mortgage Note”), and (ii) any deed of trust, security deed, mortgage, security agreement or any other security instrument which constitutes a lien on real estate (or shares of stock in the case of cooperatives) securing payment by a Mortgagor of a mortgage note (hereinafter “Security Instrument”).

(1.18) “Loss Mitigation Fees” are the fees and expenses for loss mitigation activities, as described in Transaction Addendum.

(1.18) “Mortgage”, “Mortgages” and “Mortgage Loans” means the residential mortgage loans or pools of residential mortgage loans (including the corresponding Loan Documents) which are identified on one or more Transaction Addendum(s) and are to be serviced by Servicer for Client pursuant to the terms and conditions of this Agreement.

(1.19) “Mortgagor” means one or more mortgagors, trustors of trust deeds and deeds of trust, the grantors of any Mortgages securing a Mortgage Loan and/or the owners of the Mortgaged Premises at the time of reference.

(1.20) “Mortgaged Premises” means the residential (1-4 family) real property that is encumbered by a Security Instrument securing the Mortgagor’s obligations under a Mortgage Loan, including all buildings and fixtures on such property and all accessions thereto, including installations of mechanical, electrical, plumbing, heating and air conditioning systems located in or affixed to such buildings, and all alterations, additions and replacements, and any such property following the completion of the foreclosure of the related Mortgage Loan.

(1.21) “Parties” means Client and Servicer, each singularly being a “Party”.

(1.22) “Person” means a natural person, partnership (general or limited), corporation, limited liability company, trust, joint venture, joint stock company, association, unincorporated organization, government or agency or political subdivision thereof, or other entity.

(1.23) “Representatives” means Servicer’s or Client’s officers, directors, employees, agents and subcontractors (and their employees).

(1.24) “Servicing Rights” means the rights and responsibilities with respect to servicing and supervising the Mortgage Loans and the associated Escrow Accounts and Loan Documents.

(1.25) “Servicer” means the Party identified as such in the preamble to this Agreement.

(1.26) “Servicing Fee” means the fee for Services as specified in the relevant Transaction Addendum made a part hereof.

(1.27) “Services” means all services provided by Servicer to Client hereunder and all Work Product.

(1.28) “Transaction Addendum” means each duly executed Addendum to this Agreement regarding the scope of services for which Servicer has been retained by Client.

(1.29) “Transfer Date” means, as to a Mortgage Loan, the date on which Servicer commences servicing such Mortgage Loan pursuant to the terms of this Agreement.

(1.30) “Trust Account” means that bank account into which Mortgagor’s payments or principal, interest, taxes and insurance is deposited. Trust Check is a negotiable instrument used to facilitate payment from the Trust Account.

(1.31) “Work Product” means all works, materials, software, documentation, methods, apparatus, systems, designs, improvements, inventions, user interfaces, processes, formulae, products or future products, plans, devices, enhancements, refinements or works of authorship and the like (and all tangible embodiments thereof) created by, conceived, originated, prepared, developed, conceived, or delivered by Servicer, either individually or jointly with others (whether or not patented, patentable, copyrighted or copyrightable), directly or indirectly useful in any aspect whatsoever in the business of Servicer as part of or in connection with the Services; provided, that nothing shall be considered ’‘Work Product” hereunder that Client or any third party could develop independently of Servicer’s Intellectual Property or other Confidential Information (including but not limited to such Intellectual Property and Confidential Information as may be created or developed during the term of this Agreement but separate from Servicer’s provision of Services hereunder).

(2.1) Services. Servicer will perform and deliver Services in accordance with the general specifications and requirements as set forth herein and more specifically described in each Transaction Addendum(s) attached hereto from time to-time. Except as otherwise provided in Section 4 (“Termination”), Section 34 (“Limitation of Liability”) and Section 18 (“Assignment”), if any of the terms or conditions of this Agreement conflict with any of the terms or conditions of any Transaction Addendum, the terms or conditions of such Transaction Addendum will control solely with respect to the Services covered under such Transaction Addendum.

(2.2) Scope of Services. Client hereby engages Servicer to employ commercially reasonable and prudent practices to service the loans under Applicable Requirements, including, but not limited to, to collect all scheduled payments of principal, interest and applicable deposits of taxes, assessments and other public charges that are generally impounded, hazard insurance premiums, and all other items on all Mortgage Loans subject to this Agreement including the enforcement of specific Lenders’ rights of processing demands, processing or coordinating foreclosures, and recording reconveyances/releases. Client must supply to Servicer all Loan Documents, including but not limited to Notes, Deed/Mortgages, modification agreements, forbearance agreements, assignments or any other document affecting condition of title or payment distribution (including payment history and reinstatement) and showing the correct beneficiary, needed by Servicer to complete its tasks, including but not limited to, file setup, servicing functions, and to satisfy regulatory requirements, before servicing functions will be performed, continued, or funds distributed. Upon any occurrence that could impact servicing functions, including but not limited to, an assignment of a beneficial interest in the Mortgage Loan or a modification of Mortgage Loan terms, Client must notify Servicer immediately of such occurrence and provide copies of relevant documents before servicing functions will be performed, continued, or funds distributed. Servicer shall follow instructions from Client who represents and warrants that Client is fully, exclusively and solely authorized in all cases to direct, and authorize, the Servicer to perform the Services in accordance with this Agreement. If the Mortgage Loan is owned by multiple Lenders (a “Multi-Lender Loan”), Servicer shall only follow instructions from Client. A default upon any interest in the Note shall constitute a default upon all interests. Client may determine and direct the actions to be taken on behalf of all Lenders in the event of default or with respect to other matters requiring the direction or approval of Lenders, including but not limited to, designation of brokers, servicing agents or others acting on their behalf and the sale, encumbrance or lease of any real or personal properties which may be owned by Lenders as the result of foreclosure or receipt of a deed in lieu of foreclosure, or modification or forbearance of the Mortgage Loans. For the avoidance of doubt, in the event of a conflict between Applicable Requirements and Client’s instructions the former shall control.

Client acknowledges and agrees that upon Client’s authorization of servicing transfers by and between Servicer and another servicing provider, such transfer process will be handled exclusively by Servicer and the other servicing provider, without the need for further authorization(s) by Client.

Client further acknowledges and agrees that certain Notes will become inadequately secured by collateral, or be submitted to Servicer for servicing without being secured by any, or adequate, collateral. Client shall indemnify and hold harmless Servicer from any resulting inability to enforce or collect on such Notes.

