Critical clauses that keep you out of court and ahead of borrower risks
A s mortgage litigators, anytime there is a new lawsuit or a client has an issue with a loan, the first document reviewed is the deed. When it comes to consumer loan documents there is little variety. Most lenders use the standard Fannie Mae/Freddie Mac deed of trust (DOT). But for business purpose loans, there are as many sets of loan documents as there are lawyers to think them up. Despite the variety, most loan documents contain the necessities to allow the lender to enforce the note and foreclose in the event of default. Let’s look at five nonstandard loan provisions that should be in every set of loan documents but are often overlooked. Judicial reference Many business purpose DOTs include an arbitration provision and/or a jury waiver. Unfortunately, should the borrower sue, neither provision is likely to keep the lender away from a jury. In California, for example, jury waivers in loan documents are generally unenforceable. Moreover, many arbitration provisions are insufficient to mandate arbitration, giving
anti-arbitration judges the option to deny a motion to compel. As a result, many lenders face the risk of a borrower-friendly jury. Even if the arbitration provision is well drafted, arbitration is not always the best option. Depending on its scope and the arbitrator, the lender may lack the ability to conduct key discovery, take depositions or move for summary judgment. For lack of a better term, arbitration can be arbitrary! The lender’s exposure rests with one individual — the arbitrator — with very limited rights to challenge the decision on appeal. Judicial reference, on the other hand, lets the lender avoid many of the dangers of the court system and the risk of a hostile jury, while preserving the right to conduct dis- covery, file motions and obtain the protection of the rules of evidence and civil procedure. For lenders unfamiliar with judicial reference, it is an out-of-court process similar to arbitration. But unlike arbi- tration, a judicial referee (typically a retired judge) follows civil procedure and evidence rules. More importantly, the referee’s decision is appealable, reducing the risk of a rogue arbitrator. A properly drafted judicial reference provi- sion is more likely to put the lender in the position it wants — outside a jury’s discretion without arbitration’s risks. However, if including this clause, remember to include self-help remedies like the right to nonjudicial foreclose, and to preserve the right to seek preliminary injunctions and provisional remedies. ⊲
By T. Robert Finlay, Esq. and Michelle R. Rodriguez, Esq. Wright, Finlay & Zak
Layout by Chuck Howard
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Scotsman Guide | February 2026
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