FAQ Legal Questions for Note Brokers

Q. Should I accept a copy of the note?
A. No. To have a negotiable note you need the original note. Even an affidavit of lost note does not replace the original note. The note should be endorsed over to you by wording on the back of the note like the following: PAY TO THE ORDER OF: (your name) then signed and dated by the seller. Real estate attorneys often file as part of their foreclosure complaint a motion to reinstate lost note or mortgage.

Q. Buying a note with or without recourse?
A. If the agreement of assignment of the note and the endorsement of the note is silent, the note is assumed to be sold with recourse. This means if the borrower doesn’t pay you can recover your money from the note seller. Most people do not realize this. If you are happy to buy the note without recourse, then it should say on the endorsement. PAY TO THE ORDER OF: (your name) without recourse then signed and dated by the seller.

But be careful of Usury laws. It has been held in some courts that if the new rate of interest that you will be receiving as a result of the discount is usurious then you could be in trouble.

Example: Usury rate =18%, Face note rate = 16%, you buy note with 20% discount. New interest rate = 20.51%. This is OVER the Usury rate. Speak to your attorney first if this is a possibility.

Q. Buying part of a note with 2 or more owners?
A. This can happen when a brother and sister or husband and wife own a note. One want to sell their interest, the other doesn’t. The note should be endorsed as follows: PAY TO THE ORDER OF (your name and the other non-sellers) then signed and dated by all the current owners.

We suggest that physical possession of the note should be by a trusted third party like a title company or attorney.

Q. Who is a holder in due course?
A. This is the strongest legal position you can have with regard to ownership of the note. If the original note is properly endorsed to you, you become the holder in due course.

Q. What is an estoppel letter?
A. This is a form signed by the borrower that the terms and balances shown of the note are correct. View an example of a Mortgagor Estoppel Letter or an example of a Mortgagee Estoppel Letter.

Q. When is it safe to buy a note in default?
A. If the note is already in default you are unlikely to be recognized as the holder in due course. This makes it more difficult, but not impossible to foreclose the note. The borrower can even file bankruptcy which causes an “automatic stay” that prevents you continuing the foreclosure until you get the stay lifted. If you buy a note that is already in default, expect and demand a larger discount than usual to cover your extra legal costs and delays.

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