(2.3) other. Servicer shall be responsible for further safeguarding each Client’s interest in the Mortgaged Premises and rights under the Mortgage Loan by:

(a) Inspecting the Mortgaged Premises in accordance with Applicable Requirements, and performing such other inspections as prudence and sound business judgment dictate;

(b) To the extent possible, securing any Mortgaged Premises found to be vacant or abandoned, and advising Client of the status thereof;

(c) Notifying Client promptly if Servicer receives written notice of any lien, bankruptcy, condemnation, probate proceeding, tax sale, partition, local ordinance violation, condemnation in the nature of eminent domain or similar event that would, in Servicer’s judgment. impair Client’s security: and Servicer shall assist Client in undertaking appropriate action to preserve its security;

(d) Advising Client promptly upon receipt of any request for a partial release, easement grant, substitution, subdivision or re-subdivision, subordination, alteration, or waiver of security instrument terms, and (if required by Applicable Requirements or if approved by the related Investor) seeking necessary consents to such request;

(e) Advising Client promptly in all cases (and advising the related Investor and/or Lender, if required) of any change in ownership of the Mortgaged Premises subject to a Mortgage Loan, complying with all instructions of Client with respect to the acceleration or modification of the indebtedness.

(f) Notifying Client promptly following Servicer’s receipt of an inquiry concerning, or request for approval of, an assumption and supplying all information in the possession of Servicer which if requested by Client to facilitate the preparation by Client of any required disclosures. Client, if applicable, will prepare and forward (or arrange for delivery of) all disclosures to the assumptors within period set by Applicable Requirements and send a copy set of all disclosures to Servicer. With respect to an assumption, Servicer shall have no responsibility or liability regarding disclosures required from Client (or the Investor if other than Lender) or the accuracy of the same, except as set forth in this Section.

(g) If Client (and the related Investor) authorize an assumption subject to qualification of the assumptors and receipt of further documentation, then Servicer shall, upon receipt of a signed contract and an assumption fee from the Mortgagor and proposed assumptors, provide a blank application form for completion by the Mortgagor and assumptors, with applicable verification forms to be signed by the proposed assumptors. Upon receipt of the completed application and signed verification forms from the Mortgagor and proposed assumptors, as applicable, Servicer will process the application (i.e., request credit reports and verify all information on the completed application) and forward the completed assumption package to Client for further processing. Client will then underwrite the requested assumption, request any required Investor and/or PMI Company, FHA or VA approval, and forward approved assumption to Servicer for final transfer and assumption.

(h) If consent to assumption is denied, Client will prepare a proper denial letter, forward the original denial letter to the Mortgagor, and deliver a copy to Servicer.

(2.4) Analyzed Trust Account Disclosure: Client authorizes Servicer to deposit all funds received in connection with this Agreement into an analyzed trust account at an FDIC insured bank. The analyzed trust account accrues credits that are used to offset bank service charges assessed to Servicer, which provides a financial benefit to Servicer. Any unused credits not used to offset bank service charges will not benefit Client in any manner.

(2.5) Affiliate Services. Only the Client may request Services and execute Transaction Addendums under this Agreement. Affiliates of Client must execute a separate servicing agreement in order for Servicer to provide Services to such Affiliate of Client.

(2.6) Technical Direction. Servicer will report to and receive technical direction only from such Client employees or officers as may be listed in the applicable Transaction Addendum or as may be designated from time to time by Client or the applicable Affiliate.

(2.7) Servicing Standards; Subservicing. The Services will be performed by Servicer’s Representatives or subcontractors. Subject to the following subsections (1) and (2), Servicer may assign or subcontract to another entity or person any of the Services to be performed hereunder. Servicer will remain fully liable for the acts and omissions of its agents and subcontractors as if performed by Servicer.

(2.8) Removal of Personnel. Servicer will maintain staffing levels and continuity of personnel consistent with its obligation to perform the Services. In the event that Servicer provides replacement Representatives for any reason, Servicer will not charge Client for the number of hours required to train the replacement until such Representatives are familiar with the particular project, so that such replacement Representatives are capable of performing the Services in accordance with this Agreement.

(2.9) Servicing Transfer Notice to Mortgagors. To the extent required by Applicable Requirements, Client shall send, or cause to be sent, to each Mortgagor a letter advising the Mortgagor of the transfer of the servicing responsibilities in connection with the related Mortgage Loan to Servicer, the form and content of which letters shall be mutually acceptable to Client and Servicer in the exercise of reasonable judgment. To the extent required by Applicable Requirements, Servicer shall send, or cause to be sent, to each Mortgagor a letter advising the Mortgagor of the transfer of servicing responsibilities in connection with the related Mortgage Loan to Servicer, the form and content of which letters shall be mutually acceptable to Client and Servicer in the exercise of reasonable judgment.

(2.10) Representations and Warranties. Servicer represents and warrants to Client, as of the date hereof and each Transfer Date, as follows: (i) Servicer is duly formed, validly existing, and has all requisite power and authority to enter into this Agreement and to perform the obligations required of it hereunder, (ii) Servicer’s execution and performance of this Agreement have been duly and validly authorized by all necessary corporate action, (iii) the execution and performance of this Agreement by Servicer does not and will not violate Servicer’s organizational documents, any material contracts of Servicer, or any Applicable Requirements, and (iv) Servicer has complied with, and has not violated, any law, ordinance, requirement, regulation, rule or order applicable to its business or properties, the violation of which reasonably could be expected to materially and adversely affect the Mortgage Loans or the operations or financial condition of Client or Servicer.

(3.1) Documentation. Client shall provide (or cause any transferor (former) servicer of any Mortgage Loans to provide) to Servicer, at no cost to Servicer:

(a) Before the applicable Transfer Date, copies of all Loan Documents, as well as all files, documents and records which are necessary or appropriate for Servicer to receive in order to conduct the servicing of the Mortgage Loans in accordance with Applicable Requirements, as indicated in Schedule II of the Transaction Addendum, with it being understood and acknowledged by the Parties that Servicer shall not receive and is not responsible for safeguarding Client’s original documents unless Servicer has specifically requested and received the same;

(b) applicable documentation for each Mortgage Loan to be serviced hereunder, to enable Servicer to convert or audit all required database fields and to continue servicing the Mortgage Loan on Servicer’s servicing system, without necessity of special enhancements, optional subsystems or special programming. All such documentation must be delivered to Servicer promptly after the related Transfer Date and, in all events, within a reasonable amount of time before any Client reporting is due from Servicer;

(c) if applicable and as soon as possible, a complete and accurate listing of any Mortgage Loans where the Mortgage Loan payment is inclusive of a personal or group insurance, in such detail as Servicer may reasonably require, including without limitation the name of the insurance company; type of premium coverage; premium amount; and the name and telephone number of the individual at Client knowledgeable of such coverage;

(d) written evidence (or appropriate electronic data confirming) that a Hazard Insurance policy is in force for each Mortgage Loan delivered to Servicer for servicing, allowing Servicer sufficient time, before policy expiration, to notify the Hazard Insurer to send all future notifications to or at the direction of Servicer. Lender will indemnify and hold Servicer harmless from any loss or damage resulting from lapse or insufficiency of Hazard Insurance coverage or insufficient evidence of coverage delivered to Servicer on or before the related Transfer Date; and

(e) for each Mortgage Loan to be serviced hereunder, all at Client’s cost, the transfer of any existing real estate tax service contracts and transferable life of loan flood zone determinations to Servicer. In the event that any real estate taxes or assessments in connection with a Mortgage Loan are delinquent at the time of, or would become delinquent if not paid within twenty (20) days after, the delivery of the related Mortgage File to Servicer, then in no event shall Servicer be responsible hereunder for any penalties or interest resulting from such delinquency.

