Related Party Transactions

6 Months Ended

Jun. 30, 2012

Related Party Transactions [Abstract]

Related Party Transactions

2.  Related Party Transactions

We maintain most of our cash funds at ECCU, our largest equity investor. Total funds held with ECCU were $16.0 million and $10.9 million at June 30, 2012 and December 31, 2011, respectively. Interest earned on funds held with ECCU totaled $74.4 thousand and $46.1 thousand for the six months ended June 30, 2012 and 2011, respectively.

We lease physical facilities and purchase other services from ECCU pursuant to a written lease and services agreement. Charges of $57.8 thousand and $56.4 thousand for the six months ended June 30, 2012 and 2011, respectively, were incurred for these services and are included in office operations expense. The method used to arrive at the periodic charge is based on the fair market value of services provided.  We believe that this method is reasonable.

From time to time, we purchase mortgage loans, including loan participation interests from ECCU, our largest equity owner.  During the six month period ended June 30, 2012, we purchased $4.0 million of loans from ECCU.  We did not purchase any loans from ECCU during the six months ended June 30, 2011.  With regards to all loans purchased from ECCU, we recognized $2.8 million and $4.0 million of interest income during the six months ended June 30, 2012 and 2011, respectively.  ECCU currently acts as the servicer for 77 of the 125 loans in the Company’s loan portfolio.  Per the loan servicing agreement with ECCU, a servicing fee of 50 to 65 basis points is deducted from the interest payments the Company receives on the wholly-owned loans ECCU services for the Company.  In lieu of a servicing fee, loan participations the Company purchases from ECCU generally have pass-through rates which are 50 to 75 basis points lower than the loan’s contractual rate.  On a limited number of loan participation interests purchased from ECCU, representing $8.1 million of loans at June 30, 2012, the pass-through rate is between 88 and 225 basis points lower than the contractual rate.  The Company negotiates the pass-through interest rates with ECCU on a loan by loan basis.  At June 30, 2012, the Company’s investment in wholly-owned loans serviced by ECCU totaled $51.1 million, while the Company’s investment in loan participations serviced by ECCU totaled $45.5 million.  From time to time, the Company pays fees for additional services ECCU provides for servicing these loans.  We paid less than one thousand dollars of these fees during the six months ended June 30, 2012 and we did not pay any of these fees during the six months ended June 30, 2011.

ECCU has also repurchased mortgage loans from us as part of our liquidity management practices.  In addition, ECCU has from time to time repurchased from the Company fractional participations in the loan investments which ECCU already services, usually around 1% of the loan balance, to facilitate compliance with National Credit Union Association (“NCUA”) rules when participations in those loans were sold to federal credit unions.  Each sale or purchase of a mortgage loan investment or participation interest with ECCU was consummated under a Related Party Transaction Policy adopted by the Company’s Board.  No gain or loss was incurred on these sales.  No whole loans or loan participations were sold to ECCU during the six months ended June 30, 2012 and 2011, respectively.

Other Related Party Transactions

On December 28, 2011, we entered into a Loan Purchase Agreement with ECCU, pursuant to which ECCU agreed to repurchase two of our impaired mortgage loan interests in exchange for a cash purchase price of $4.5 million. In addition to the delivery of the cash purchase price, ECCU also transferred to us a 1% participation interest and second deed of trust in a loan which resulted in us holding a 100% interest in such loan. While the 1% loan participation interest and second deed of trust we acquired had a principal balance of $25 thousand and $500 thousand, respectively, we received no value for these loan interests since the acquired loans were in default and the value of the real property was estimated to be approximately $1.2 million less than the outstanding principal balance of the mortgage loan interest we owned prior to entering into the Loan Purchase Agreement.

