Understanding Collateral: What it is and Why it Matters in Lending
Collateral is an asset or property that a borrower pledges to a lender as security for a loan or other type of financial obligation. In the event that the borrower is unable to repay the loan, the lender may seize the collateral and sell it to recoup some or all of the outstanding debt.
Collateralized Loans between an NCE and JCE
It is common for a 'new commercial enterprise' NCE to provide a collateralized loan to a 'job creating entity' (JCE). To assess the borrower's ability to repay the loan, it's crucial to understand the value of the collateral the borrower (JCE) is offering to the NCE, which can take the form of land and building or the borrower's ownership interest in the project entity.
Landmark Ruling Allows EB-5 Investors to Use Unsecured Loans as a Source of Funds
Back in 2015, EB-5 regulations stipulated that loans used for capital investment must be backed by collateral in the form of the investor's personal assets, effectively barring unsecured loans. However, in 2018, investors contested this interpretation, and a district court ruled in their favor. USCIS appealed the decision, but a circuit court upheld the ruling, stating that the source of cash for the investment, whether it be a paycheck, gift, or loan, was legally and practically irrelevant. In 2021, USCIS approved an I-526 petition from one of the plaintiffs who had used an unsecured loan as a source of funds, marking a significant precedent-setting case that demonstrates the validity of using cash from an unsecured loan as an EB-5 investor.