(3.2) Default. lf. (i) Client shall fail to pay to Servicer any sums as and when due and payable to Servicer under this Agreement, whether as compensation, reimbursement or otherwise; or (ii) any secured party holding a security interest shall demand that Servicer pay over to that secured party any sums otherwise payable to Servicer under this Agreement; or (iii) Client shall be in default hereunder in any other material respect; then Servicer shall: (A) be entitled to set off, against its damages, all sums due from Servicer to Client hereunder including monthly remittances; and (B) have and may exercise all other remedies permitted by law for breach of contract.

(3.3) Compliance. During the Term of this Agreement, including any extensions hereof, Servicer agrees to comply with Applicable Requirements relating to the servicing of the Mortgage Loans that are the responsibility of Lender.

(3.4) No Advances. With the exception of advances required by law to be made by Servicer, and notwithstanding any other contrary provisions herein, the Parties acknowledge and agree that Servicer shall not be required to advance any of its own funds on behalf of others, with in the scope of the Services. For those advances made by Servicer, Client shall reimburse servicer for such advances within seven (7) Business Days of request; provided, that Servicer shall not make discretionary advances greater than $2,500 without the prior approval of Client.

(3.5) Document Custodians / Expenses. Client will select the document custodian and bear the entire cost of establishing and maintaining each document custodian regime required by Client or any other Investor with respect to any of the Mortgage Loans. To the maximum extent permissible under Applicable Requirements, Client will identify each document custodian to Servicer and instruct each custodian to cooperate with reasonable requests of Servicer, especially in connection with requests for documents or information to enable Servicer to process releases of paid in full Mortgage Loans.

(3.6) No Recourse to Servicer. Client agrees that in no event shall Servicer be liable for losses incurred by Client or any other Person in connection with the Mortgage Loans serviced hereunder, including without limitation losses incurred in connection with the default or foreclosure of such Mortgage Loans.

(3.7) Representations and Warranties. Client represents and warrants to Servicer, as of the date hereof and each Transfer Date, as follows: (i) Client is duly formed, validly existing, and has all requisite power and authority to enter into this Agreement and to perform the obligations required of it hereunder, (ii) Client’s execution and performance of this Agreement have been duly and validly authorized by all necessary corporate action, (iii) the execution and performance of this Agreement by Client does not and will not violate Client’s organizational documents, any material contracts of Client, or any Applicable Requirements, (iv) Client has complied with, and has not violated, any law, ordinance, requirement, regulation, rule or order applicable to its business or properties, the violation of which reasonably could be expected to materially and adversely affect the Mortgage Loans or the operations or financial condition of Client, (v) that Client owns the Mortgage Loans, which are valid, existing, and enforceable, or that Client is the lawful holder of the servicing rights to such valid, existing, and enforceable Mortgage Loans, or that Client is specifically authorized in writing to act on behalf of the individual(s) or entity(ies) that own such Mortgage Loans or the servicing rights thereto, in all cases free of any known fraud or wrongdoing.

(4.1) This Agreement shall begin on the date first set forth above. The appointment of Servicer as Servicing Agent hereunder shall continue until each Mortgage Loan is paid in full, servicing is transferred, or 30 days after either party to this Agreement gives written notice or email notice to the other of its intent to terminate this Agreement. On an individual Mortgage Loan basis, this Agreement shall terminate as to that Mortgage Loan when any of these events occur: (a) payment in full of the Mortgage Loan and reconveyance of the related Security Instrument securing the related Mortgage Loan; or (b) 30 days’ written notice by Servicer to Client; (c) 30 days’ written notice by Client to Servicer (unless a shorter period of time is permitted under certain circumstances as provided in this Agreement or applicable law). All rights and authority under this Agreement shall continue upon written authorization by the Client for Servicer to handle the property management and property liquidation resulting from foreclosure.

(4.2) Upon termination of this Agreement in its entirety or as to any one Mortgage Loan, Servicer shall deliver to Client all of Client’s funds (or if terminated only as to certain Mortgage Loan(s), all of Client’s funds relating to such Mortgage Loans), less any funds owing to Servicer. At termination of all Mortgage Loans or a terminated Mortgage Loan, Client shall reimburse Servicer for any outstanding advances approved by Client as provided herein made within seven (7) days upon written demand by Servicer to Client.

(4.3) If Client terminates or transfers servicing on any of the Mortgage Loans subject to this Agreement to another party or servicer other than Servicer, Client must first pay in full all servicing and related fees due Servicer and an additional transfer fee as set forth in Exhibit A hereto, then Servicer will create and send the corresponding RESPA “goodbye” letters, Master Reports, and transfer relevant escrow/impound amounts. Additional requests may be subject to customary and reasonable additional charges. This transfer fee does not apply to Mortgage Loans that are paid off or sold by Client. If any Mortgage Loan being serviced by Servicer is government regulated, such as an existing HAMP loan, then Servicer will only transfer beneficial interest in the Mortgage Loan and/or servicing to a Lender and/or servicer meeting the regulatory requirements. Servicer’s compensation in any area is subject to change upon 30 days written notice to Client; Client may avoid changes by terminating this Agreement in writing at any time during said 30 day period, and Client shall not be liable for the foregoing transfer fee. Invoices to Client for services provided by Servicer, or arranged through Servicer, are due upon receipt and payable within 20 days, after which time they will be considered delinquent and subject to a 10% past due charge; provided, however, that if Client disputes any amounts reflected in such invoices, Client and Servicer agree to work together in good faith to resolve such disputes. If Client’s account becomes delinquent, all activities of Servicer on behalf of Client may cease.

