Redwood Trust

The Company lends up to 7% of total Member capital contributions to Redwood Mortgage Corp. (a Manager) as the Formation Loan to fund sales commissions. The loan is unsecured and non-interest-bearing, repaid in 10 annual installments. Redwood Mortgage Corp. is released from the obligation if a successor Manager stops using Redwood Mortgage Corp. as loan broker, creating a structural incentive to retain Redwood Mortgage Corp. regardless of performance.

“The Company may lend to Redwood Mortgage Corp., a sum not to exceed 7% of the total amount of Capital Contributions to the Company by the Members, the proceeds of which shall be used solely for the purpose of paying selling commissions and all amounts payable in connection with unsolicited orders received by the Managers. The Formation Loan shall be unsecured and shall be evidenced by a non-interest bearing promissory note executed by Redwood Mortgage Corp. in favor of the Company.”

Redwood Mortgage Corp. serves simultaneously as a Manager of the Company and as the mortgage loan broker that receives loan brokerage commissions (estimated 2%-5% of each Loan principal, capped at 4% per annum of total assets) paid by borrowers on all Loans originated for the Company. This creates a direct conflict of interest between Redwood Mortgage Corp.'s role as a fiduciary Manager and its role as a compensated third-party intermediary.

“The Company will enter into Loan transactions where the borrower has engaged and agreed to compensate Redwood Mortgage Corp. to act as a broker in arranging the Loan. The exact amount of the loan brokerage commissions are negotiated with prospective borrowers on a case by case basis. It is estimated that such commissions will be approximately two percent (2%) to five percent (5%) of the principal amount of each Loan made during that year. The loan brokerage commissions shall be capped at 4% per annum of the Company's total assets per year (except during the first year of operations), based on the asset amount at the beginning of each year.”