I-526 denial insurance: criteria and coverage
Insurance that covers investors for denial of their I-526 petition
Kurt Reuss: What criteria do you use to decide whether or not a project is coverable under your I-526 denial refund policy?
Marc DiFanti: When we look to underwrite these policies and do our due diligence, we really look at it from two standpoints. First, of course, is the strength of the project. We look at the project as a whole and its viability and its likelihood of success and how it can work going forward. Secondly we look at the team that’s been put together. Do they have a great securities council? Do they have a great immigration counsel? Do they have a great regional center with a great track record in the EB-5 visa industry?
For example, we’d consider Bruce Rosetto from Greenberg Traurig as great; that is, he's somebody who’s been in this industry for a long time and he and his firm have handled a large number of EB-5 projects. When we see team members like him, and a whole cohesive team that knows the industry and can handle these types of petitions and filings and understands all the work that goes into it, we realize that they're projects that we want to insure and projects that are likely to receive acceptance from USCIS.
Kurt Reuss: That sounds like it could be a bit of a challenge to figure out who you want to enroll. Obviously, it comes down to the experience of the people involved.
Bruce Rosetto: Marc, I think the underwriting criteria that you mentioned are excellent, but having said that, what if you make a mistake?
Hypothetically, say there’s a regional center that you thought had a great track record which perhaps isn’t really as good as you believe. Perhaps it doesn't file all of its compliance reports because it doesn't file its I-924s on time.
Now, the regional center becomes at-risk. Would the insurance then cover a denial by USCIS because the regional center failed?
Marc DiFanti: Quite frankly, it would not be excluded under the policy and it would go along with the premise that the petitions were filed and subsequently denied by the USCIS for any number of other reasons. One of them could be that the EB-5 regional center was on bad terms or bad grounds in what they had done and hadn't handled their business properly.
That's a possibility that we have occasionally run into during our due diligence process. That’s also why we conduct a fairly lengthy review. That review might be undertaken internally, at Mark Edward Partners, or else by our partners at NES, or by the underwriters at Void. The bottom line is we have a pretty lengthy review process, and it’s our intent to catch those issues as soon as possible.
Bruce Rosetto: I think it makes a product better if you do a stringent underwriting due diligence, because it will make everybody feel that the product is going to be there when you need it.
Kurt Reuss: Marc, in the instance where an investor’s I-526 petition is denied and you pay them back their $500,000 capital investment. I guess the refunding of the administrative fee is something that is between the regional center and the investor. Is that correct?
Marc DiFanti: That is correct.
Kurt Reuss: Then, what happens to that partnership interest that the insurance company has maybe taken over? Is that the situation? That you are now a partner in this partnership?
Marc DiFanti: Yes. I think the important aspect to understand is that the policy provides for what we'll call a work out period. That's a function of the fact that, quite frankly, the insurance company doesn't want to become a limited partner or non-managing member of the project. For the most part, it’s very likely that the project doesn’t want the insurance company involved in any other capacity.
There's an opportunity for the issuer to source a new investor and replace the denied investor. If that's not possible, the insurance company can step in, provide the return of capital under the policy and step into the “shoes,” so to speak, of the denied investor.
From there, there are really two options: If the issuer has the ability to source a new investor, under the same terms of the offering, and replace the insurance company, then that's a more than welcome outcome. If not, then the insurance company remains in place of the denied investor and waits for a buy-out period at some point down the road.
Kurt Reuss: Marc, I recently read a blog posting by Suzanne Lazicki, an update on USCIS denials. She mentioned that in Q3 of 2015, the I-526 denial rate was 8% which rose to 15% in Q4. That rate then further increased to 23% in the most recent quarter. Does that scare you at all? As far as the denial rates go, does it concern you that perhaps USCIS may now have a different approach towards the I-526 approval process?
Marc DiFanti: It doesn't concern me, right now. Obviously, though, it's never good to see those statistics across-the-board. But we’ve spent nearly five years working to build a good product and do our due diligence in our underwriting so that we’ve reached a point where we feel comfortable with the product and the industry as a whole. We found during that period, when a project has the right team in place, those projects have a significantly lower denial rate than the overall industry as a whole.
We feel that if we do our EB-5 due diligence and our underwriting properly we can offset some of that by finding projects that will be more successful.