(4.4) Servicers Right of Interpretation. In accordance with various and changing State and/or Federal Laws, State and/or Federal Case Law, and Servicer’s interpretation of such laws, proper procedures and risks, Servicer reserves the right to: (a) determine how any advances and/or late charges are assessed and to adjust all unpaid late charges or assessments of late charges accordingly; (b) apply the default interest rate only after the foreclosure has been recorded on owner occupied Mortgage Loans, and apply the default interest rate normally after the foreclosure has been recorded on non-owner occupied Mortgage Loans; or (c) determine the interpretation and application of other terms and conditions of the Note. By continuing to hire Servicer to service the Mortgage Loan, Client agrees that Servicer may decline to enforce certain provisions of the Note as noted above. By declining enforcement of certain provisions, Servicer may effectively waive those provisions on behalf of Client. Client agrees to such waiver by continual hire of Servicer and shall have no cause of action against Servicer due to Servicer’s determination not to act in accordance with this section. If Servicer determines that a Mortgage Loan is predatory in nature, or the Mortgage Loan does not comply with federal or state requirements, or at any time during servicing of the Mortgage Loan becomes predatory in nature or does not comply with federal or state requirements, Servicer can refuse lo accept the Mortgage Loan for servicing or can cancel any existing servicing or functions by Servicer related to the Mortgage Loan as provided above by giving thirty (30) day’s written notice. Servicer reserves the right not to pursue or continue any foreclosure on any asset it services if Servicer reasonably believes that foreclosure, or the terms and conditions provided or established by Client, will violate state or federal law or company policy.

Client or its custodian shall retain custody of the original Note and Deed of Trust or Mortgage for the Mortgage Loans (or assignment thereof), unless Servicer is specifically authorized by Client and agrees to retain such documentation. If Servicer is required to maintain custody of the original Note and Security Instruments for the Mortgage Loans (or assignment thereof), there will be an additional fee payable to Servicer for this service as set forth in Exhibit A.

Client may make such advances that are necessary and prudent to protect, and to collect, Client’s interest in the Loans. Client shall immediately notify Servicer in writing or by email of any such advances made by Client. As a normal course of business, Servicer will not advance any funds on behalf of Client or any other person or entity unless mandated by law.

Servicer shall in accordance with industry standards and applicable laws, rules and regulations: (a) issue monthly statements to the Mortgagor on each Mortgage Loan directing loan repayment to Servicer; (b) make regular collection calls to the Mortgagor; (c) issue Late Notices calculating in any late fees due; (d) issue Final Notices warning of the possibility of foreclosure if payment is not received; (e) obtain property values and title information as agreed; (f) on Mortgage Loans that do not use the Optional Escrow/Impounds service, notify Client of any known, actual or pending ineffectiveness of insurance on Mortgage Loans that Client has related insurance coverage, and Client files a Loss Payee Notice with the insurer listing both Client and Servicer for notice, however Servicer will not provide forced placed insurance, but can refer Client to an independent insurance provider for direct placement, and Servicer is not responsible for the consequences of any nonpayment of insurance; (g) on Mortgage Loans that do not use the Optional Escrow/Impounds service, receive notices of property tax delinquencies and notify Client of any known nonpayment of taxes if Client has signed up for a Tax Service and listed Client and Servicer for notices of nonpayment of taxes, however Servicer is not responsible for the consequences of any non-payment of taxes; (h) use active collection efforts including outgoing collection calls at least three times at different hours on different days each month as needed to contact Mortgagor (unless satisfactory arrangements have been made), skip trace, letters of understanding, facilitate loan modification agreements at direction of Lender, facilitate forbearance agreements at direction of Lender, facilitate short payoffs at direction of Lender, facilitate short sale coordination at direction of Lender, as mutually agreed; (i) coordinate bankruptcy relief and legal issue resolution (including retention of outside legal counsel, direction of legal strategy, oversight of legal logistics or foreclosures, bankruptcies, real estate owned (“REO”) management and property disposition, property preservation, and related actions) as agreed; (j) address known city/municipal notices and issues; (k) manage property preservation and securing as mutually agreed by Client and Servicer; (l) coordinate REO property management, evictions and property sale as mutually agreed by Client and Servicer; (m) issue payoff demands, beneficiary statements and mortgage ratings; (n) demand, receive and collect all loan payments, deposit them by the next Business Day into Servicer’s trust account and upon sufficient time to clear funds, transfer by bank wire (ACH) or check Lender’s and/or Client’s share of such funds (net proceeds) in accordance with instructions provided to Servicer, normally within ten (10) days of receipt or upon sufficient time to clear funds (but not more than twenty-five (25) days from the time funds have been cleared); (o) issue annual income tax statements (1098 and 1099-INT) to all Mortgagors and Lenders; (p) answer Mortgagor inquiries, demands and requests; (q) execute and deliver on Client’s behalf and in Client’s name any documents necessary or convenient for the exercise of any rights or duties which Client may have as servicing agent under the Security Instruments, including but not limited to preparing and issuing Requests for Reconveyance or Release, recording a Full or Partial Reconveyance or Release and Beneficiary Statements as permitted by law; (r) convey Payoff Demands within two (2) Business Days of receipt by Servicer to Client for written or email approval, and if Client’s written or email approval is not received by Servicer within the following two (2) Business Days, Servicer shall possess the right to assume the Payoff Demand to be correct and accept it; and (s) with the consent of the Client, Servicer shall process foreclosures when directed to do so in writing or by email and provide Client with copies of the notice of default (if appropriate) and the notice of sale filed by Servicer, and will have authority to act on behalf of the Client or Lenders to execute all foreclosure documents including, but not limited to, Substitution of Trustee. Servicer may produce a copy of this Agreement as evidence of its authority. When Mortgage Loans submitted as delinquent are brought current, they will automatically be switched to the Performing Loan Program.

Servicer reserves the right to subcontract from time to time with, and use the services of, one or more outsource firms to perform the duties of Servicer described herein. Client agrees: (i) to exert its best efforts to support Servicer, to assure timely reparation, execution, recording and filing of appropriate release, satisfaction and reconveyance documents; and (ii) from time to time, at Servicer’s request, to adopt appropriate resolutions appointing designated officers of Servicer and Servicer-designated officers of such firms as duly authorized signing officers of Client: (A) to request necessary documents from Client’s document custodians; and (B) to execute and record appropriate reconveyance, release, satisfaction and reconveyance documents, provided in each instance that Servicer has provided reasonable background information (including resumes) and has performed reasonable due diligence activities (including background checks) on Servicer’s designees.

For its services, Servicer shall earn servicing fees according to the attached Exhibit A. Servicer will retain: (a) all fees for payoff demand statements and related documents, and returned check charges, if applicable; (b) 100% of the standard monthly loan servicing fee based on each and every Mortgage Loan as long as the Mortgage Loan is in Servicer’s servicing system, including during the foreclosure process, bankruptcy relief, the REO sales process, and payment process. The monthly servicing fee earned by Servicer and all hard costs incurred in the normal transaction of business, including but not limited to actual attorney’s fees, foreclosure costs, property valuations, title fees, property preservation costs, municipal charges, taxes, and agent fees may be deducted from Client or Lender’s proceeds, charged to a Client Credit Card kept on file by Servicer, deducted from an established expense Reserve Account, or may be billed separately, as determined by Servicer. All hard costs in excess of $100 must be approved by Client in writing, or by email, before being incurred by Servicer. Extraordinary activity and special requests may be subject to reasonable additional charges. Servicer’s compensation is subject to change upon 30 days written notice to Client; Client and Lenders may avoid changes by terminating this Agreement in writing at any time during said 30 day period. Fees for certain documents and services, if available, will be charged according to Exhibit A hereto.