Prior to entering into negotiations with ECCU, we notified ECCU that we believed that ECCU had breached certain representations and warranties set forth in mortgage loan purchase agreements we had entered into with ECCU to purchase three (3) mortgage loan interests for an aggregate sum of $6.6 million. In exchange for the delivery of the $4.5 million purchase price and mortgage loan interests acquired from ECCU, we agreed to grant a release, waiver and discharge of certain claims we had made for an alleged breach of representations and warranties made by ECCU in connection with three (3) loans we had acquired from ECCU. We also agreed to grant a complete release and discharge for any claims arising out of the purchase, servicing and any actions undertaken by ECCU as the lead lender for an additional nine (9) loans we previously acquired from ECCU which no cause for claims had been identified, or which were reasonably expected to be, subject to any claims arising in connection with the purchase of such loans.  This loan sale enabled us to recover $914 thousand of allowance for loan losses that had been previously recorded on two of the loans we sold to ECCU.

While no independent valuation was made in determining the value of the claims we released in favor of ECCU, we believe that litigation risks and uncertainties in pursuing such claims resulted in an arms-length purchase price mutually agreed upon with ECCU in exchange for granting a release of such claims. Prior to entering into the Loan Purchase Agreement, we requested and received independent market valuations for the impaired loan interests that were transferred to and received from ECCU pursuant to the terms of the Loan Purchase Agreement. In addition, we relied upon the advice of independent legal counsel in evaluating litigation risks we faced in pursuing an action against ECCU arising from our purchase of these mortgage loan interests. None of our managers that serve as an officer, director or employee of ECCU participated in any of the discussions, review and approval of the Loan Purchase Agreement. As a result, the terms, conditions and provisions of the Loan Purchase Agreement were negotiated and approved by our independent managers in accordance with our Related Party Transaction Policy.

On December 14, 2007, the Board of Directors appointed R. Michael Lee to serve as a Company director.  Mr. Lee serves as Vice President Member Relations, Midwest Region, of Alloya Corporate Federal Credit Union (“Alloya”), formerly Members United Corporate Federal Credit Union (“Members United”).  See Note 6 for information regarding the Company’s borrowings from Members United.  The Company has $92.0 thousand on deposit with Alloya as of June 30, 2012.

From time to time, our Board and members of our executive management team have purchased investor notes from us. One of our Board members, Mr. Art Black, is the beneficial owner of a living trust that holds $224,276 of our Class A Notes.  On May 19, 2009, we sold $19.3 million of loans to Western Federal Credit Union, which is an equity holder of our Class A Units. The loans were sold to Western at par.  Proceeds from the sale were used to pay down the BMO Facility.

We have also entered into a selling agreement with our wholly-owned subsidiary, MP Securities, pursuant to which MP Securities will assist us in distributing our 2012 Secured Investment Certificates, which are notes we sell under a private placement memorandum and which are secured by loans or cash. The sales commissions and cost reimbursements paid to any broker-dealer firms that are engaged to assist in the distribution of such certificates will not exceed 3% of the amount of certificates sold.  MP Securities will also act as a selling agent for our Class A Notes offering pursuant to a Registration Statement filed with the SEC on July 3, 2012.  At the time the registration statement is deemed effective, we anticipate that our affiliate, MP Securities, will sell most of the Class A Notes being registered.  Each participating broker in the Class A Notes offering, including MP Securities, will be entitled to receive commissions ranging from .5%, plus an amount equal to .25% per annum on the average note balance for a Variable Series Note to 5% for a Flex Series or 60 month Fixed Series Note depending on whether it sells a Fixed Series, Variable Series or Flex Series note and the term of the respective note sold (12 months to 84 months).

To assist in evaluating any related transactions we may enter into with a related party, our Board has adopted a Related Party Transaction Policy. Under this policy, a majority of the members of our Board and majority of our independent Board members must approve a material transaction that we enter into with a related party.  As a result, we anticipate that all future transactions that we undertake with an affiliate or related party will be on terms believed by our management to be no less favorable than are available from unaffiliated third parties and will be approved by a majority of our independent Board members.