Lender Protections

Fabrica's trust structure includes legal mechanisms that provide lenders with certainty and security when financing property tokens. These protections ensure that lenders can perfect their security interest and recover collateral in the event of default.

Structural Protections

The Fabrica Trust is designed so that lenders are protected at every stage of a loan, from origination through repayment or default.

Collateral Custody

When a property token is deposited into a lending protocol's smart contract, the smart contract holds the token as collateral. Under the trust agreement, this is classified as a functional contract (Section 7.3(b)): the protocol has custody of the token, but the borrower retains beneficial ownership of the property until the loan resolves.

This distinction is critical: it means the lender holds real collateral (the token, which controls the trust, which holds the property), while the borrower continues to use the property and bear its obligations during the loan.

Recovery Protection

The trust's token recovery mechanism (Section 10.2) includes a built-in protection for lenders: the self-service recovery process can only be initiated when the token is in a personal wallet (EOA or Smart Wallet). A borrower cannot use the recovery process to reclaim a token that is held in a lending contract.

This means a borrower cannot circumvent a loan by claiming they lost their keys. The token must be returned to the borrower (through repayment) before any recovery process can begin.

Stolen Token Handling

If a token is stolen before or during a loan, the trust agreement distinguishes between the original owner's rights and a good-faith lender's rights:

• An unauthorized transfer does not transfer beneficial ownership (Section 7.5)
• However, a lender who obtained control of the token for value, in good faith, and without notice of the theft qualifies as a qualifying purchaser under UCC Article 12 and takes free of adverse claims
• The original owner's remedy is against the thief, not against the good-faith lender

---

UCC Framework

The trust agreement incorporates two UCC frameworks that provide lenders with well-established legal protections for secured transactions. See UCC Article 12 for a detailed explanation of how these provisions work.

UCC Article 12

The property token is treated as a controllable electronic record (CER) under UCC Article 12. This means:

• Control-based perfection: Holding the token in a smart contract establishes a valid, perfected security interest without filing UCC financing statements or recording liens at the county
• Qualifying purchaser protection: Lenders who obtain control for value, in good faith, and without notice of competing claims take free of adverse claims
• Smart contract compatibility: Depositing a token into a lending smart contract constitutes "control" for UCC purposes

UCC Article 8

When a property token is credited to a securities account and held through a securities intermediary that has agreed to treat it as a "financial asset," UCC Article 8 governs instead. This provides an additional framework for institutional custody arrangements.

UCC Article 9 (Enforcement)

On default, the enforcement process follows UCC Article 9 (Secured Transactions). The trust agreement specifies that the standards and procedures encoded in lending smart contracts are "agreed standards" for purposes of UCC 9-603, meaning the onchain enforcement mechanisms are contractually recognized as commercially reasonable.

See Loan Defaults & Liquidation for the complete default and enforcement process.

Real-Property Law Preservation

The trust agreement includes an important boundary: UCC "control" determines rights in the token as a controllable electronic record, but does not by itself transfer, encumber, or create any interest in the recorded title to the property. Transfer of recorded title still requires a deed satisfying applicable real property law.

This means the UCC collateral framework and the real property framework operate in parallel without conflicting.

---

How Protections Work in Practice

---

Borrower Rights During Loan

While the token serves as collateral, the borrower retains:

• Beneficial ownership: The borrower remains the owner of the property
• Right to use: Full access to and use of the property
• Property rights: All rights under the Fabrica Trust except the ability to transfer
• Right to redeem: The borrower can repay the loan at any time to reclaim the token

The lending protocol holds the token as security, but the borrower is the owner in every practical sense until default and liquidation occur.

---

Confidence Scoring

Validators continuously monitor property status and maintain confidence scores that reflect property health. These scores inform lending decisions:

• Tax status: Whether property taxes are current
• Lien status: Whether there are recorded encumbrances
• Compliance: Whether the property meets its jurisdictional obligations
• Void status: Whether the token has been dissociated from the property through an alternative dissolution

Lenders can use confidence scores as part of their due diligence when evaluating specific properties for peer-to-peer loans.

---

Additional Safeguards

Beyond the UCC and trust provisions, lenders benefit from:

• Onchain transparency: Ownership, loan status, and property history are verifiable on the blockchain
• County records: The underlying property ownership is recorded at the county level, providing a public record
• 23 regulatory licenses: Fabrica operates under licenses covering all 50 US states
• Open source trust: The trust agreement is publicly available for legal review

While Fabrica has designed robust protections, the trust model has never been tested in court. Lenders should conduct appropriate due diligence and consider consulting legal counsel for significant lending activities.