Mortgage Loans that are new or performing on the applicable Transfer Date will be started under the Performing Loan program. If required information is supplied and associated fees are paid, in addition to the items in Section 7 a, b, c, l, m, n, o, p, q, r and s Servicer shall: (a) on Mortgage Loans that do not use the Optional Escrow/Impounds service, notify Client of any known, actual or pending ineffectiveness of insurance on Mortgage Loans that Client has related insurance coverage, and Client files a loss Payee Notice with the insurer listing both Client and Servicer for notice, however Servicer will not provide forced placed insurance, but can refer Client to an independent insurance provider for direct placement, and Servicer is not responsible for the consequences of any non-payment of insurance; (b) on Mortgage Loans that do not use the Optional Escrow/Impounds service, receive notices of property tax delinquencies and notify Client of any known nonpayment of taxes if Client has signed up for a Tax Service and listed Client and Servicer for notices of nonpayment of taxes, however Servicer is not responsible for the consequences of any nonpayment of taxes; (c) attempt at least once to contact Mortgagor at any of the phone numbers in Servicer’s file if Mortgage Loan is over 15 days delinquent (unless satisfactory arrangements have been made). Mortgage Loans under the Performing Loan program that do not make payments for 2 months will automatically be switched to the Delinquent Loan Program when they miss the 3rd payment, and present and past due uncollected servicing fees and the Delinquent Loan Program servicing fees will be charged.

For its services, Servicer shall earn a servicing fee on each Mortgage Loan in the Servicer’s system that qualifies as performing as set forth in Exhibit A attached. Additionally, Servicer shall be entitled to: (a) all fees for payoff demand statements and related documents, returned check charges, if applicable; (b) 100% of paid monthly late charges; (c) 100% of the standard monthly Mortgage Loan servicing fee during the foreclosure process. The monthly servicing fee earned by Servicer and all hard costs incurred in the normal transaction of business, including but not limited to actual attorney’s fees, foreclosure costs, property valuations, title fees, property preservation costs, municipal charges, taxes, and agent fees may be deducted from Client or Lender’s proceeds, charged to a Client Credit Card kept on file by Servicer, deducted from an established expense Reserve Account, or may be billed separately, as determined by Servicer. Extraordinary activity and special requests may be subject to reasonable additional charges. Servicer’s compensation is subject to change upon 30 days written notice to Client; Client may avoid changes by terminating this Agreement in writing at any time during said 30 day period. Fees for certain documents and services, if available, will be charged according to Exhibit A hereto.

(11.1) To the extent required by the Loan Documents, Client may request Servicer to provide the following property insurance and property tax service for first position Mortgage Loans in accordance with the fees structure set forth in Exhibit A hereto. This fee will be added to the monthly loan servicing fee and prorated to the respective Lenders, if appropriate. If this optional service is requested in writing or by email by Client and accepted in writing or by email by Servicer, and if all required information is supplied per the Land Home Financial Services Loan Servicing Checklist, and associated fees are paid, when the Mortgagor’s monthly payment includes amounts for the payment of insurance and/or property taxes, Servicer will collect and hold those proceeds in a trust account insured by the Federal Deposit Insurance Corporation and disburse the scheduled payments to the respective authority as scheduled. Any funds remaining in the account after full repayment of the Mortgage Loan shall be released to the Mortgagor. Client may direct Servicer, upon acceleration of the Mortgage Loan due to default, in Client’s sole subjective discretion, subject to any applicable law, including RESPA which may prohibit such direction, how to apply the funds it receives toward reduction of the amount owed under the Loan Documents (applied to advances, principal, interest or other expenses, in the Servicer’s sole discretion), completion of any work on the property securing the Mortgage Loan, protection of the property or other purposes permitted by this Agreement, the Loan Documents or law, or any combination thereof. Servicer accepts no responsibility for the consequences of incorrect information supplied by Client or Lender. Servicer is not responsible for the consequences of any non-payment of insurance or property taxes. If any interest on the balances aggregated is required by applicable law to be paid to the Mortgagor for impounding Mortgagor’s monies, Client will be responsible to pay such interest on demand by Servicer. If a Mortgagor’s escrow funds are insufficient to pay insurance and/or property taxes, Client shall immediately advance to Service. if as escrow account funds sufficient to cover the shortage; Client’s failure to do so may jeopardize Client’s lien position due to the failure of insurance and/or property taxes, and Servicer accepts no responsibility for Client’s failure to make such an advance provided such failure was not the result of an act or omission of Servicer or its agents, employees or vendors. Whenever possible, Client’s advance will be recovered from Mortgagor’s subsequent payments into escrow for insurance and/or property taxes proceeds.

(11.1.1) Insurance and Taxes. If the Mortgagor’s monthly payment does not include amounts for the payment of insurance and/or properly taxes, it is the responsibility of the Client to: a) verify insurance coverage annually and send copies of insurance coverage to the Servicer, however Servicer is not responsible for the consequences of any non-payment of insurance; b) check for payment of taxes annually or use a Tax Service; Servicer may receive notices of property tax delinquencies and notify Client of any known nonpayment of taxes if Client has signed up for a Tax Service and listed Client and Servicer for notices of nonpayment of taxes, however Servicer is not responsible for the consequences of any non-payment of taxes. Servicer accepts no responsibility for the consequences of incorrect information supplied by Client.

(11.1.2) Optional REO MANAGEMENT & SALES SERVICE. Servicer or affiliate of Servicer can provide REO management and sales service for most properties for an industry standard 6% listing per property in accordance with Exhibit A hereto. Certain properties deemed by Servicer as not fitting the norm may be negotiated separately with Client, and acceptance of any order is at the sole discretion of Servicer. Client must request this service in writing or by email per property and return a signed REO Servicing Authorization form to be supplied by Servicer. There is a $1000.00 deposit (“the Deposit”) required with each REO order unless Client maintains a reserve account with Servicer. There is a $200.00 cancellation fee and possible expenses that will be applied against the Deposit if the order is cancelled after submission to Servicer and before the end of the listing period, unless there is gross negligence on the part of the listing agent or Servicer, with any balance being refunded to Client within twenty-five (25) days of file closing. If the property is sold and finalized, the Deposit will be credited against fees due. If the listing expires without sale, the Deposit will be refunded within twenty-five (25) days of listing expiration date.

