Is it legal for the directors of a private foundation to provide mortgage loans to homeowners and close friends?

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Is it legal for the directors of a private foundation to provide mortgage loans to homeowners and close friends?

The president and treasurer of a private foundation continue to provide mortgage loans to homeowners and to close personal friends on more than one occasion. They, also, do mortgage loan business under their own name with the same person. Isn’t this to be considered self-dealing? Also, would it not be odd for the original trustees to leave real property to someone and then in their bylaws for a private foundation state that no director or member of the private foundation shall benefit.

Asked on July 29, 2019 under Business Law, California

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 1 year ago | Contributor

There is nothing intrinsically illegal about providing loans to people whom the officers of a trust personally know IF the transactions are structured properly, as if they were "arms length" transactions, and are a good investment for the foundation. For example, say that the friends, etc. are good credit risks and are paying a competitive rate of interest: in that case, since issuing the loans may bring in a net profit (the interest) to the foundation, increasing its funding at a low risk, there would be nothing illegal or improper about it. On the other hand, loans at below market rate (or for zero interest) and/or make to bad credit risks would clearly be *against* the foundation's interest and could easily be a violation of these officers' or trusteees' duty. So there is no blanket prohibition against this; it will depend on the facts and whether doing this is objectively reasonable or not.


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