Loan Defaults & Liquidation

When a borrower fails to repay a loan by the maturity date, the loan enters default. Fabrica has built a structured default process that follows established commercial law (UCC Article 9) to protect both borrowers and lenders.

This page explains what happens at each stage, what rights each party has, and how the process differs between lending protocols.

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Default Timeline

A loan defaults when it reaches its maturity date without full repayment. There is no automatic grace period beyond the contractual deadline.

The exact timeline depends on the lending protocol:

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Borrower Rights During Default

A defaulted loan does not immediately transfer ownership. The borrower retains rights during the objection window:

Right to redeem. The borrower can repay the full loan amount (principal plus accrued interest) at any time before liquidation completes. Repayment returns the property token to the borrower and cancels the default.

Right to object. The borrower can formally object to the lender's proposed disposition of the collateral within the objection window.

Right to an accounting. The borrower can request a statement of the total amount owed, including principal and interest.

Continued beneficial ownership. Until liquidation is finalized, the borrower remains the beneficial owner of the property under the Fabrica Trust.

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UCC Compliance

The default process follows UCC Article 9 (Secured Transactions), which governs what happens when a borrower defaults on a secured loan.

Why This Matters

The UCC provides a well-established legal framework that courts, attorneys, and financial institutions understand. By following UCC procedures, Fabrica's default process has the same legal standing as defaults on traditional secured loans.

The Fabrica Trust agreement specifies that the standards and procedures encoded in the lending smart contracts are "agreed standards" for purposes of UCC 9-603. This means the onchain enforcement mechanisms have been contractually recognized as commercially reasonable.

What the UCC Notice Contains

Each UCC notice includes:

• The borrower's identity
• The trust name and property description (legal description, county, and token identifier)
• The debt amount owed
• The type of disposition proposed (strict foreclosure or sale)
• The borrower's rights during the objection window

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Liquidation by Protocol

NFTfi (Strict Foreclosure)

NFTfi uses a strict foreclosure model under UCC 9-620/9-621:

1. Borrower receives a Notice of Default proposing that the lender accept the collateral in full satisfaction of the debt
2. Borrower has 20 days to object, redeem (repay), or request an accounting
3. If no objection is raised and no repayment is made, the lender claims the property token
4. The lender becomes the new beneficial owner of the trust and the property

After claiming the token, the lender can:

• Hold the property as an investment
• Sell it on the Fabrica marketplace or any NFT marketplace
• Off-ramp to traditional title ownership (see Off-Ramp)

MetaStreet (Disposition by Sale)

MetaStreet uses a public auction model under UCC 9-610:

1. Borrower receives a Notice of Disposition informing them the collateral will be sold
2. The property token is auctioned after the notice period
3. Auction proceeds are distributed to capital providers by tranche seniority
4. Any surplus above the total debt returns to the original borrower

Capital providers do not receive the property token directly. The auction mechanism handles liquidation and distributes proceeds automatically.

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Credit Impact

Defaults affect a borrower's ability to access future loans:

This multiplier is applied to the property valuation when calculating the maximum loan amount a borrower can receive from MetaStreet pools. NFTfi lenders set their own terms and may independently consider a borrower's history.

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What Default Does Not Do

It is important to understand the boundaries of the default process:

• Default does not automatically transfer ownership. The borrower remains the beneficial owner until liquidation completes.
• Default does not affect other properties. Each loan is secured by a specific property token. Default on one loan does not encumber other properties.
• Default does not bypass the trust. The lender who acquires a token through liquidation becomes a beneficiary under the same Fabrica Trust agreement, with the same rights and obligations as any property owner.
• Default does not require Fabrica's involvement. The smart contract enforces the loan terms. Fabrica sends notices as a service, but the onchain mechanics operate independently.

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After Liquidation

Once liquidation completes:

1. The property token transfers to the new owner (lender or auction winner)
2. The new holder becomes the beneficial owner under the trust
3. All property obligations (taxes, maintenance, compliance) transfer to the new owner
4. The loan is marked as liquidated and closed

The new owner has the same rights as any Fabrica property owner, including the ability to borrow against the property, sell it, or off-ramp to traditional ownership.