Client acknowledges that Servicer has no obligation, other than described elsewhere in this Agreement, to make any payment (other than the forwarding of a Mortgagor’s payment) to or on behalf of Client, to senior liens or to otherwise protect or enforce the Client’s security or rights hereunder. In the event any payment collected for the benefit of Client is returned NSF or uncollectible in Servicer’s Trust Account, Client will immediately upon notification from Servicer, return Servicer’s uncashed Trust Check, or immediately reimburse Servicer’s Trust Account the full amount received from Servicer’s Trust Check. In no event is Servicer obligated to cover or make good Mortgagor’s shortages in Servicer’s Trust Account. Servicer is hereby authorized to place a “Stop Payment” on Client’s Trust Check from Servicer, or reverse any ACH (Electronic Funds Transfer) whenever the representing funds are returned NSF or uncollectible in Servicer’s Trust Account. Servicer may deduct such amounts from any proceeds due Lenders. Servicer is not liable for any losses related to loan adjustments from variable rate, HELOC, or other similar type loans, or changes in loan terms due to modification, unless notified in writing by the Client of the adjustment. Changes shall become effective no sooner than two weeks after this notification is received by Servicer. Servicer does not offer senior lien monitoring, but can refer Client to an independent service provider. Client is responsible on junior liens for verifying insurance coverage and tax payments with senior liens. It is the responsibility of the Client to track maturity dates and, if desired, request Servicer to prepare a Maturity Notice (at the end of the mortgage period) lo the Mortgagor for a fee. It is the responsibility of the Client to periodically monitor mortgage loan data, Mortgagor payments and servicing activity by reading the monthly report sent by Servicer. If Client requires or requests additional reporting beyond what is provided by Servicer using its standard reporting and web login, there will be additional reasonable charges for setup, custom report templates, programming, maintenance, and regular distribution of such information.

(a) Notwithstanding anything to the contrary herein, Servicer shall be fully authorized by Client to prepare, execute and record all documentation required to release property liens on behalf of Client, following negotiated settlements with borrowers, and other authorized resolutions.

Indemnification by Servicer. Servicer shall indemnify, defend and hold Client and its Representatives, Affiliates, successors and assigns harmless from any and all claims, demands, causes of action, losses, damage, fines, penalties, liabilities, costs and expenses, including reasonable attorney’s fees and court costs, sustained or incurred by Client by reason of or arising directly from third party claims that were caused by or resulted from the Servicer or its subservicer’s malfeasance, willful misconduct, negligence, breach of Servicer’s representations and warranties in this Agreement, or a failure by Servicer to act in compliance with the terms of this Agreement, except where Servicer’s actions or omissions were pursuant to a directive of Client or were affected by a failure of Client or any prior servicer, sub-servicer, owner or originator of a Mortgage Loan to comply with Applicable Requirements. Servicer shall have no obligation to correct any errors or omissions of an originator or prior servicer of a Mortgage Loan unless specifically requested to do so in writing by Client, and then only if the Parties, negotiating in good faith, can agree in writing on a reasonable fee for such service. The foregoing indemnification shall survive the termination of this Agreement.

Indemnification by Client. Client shall indemnify, defend and hold Servicer and its Representatives, Affiliates, successors and assigns harmless from any and all claims, demands, causes of action, losses, damage, fines, penalties, liabilities, costs and expenses, including reasonable attorney’s fees and court costs, sustained or incurred by Servicer by reason of or arising directly from third party claims or actions that were caused by or resulted from (A) any actions or omissions in respect of any Mortgage Loan or property of any prior servicer, subservicer, owner or originator of a Mortgage Loan or property, (B) taking any action, or refraining from taking any action, with respect to any Mortgage Loan or property, that results from the malfeasance, willful misconduct or negligence of Client, Client’s subservicers, contractors, or agents, or from the failure of the Client to provide Servicer the necessary Loan Documents in order to allow Servicer sufficient lime to timely process satisfactions, payoffs and releases, (C) Servicer’s reliance on the authority of Client to direct the activity of Servicer within the scope of this Agreement, (D) Client’s failure to observe or perform any of Client’s covenants, agreements, or representations contained in this Agreement, and/or (E) Client’s failure to comply with its regulatory obligations following Client advising Servicer that such regulatory obligation is outside the scope of the Servicer’s services. The foregoing indemnification shall survive the termination of this Agreement.

(14.1) Each Party’s obligation to indemnify the other hereunder with respect to any claim of a Mortgagor, Investor or other third party shall be conditioned upon the following: (i) the Party seeking indemnity (the “Indemnitee”) shall give to the Party from whom indemnity is sought (the “Indemnitor”) prompt written notice of any such claim and shall provide such detail as the Indemnitor may reasonably require; (ii) the Indemnitee shall reasonably cooperate in the defense of such action; (iii) the Indemnitor shall have full control and authority to retain counsel of its choice, defend and settle any such action or claim at its sole expense provided, however, that where the settlement is for more than monetary relief alone, the Indemnitor shall not have the right to bind Indemnitee to a settlement agreement, without the prior written consent of the Indemnitee, which consent shall not be unreasonably withheld, under which a) the Indemnitee will be required to make an admission of wrongdoing; or b) an admission of wrongdoing by Indemnitor on Indemnitee’s behalf could be reasonably inferred or construed.

(14.2) No provision of, or the exercise of any right(s) under this Section 14 shall limit the right of any Party in appropriate circumstances to: (i) exercise self-help remedies such as set-off; (ii) foreclosure against any real or personal property collateral; (iii) obtain provisional or ancillary remedies such as injunctive relief or the appointment of a receiver from any court having jurisdiction before, during or after the pendency of any arbitration. The institution and maintenance of an action for provisional remedies or pursuit of provisional or ancillary remedies or the exercise of self-help remedies shall not constitute a waiver of the right of any Party to submit the controversy or claim to arbitration. Each Party hereby consents to the exclusive jurisdiction and venue of the state court and federal district court in the Stale of California for any provisional or ancillary relief sought pursuant to this Section and irrevocably waives all claims of immunity from jurisdiction and any right lo object on the basis that any proceeding for such relief has been brought in an improper or inconvenient venue or forum. The Parties each hereby knowingly, voluntarily, and intentionally waive the right each may have to a trial by jury in respect of any litigation based hereon, or arising out of, under or in connection with this or any action of either Party. This provision is a material inducement for Parties entering into this Agreement.

Servicer represents and warrants to Client that ii. any agent, employee, or any vendor hired by Servicer, holds all required and applicable federal, state and/or local licenses, certificates and other permits as may be necessary to conduct the activities required by its engagement and this Agreement and that the Servicer’s performance of such services will not conflict with or violate any applicable agreement, law or regulation applicable to the Servicer. Servicer further represents and warrants to Client that it is and will continue to be in compliance with all applicable federal, state and local laws, ordinances and regulations pertaining to its business. Servicer further represents and warrants to Client that it is not subject to any court or administrative judgments, orders, injunctions and/or rulings which would have an adverse effect on its ability to service the Mortgage Loans and perform under this Agreement. Servicer further represents and warrants to Client that neither the Servicer nor any of its directors, officers or principals have been sued by any of the Servicer’s present or former clients, partners, co-ventures or other persons and that the Servicer is not involved in any litigation which if resolved adversely to the Servicer would negatively impact its ability to perform its obligations hereunder. Client represents and warrants to Servicer that it, any agent, employee, or any vendor hired by Client, holds all required and applicable federal, state and/or local licenses, certificates and other permits as may be necessary to conduct the activities required for Client to receive payments and proceeds collected by Servicer.

15.1 Data. Servicer shall maintain (a) off site backup storage for the data files used in connection with the services provided under this Agreement and (b) customary security to protect client’s proprietary information.

At all times during the term of this Agreement, Servicer shall be an independent contractor and not an employee of Client. Client shall not have the right to control the means by which Servicer accomplishes its services and duties pursuant to this Agreement. Servicer shall, at its sole cost and expense, furnish all facilities, materials and equipment that may be required for furnishing services pursuant to this Agreement.

Except as otherwise provided herein or as Client may specify in writing, Servicer shall have no authority, express or implied, to act on behalf of Client in any capacity whatsoever as an agent. Except as otherwise provided herein or as Client may specify in writing, Servicer shall have no authority, express or implied, to bind Client to any obligation whatsoever.

Servicer reserves the right to subcontract from time to time with, and use the services of, one or more outsource firms including, but not limited to law firms and real estate brokers, to perform the duties of Servicer as described in herein.

During the performance of this Agreement, Servicer agrees as follows:

a. Servicer shall not discriminate against any employee or applicant for employment because of race, color, religion, sex, national origin or mental or physical disability. Servicer shall ensure that applicants are employed and that employees are treated during employment without regard to their race, color, religion, sex, national origin, or mental or physical disability. Such actions shall include, but not be limited to the following: employment upgrading, demotion or transfer, recruitment or recruitment advertising, layoff or termination, rates of pay or other forms of compensation and selection for training, including apprenticeship. Servicer agrees to post in conspicuous places, available to employees and applicants for employment, a notice setting forth provisions of this non-discrimination clause.

b. Servicer shall, in all solicitations and advertisements for employees placed by, or on behalf of Servicer, state that all qualified applicants will receive consideration for employment without regard to their race, color, religion, sex, national origin, or mental or physical disability.

c. Servicer shall cause the foregoing paragraphs (a) and (b) to be inserted in all subcontracts for any work covered by this Agreement, provided that the foregoing provisions shall not apply to subcontracts for standard commercial supplies or raw materials.

Servicer agrees that it shall not make, participate in the making, or in any way attempt to use its position to influence any decision of Client in which Servicer knows or has reason to know that Servicer. its officers, partners, or employees have a financial interest as defined in Section 87103 of the California Government Code.

Servicer shall carry workers compensation insurance as required by law for the protection of its employees during the progress of the work.

Servicer shall be knowledgeable of and comply with all local, state and federal laws, rules and regulations that may apply to the performance of this Agreement.

This Agreement shall be construed in accordance with and governed by the laws of the State of California and Servicer and Client agree to submit to the jurisdiction of California courts sitting in the County of Orange.

No waiver of any of the terms of this Agreement or any Transaction Addendum will be valid unless in writing and designated as such. Any waiver by any party or a breach of any provision of this Agreement shall be in writing and will not operate as or be construed to be a waiver of any other breach of such provision or any other provision of this Agreement will not be considered a waiver or deprive any party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. In addition, in granting any waiver, the waiving party will exercise its best efforts to ensure that all Parties continue to have substantially equivalent rights, benefits, privileges, duties and responsibilities. Any forbearance or delay on the part of either party in enforcing any of its rights under this Agreement will not be construed as a waiver of such right lo enforce same for such occurrence or any other occurrence.

The Servicer acknowledges and agrees that Client and its Affiliates possess and will possess information, whether or not in writing or other tangible form, that is disclosed to or learned by Servicer as a consequence of or through performance of the Services, whether or not related to the Servicer’s specific work that is non-public information important to Client’s business, including the names and addresses of the Mortgagors (“Confidential Information”). As used herein, “Applicable Privacy Law” means the Gramm-Leach-Bliley Act, 15 U.S.C. §§ 6801-6827, lnteragency Guidelines Establishing Information Security Standards, 12 C.F.R. Part 570, Appendix B, and other applicable law regarding privacy.

Servicer will take all of the following measures to protect the confidentiality of the Confidential Information:

(a) Servicer will not disclose any of Client’s Confidential Information except as required by Applicable Requirements or with the prior authorization of Client.

(b) Servicer will safeguard Client’s Confidential Information with the same degree of care to avoid unauthorized disclosure as it uses lo protect its own Confidential Information of a similar nature, but in any event, no less than reasonable care, which necessarily includes the care required by Applicable Privatty Law.

(c) Servicer will not use (or assist or permit any other person to use) any of the Confidential Information for any purpose other than in furtherance of the performance of its duties as Servicer.

(e) Servicer will maintain all consumer information subject to Applicable Privacy Law in accordance with standards required by Applicable Privacy Law.

This Agreement and any addendum, exhibit or schedule hereto may be executed in any number of counterparts and by different parties hereto in separate counterparts each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. This Agreement may also be executed and delivered by way of facsimile or email. Photo static copies of this Agreement have the same force and effect as an original of this Agreement.

This Agreement constitutes the entire agreement of the parties. No other agreement, oral or written, pertaining to the work to be performed under this Agreement shall be of any force or effect unless it is in writing and signed by both parties. Any work performed that is inconsistent with or in violation of the provisions of this Agreement shall not be compensated. This Agreement may be modified only by a written agreement signed by each of the parties hereto. Notwithstanding the above, amendments to this Agreement, its exhibits or schedules, may take the form of electronic communication between the Parties, as provided in the Notice provision of this Agreement.

If any provision of this Agreement is held to be invalid or unenforceable under any applicable statute or rule of law, then that provision shall be curtailed and limited only lo the extent necessary to bring said provision within the legal requirements and this Agreement as so modified shall continue in full force and effect.

The headings of the various sections and paragraphs of this Agreement have been inserted for convenience and reference only and shall not be deemed to be part of this Agreement.

Without the prior written consent of Client, Servicer agrees not to disclose the identity of Client or its Affiliates or any of their directors, officers, managers, employees, Servicers or agents as a customer or prospective customer of

Servicer, or the existence or nature of this Agreement. Neither the Servicer nor Client, nor their respective Representatives, shall disseminate any oral or written advertisement, endorsement or other marketing material relating to each other’s activities under this Agreement without the prior written approval of the other party. No Party hereto will use the name, mark or logo of the other party in any advertisement or printed solicitation without first having prior written approval of the other party. The parties hereto shall take reasonable efforts to ensure that its vendors shall not disseminate any oral or written advertisement, endorsement or other marketing materials referencing or relating to the other Party without that Party’s prior written approval.

Except at otherwise provided in Sections 13 and 14, if Servicer is served with a Summons and Complaint which requires Servicer to appear in person and/or give testimony on behalf of Client for any legal action against Client, Servicer is to be reimbursed for any reasonable litigation response costs, fees and expenses, including, but not limited to, hotel, airline, meals and car rental. Servicer is to be paid $150.00 per normal business hour from the Servicer’s main office per employee needed. Client shall not be responsible for any such costs and fees if the appearance is a result or related to Servicer’s act or activity that were not a direct result of Client’s instructions or not within the scope of the Servicer’s services contemplated under this Agreement. Servicer shall provide in writing to Client a detailed invoice outlining all items and charges lo be paid by Client.

Client represents to Servicer that, if the Client is acting as a servicer, sub servicer or agent of private Lenders, that Client has informed Lenders of its choice in outsourcing the servicing to Servicer and that both Client and private Lenders, if any, are jointly and severally liable for the payment of Servicer’s fees only if the Client has not paid Servicer’s fees in connection with the Mortgage Loan or Mortgaged Premises.

Except to the extent the validity of the Mortgage Loan is adversely affected or caused by Servicer or its representatives, Servicer is not responsible to Client, its successors, assigns, Lenders, or any other third party for the validity of the Mortgage Loan submitted by Client, including without limitation, (a) the Loan Documents, including notes, deeds/mortgages, or assignments, (b) whether the Mortgage Loan is a valid, enforceable or existing lien on the property, (c) the enforceability of the Mortgage Loan against the Mortgagor, (d) or any regulatory compliance or violation of any other state or federal laws, including without limitation the Real Estate Settlement Practices Act and the Truth in-Lending Act that occurred before the transfer of servicing rights and obligations to Servicer. Under no circumstances will Servicer be responsible for any indirect, incidental, special, punitive, or consequential damages.

Except as otherwise provided herein, all notices required under this Agreement shall be in writing and delivered personally or by facsimile, email or by overnight delivery service or by first class mail, postage prepaid, to each party at the address listed below. Either party may change the notice address by notifying the other party in writing. Notices shall be deemed received upon receipt, electronic confirmation of delivery as to facsimile or email notices, or Three (3) days after deposit in the U. S. Mail, whichever is applicable.

(35.1) If a dispute arises out of, or relates to this Agreement, the dispute shall be decided by general reference procedures pursuant to California Code of Civil Procedure Section 638. The general reference shall be commenced by a request or a motion filed with the clerk or presiding judge of the Superior Court of the County of Orange, with a copy served on the other party, pursuant to Code of Civil Procedure Section 638. Any such request or motion shall include a copy of this Agreement. Except to the extent modified herein, the reference shall be conducted in accordance with California law including, but not limited to, the California Code of Civil Procedure and California Evidence Code. Any general reference shall be commenced within the period specified by the applicable statute of limitation for the claim(s) made. All general reference proceedings hereunder shall, unless all parties thereto otherwise agree in writing, be conducted in a mutually agreeable location in the County of Orange, State of California.

(35.2) Subject to an award of fees and costs to the prevailing party in the general reference, each party shall pay one half of the expenses of the general reference at the rate set by the Court pursuant lo Code of Civil Procedure Sections 645.1 and 1023. The referee(s) shall not have the right to convene a jury to be the trier of fact of any controversy hereunder. BOTH PARTIES HEREBY WAIVE A JURY TRIAL IN CONNECTION WITH ANY DISPUTE ARISING OUT OF THIS AGREEMENT.

(35.3) No reference arising out of or relating to this Agreement shall include, by consolidation, joinder with or in any other manner, an additional person or entity not a part to this Agreement except by written consent containing a specific reference to this Agreement by both parties hereto unless ordered by a court of competent jurisdiction. Consent to a reference involving an additional person or entity shall not constitute consent to a reference of any claim, dispute or other matter in question not described in the written consent or with a person or entity not named or described therein,

(35.4) The parties agree that the referee shall be a member of the American Arbitration Association, and be empowered to award to the prevailing party a reimbursement of costs of the general reference, including, without limitation, attorney’s fees, expert fees, fees assessed by the referee and the referees compensation.

(35.5) BY EXECUTING THIS AGREEMENT, YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THIS AGREEMENT DECIDED BY A GENERAL REFERENCE PROCEEDING, WITH A REFEREE AND NOT AN ACTIVE JUDGE, AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR BEFORE A JURY. IF YOU REFUSE TO SUBMIT TO A GENERAL REFERENCE PROCEEDING AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO PARTICIPATE IN THE GENERAL REFERENCE PROCEEDING UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE.

(a) Servicer shall have exclusive title and ownership rights, including all Intellectual Property rights, throughout the world in all Work Product and Intellectual Property. This Section 36 (Work Product”) and the references incorporated herein shall survive the term of this Agreement.

(b) Client agrees, and will cause its Representatives and Affiliates to agree, that nothing relating to the Services, or related to any Intellectual Property or Work Product, shall be considered a work made for hire within the meaning of Title 17 of the United States Code. Client automatically assigns, and shall cause its Representatives and Affiliates, as appropriate, to assign, at the time of creation and without any requirement of future consideration, any right, title, or interest it or they may have in any Work Product or Intellectual Property, including any patent applications, patents, copyrights, or other Intellectual Property rights. Upon request of the Servicer, Client shall take such further action, arid shall cause its Representatives and/or Affiliates to take such further action, including the execution and delivery of instruments of conveyance, as the Servicer reasonably may deem appropriate to give full and proper effect to such assignment This section shall survive the term of this Agreement.

(C) All uses of any trademarks, service marks and trade names in the Work Product or in the performance of the Services, and the goodwill associated therewith, whether by Servicer or third parties, inures and will inure to the benefit of Servicer. Servicer hereby grants Client and its Affiliates an irrevocable, unrestricted, non-exclusive, paid-up, perpetual, worldwide license to use, duplicate, distribute and display any Work Product so as to enable the full use and/or benefit of the Work Product, provided that Client or its Affiliate obtains the prior written consent of the Servicer for any use contemplated by this Section 36(c), which consent shall not be unreasonably withheld. The license granted by this Section 36(c) shall survive by one (1) year any termination of this Agreement or any Transaction Addendum,

This Agreement is non-exclusive and each Party may in their sole discretion enter into arrangements with third parties that are not in conflict with this Agreement.

Servicer will accept direction only from the following authorized Client employees /officers / designated personnel: _______________________. Client’s authorized representatives and officers may execute documents as authorized by Client.

Third party service providers including, but not limited to the following, will be chosen by mutual agreement of the Client and Servicer, retained and paid by the Servicer, all such payments to be reimbursed by the Client: