Can You Assign a Promissory Note
“Can you assign a promissory note?” is a request you need to make to someone who promises to pay you a certain amount of money at a later date. 3 min read updated on February 01, 2023
“Can you assign a promissory note?” is a request you need to make to someone who promises to pay you a certain amount of money at a later date. While it is not as formal as a contract, a promissory note is legally binding, meaning that the promisee is entitled to take legal action if the promisor fails to make the specified payment.
What Is a Promissory Note?
A promissory note refers to a written document stating that a certain amount of money will be paid to someone by a specified date. Generally, it is not necessary for the note to be recorded officially. The borrower is required to sign the note, but the lender may choose not to sign it. A promissory note is a legally binding note that is often used between parties who know each other personally, and it is totally customizable.
Using a Promissory Note to Pledge Collateral
Collateral refers to property pledged to ensure that a loan will be repaid. Take the following measures when collateral is pledged with a promissory note:
- If you are the lender, make sure the borrower upholds the terms stated in the promissory note. Also, the interest specified in the note must be legal.
- If you are the borrower, issue the promissory note to the institution or individual that needs it to obtain a loan for you. This should be done with an addendum stating the assignment of your rights or the completion of the assignment paperwork required by the lender.
Theoretically, a lender will only be willing to accept a promissory note as a form of collateral if you have satisfied at least part of the promise stated in the note. This means that you must have already paid back some money in accordance with the terms of your promissory note.
Using an Assignment of Deed of Trust
The purpose of a trust deed investment is to generate a greater return on your money on top of the amount you will otherwise receive from a certificate of deposit or savings account. If you are planning to make these types of investment, it is essential that you know how to use an assignment of deed of trust .
In California and many other states, the repayment of a promissory note is secured with a deed of trust against real property. Essentially, a trust deed investment involves the purchase of a promissory note, which is required to be secured by a deed of trust as part of the transaction.
When you obtain a loan to buy real estate, you will have to use a promissory note. The terms for repaying the loan, including the interest rate and monthly payment amount, will be stated in the promissory note. A deed of trust will be used to ensure that the promissory note will be repaid when it is recorded against the property purchased with the loan.
A lender may sell a promissory note. This usually happens between banks, but it can be done by any person who wishes to buy the promissory note as a form of investment. When a lender sells a promissory note, the deed of trust that secures the note will also be sold with it.
Difference Between Mortgage Assignment and Note Endorsement
When you are applying for a loan to purchase a home, the lender may require you to sign a promissory note and a mortgage or a deed of trust. In the event that your loan is sold to another party, these documents will be transferred to the new owner with an assignment and an endorsement. The new owner will have the right to receive payments and foreclose if you fail to make payments.
In casual conversations, people often use the word “mortgage” to refer to a home loan. A mortgage or a deed of trust is an essential document included as part of the process of securing a home loan. It is a form of security instrument. A promissory note , on the other hand, specifies the details and terms of the loan and obligates the borrower to repay the loan.
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Collateral Assignment
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A collateral assignment involves granting a security interest in the asset or property to a lender. It is a lawful arrangement where the borrower promises an asset or property to the lender to guarantee the debt repayment or meet a financial obligation. Moreover, in a collateral assignment, the borrower maintains asset ownership, the lender holds the security interest, and the lender has the right to seize and sell the asset in event of default. This blog post will discuss a collateral assignment, its purpose, essential considerations, and more.
Key Purposes of a Collateral Assignment
Collateral assignment concerns allocating a property's ownership privileges, or a specific interest, to a lender as loan collateral. The lender retains a security interest in the asset until the borrower entirely settles the loan. If the borrower defaults on loan settlement, the lender can seize and market the collateral to recover the unpaid debt. Below are the key purposes of a collateral assignment.
- Enhanced Lender Protection: The primary purpose of the collateral assignment is to provide lenders with an added layer of security and assurance. Also, by maintaining a claim on the borrower's properties, lenders lower their risk and improve the probability of loan settlement. In case of default, the lender can sell the collateral to recover the unpaid balance. This security authorizes lenders to offer loans with lower interest rates, as the threat associated with the loan is reduced.
- Favorable Loan Terms: Collateral assignment allows borrowers to access financing on more favorable terms than unsecured loans . However, the terms of the loan will vary depending on the borrower’s creditworthiness and the value of the collateral. Generally, lenders are more willing to extend larger loan amounts and lower interest rates when they have collateral to fall back on. The presence of collateral reassures lenders that they have a viable means of recouping their investment, even in case of default. This increased confidence often leads to more competitive loan offers for borrowers.
- Unlocking Asset Value: Collateral assignment enables borrowers to leverage the value of their assets, even if those assets are not readily convertible into cash. For instance, a business owner with valuable machinery can assign it as collateral to secure a business loan. This arrangement allows the borrower to continue utilizing the asset for operational purposes while accessing the necessary funds for expansion or working capital. Collateral assignment, thus, enables the efficient allocation of resources. However, the collateral will still be considered in determining the loan amount and terms.
- Access to Higher Loan Amounts: When borrowers promise collateral against a loan, lenders can present greater loan amounts than for other unsecured loans. The worth of the collateral serves as a reassurance to lenders that they can recover their investment even if the borrower fails to settle the loan. Therefore, borrowers can obtain higher loans to finance important endeavors such as purchasing property, starting a business, or funding major projects.
- Diversification of Collateral: Collateral assignment offers flexibility for borrowers by allowing them to diversify their collateral base. While real estate is commonly used as collateral, borrowers can utilize other valuable assets such as investment portfolios, life insurance policies, or valuable personal belongings. This diversification allows borrowers to access financing without limiting themselves to a single asset, thereby preserving their financial flexibility.
Steps to Execute a Collateral Assignment
A collateral assignment is a financial procedure that involves utilizing an asset as security for a loan or other responsibilities. Below are the essential steps involved in the collateral assignment process.
- Assess the Need for Collateral Assignment. The initial step in collateral assignment is determining whether collateral is necessary. Lenders or creditors may require collateral to mitigate the risk of default or ensure repayment. Evaluating the value and marketability of the proposed collateral is crucial to ascertain if it meets the lender's requirements.
- Select Appropriate Collateral. The next step involves choosing a suitable asset for collateral assignment. Common classifications of collateral comprise stocks, real estate, bonds, cash deposits, and other valuable assets. The collateral's value should be sufficient to cover the loan amount or the obligation being secured.
- Understand Lawful and Regulatory Requirements. Before proceeding with collateral assignment, it is essential to comprehend the lawful and regulatory provisions specific to the jurisdiction where the transaction happens. Collateral assignment laws can vary, so seeking advice from legal professionals experienced in this area is advisable to ensure compliance.
- Negotiate Provisions. Once the collateral is recognized, the collateral assignment provisions must be negotiated among the concerned parties. It includes specifying the loan amount, interest rates, repayment terms, and any further duties or limitations associated with the collateral assignment.
- Prepare the Collateral Assignment Agreement. The collateral assignment agreement is a lawful document that typically includes details about the collateral, the loan or obligation being secured, and the rights and responsibilities of both parties. It is highly advised to engage the services of a legal specialist to prepare or review the contract.
- Enforce the Collateral Assignment Agreement. After completing the collateral assignment agreement, it must be executed by all involved parties. This step ensures that all necessary signatures are obtained and copies of the agreement are distributed to each individual for record-keeping objectives.
- Notify Relevant Parties. To ensure proper recognition and recording of the collateral assignment, it is important to notify all relevant parties. It may involve informing the lender or creditor, the custodian or holder of the collateral, and any other pertinent stakeholders. Sufficient documentation and communication will help prevent potential disputes or misunderstandings.
- Record the Collateral Assignment. Depending on the nature of the collateral, it may be necessary to record the collateral assignment with the appropriate government authority or registry. This step provides public notice of the assignment and establishes priority rights in case of multiple claims on the same collateral. Seeking guidance from legal professionals or relevant authorities can determine if recording the collateral assignment is required.
- Monitor and Maintain the Collateral. Throughout the collateral assignment term, it is crucial to monitor and maintain the value and condition of the collateral. This includes ensuring insurance coverage, property maintenance, and compliance with any ongoing obligations associated with the collateral. Regular communication between all parties involved is essential to address concerns or issues promptly.
- Terminate the Collateral Assignment. Once the loan or obligation secured by the collateral is fully satisfied, the collateral assignment can be terminated. This involves releasing the collateral from the assignment, updating relevant records, and notifying all parties involved. It is important to follow proper procedures to ensure the appropriate handling of the legal and financial aspects of the termination.
Key Terms for Collateral Assignments
- Security Interest: It is the legal right granted to a lender over the assigned collateral to protect their interests in case of borrower default.
- Collateral Valuation: The process of determining the worth or market value of the assigned collateral to assess its adequacy in securing the loan.
- Release of Collateral: The action taken by a lender to relinquish its claim over the assigned collateral after the borrower has fulfilled the loan obligations.
- Subordination Agreement : A legal document that establishes the priority of multiple creditors' claims over the same collateral, typically in the case of refinancing or additional loans.
- Lien : A legal claim or encumbrance on a property or asset, typically created through a collateral assignment, that allows a lender to seize and sell the collateral to recover the loan amount.
Final Thoughts on Collateral Assignments
A collateral assignment is a valuable instrument for borrowers and lenders in securing loans or obligations. It offers borrowers access to profitable terms and more extensive loan amounts while reducing the risk for lenders. Nevertheless, it is essential for borrowers to thoughtfully assess the terms and threats associated with collateral assignment before proceeding. Seeking professional guidance and understanding the contract can help ensure a successful and beneficial financial arrangement for all parties involved.
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Assigning Loan Documents: Practical Reminders
The recent Supreme Court of Delaware case J.M. Shrewsbury v. The Bank of New York Mellon , CA No. N15L-03-108 (Del. 2017), provides a reminder of the importance of clearly documenting the assignment of loan documents. The Court’s holding requires that prior to the assignee of a mortgage loan filing suit on the note or mortgage, the assignee must have received both an allonge/assignment of the note and an assignment of the mortgage. The case is a reminder of the importance of maintaining a precise chain of title when assigning loan documents. The facts of the case as described below demonstrate the need to make sure that you “don’t leave the note behind.”
In 2007, J.M. Shrewsbury and Kathy Shrewsbury signed a promissory note in favor of Countrywide Home Loans, Inc. Concurrently, the Shrewburys were granted a mortgage to secure their obligations under the note, which mortgage encumbered real property in Delaware. In 2011, the mortgage was assigned to The Bank of New York Mellon (Bank). In 2013, the Shrewsburys requested and received a copy of the original note, which contained no indication that the note had been assigned. Neither party disputed the fact that the Shrewsburys stopped making mortgage payments in 2010.
The Bank commenced a mortgage foreclosure action in 2015 in the Superior Court of the State of Delaware, Bank of N.Y. Mellon v. Shrewsbury , C.A. No. N15L-03-108 CLS (Del. Super. Ct. Feb. 17, 2016). In holding in favor of the Bank, the Superior Court found that the Bank need only show that it had a valid assignment of the mortgage to enforce its rights. The Shrewsburys appealed the decision to the Court.
In reversing and remanding the decision of the Superior Court, the Court followed its reasoning in Iowa-Wisconsin Bridge Co. v. Phoenix Finance Corporation, Iowa-Wisconsin Bridge Co. v. Phoenix Finance Corporation , 25 A.2d 383, 389 (Del. 1942), stating that a debt is an essential requisite to a mortgage. While persuaded by wide-ranging case law and other respected authorities, the Court’s decision relied most heavily on the United States Supreme Court case Carpenter v. Longan, 83 U.S. 271 (1872), holding that the “note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity.”
Practical Reminders
While this case involved a residential transaction, important considerations can be applied in commercial mortgage transactions whether in connection with construction, bridge or permanent mortgage financing, a loan sale, a transfer of a loan to an affiliate of the original lender, or other assignment of the loan.
Practical reminders include:
- Make sure that the chain of title is precise when assigning the mortgage, the note and other collateral documents such as assignments of leases and rents, guarantees and UCC’s. Don’t leave the note “behind.”
- Assign and endorse the note by allonge so that the chain of title is complete. Firmly affix the allonge(s) to the underlying note.
- Keep good records of all documentation, including recorded ( i.e. the mortgage an assignment of mortgage) and unrecorded documents. Retain originals in a safe place (such as under the control of a custodian or servicer or in a vault) and copies of all loan documents including assignment documents.
- When the loan is assigned, always deliver the original note along with the original allonge.
Members of our Real Estate and Finance Groups regularly handle commercial real estate financing and sales transactions throughout the country. If you have questions or would like further information, please contact Tim Davis ( davist@whiteandwilliams.com ; 215.864.6829) or Pat Haggerty ( haggertyp@whiteandwilliams.com ; 215.864.6811).
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What Is Collateral Assignment (of a Life Insurance Policy)?
Meredith Mangan is a senior editor for The Balance, focusing on insurance product reviews. She brings to the job 15 years of experience in finance, media, and financial markets. Prior to her editing career, Meredith was a licensed financial advisor and a licensed insurance agent in accident and health, variable, and life contracts. Meredith also spent five years as the managing editor for Money Crashers.
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Definition and Examples of Collateral Assignment
How collateral assignment works, alternatives to collateral assignment.
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If you assign your life insurance contract as collateral for a loan, you give the lender the right to collect from the policy’s cash value or death benefit in two circumstances. One is if you stop making payments; the other is if you die before the loan is repaid. Securing a loan with life insurance reduces the lender’s risk, which improves your chances of qualifying for the loan.
Before moving forward with a collateral assignment, learn how the process works, how it impacts your policy, and possible alternatives.
Collateral assignment is the practice of using a life insurance policy as collateral for a loan . Collateral is any asset that your lender can take if you default on the loan.
For example, you might apply for a $25,000 loan to start a business. But your lender is unwilling to approve the loan without sufficient collateral. If you have a permanent life insurance policy with a cash value of $40,000 and a death benefit of $300,000, you could use that life insurance policy to collateralize the loan. Via collateral assignment of your policy, you authorize the insurance company to give the lender the amount you owe if you’re unable to keep up with payments (or if you die before repaying the loan).
Lenders have two ways to collect under a collateral assignment arrangement:
- If you die, the lender gets a portion of the death benefit—up to your remaining loan balance.
- With permanent insurance policies, the lender can surrender your life insurance policy in order to access the cash value if you stop making payments.
Lenders are only entitled to the amount you owe, and are not generally named as beneficiaries on the policy. If your cash value or the death benefit exceeds your outstanding loan balance, the remaining money belongs to you or your beneficiaries.
Whenever lenders approve a loan, they can’t be certain that you’ll repay. Your credit history is an indicator, but sometimes lenders want additional security. Plus, surprises happen, and even those with the strongest credit profiles can die unexpectedly.
Assigning a life insurance policy as collateral gives lenders yet another way to secure their interests and can make approval easier for borrowers.
Types of Life Insurance Collateral
Life insurance falls into two broad categories: permanent insurance and term insurance . You can use both types of insurance for a collateral assignment, but lenders may prefer that you use permanent insurance.
- Permanent insurance : Permanent insurance, such as universal and whole life insurance, is lifelong insurance coverage that contains a cash value. If you default on the loan, lenders can surrender your policy and use that cash value to pay down the balance. If you die, the lender has a right to the death benefit, up to the amount you still owe.
- Term insurance : Term insurance provides a death benefit, but coverage is limited to a certain number of years (20 or 30, for example). Since there’s no cash value in these policies, they only protect your lender if you die before the debt is repaid. The duration of a term policy used as collateral needs to be at least as long as your loan term.
A Note on Annuities
You may also be able to use an annuity as collateral for a bank loan. The process is similar to using a life insurance policy, but there is one key difference to be aware of. Any amount assigned as collateral in an annuity is treated as a distribution for tax purposes. In other words, the amount assigned will be taxed as income up to the amount of any gain in the contract, and may be subject to an additional 10% tax if you’re under 59 ½.
A collateral assignment is similar to a lien on your home . Somebody else has a financial interest in your property, but you keep ownership of it.
The Process
To use life insurance as collateral, the lender must be willing to accept a collateral assignment. When that’s the case, the policy owner, or “assignor,” submits a form to the insurance company to establish the arrangement. That form includes information about the lender, or “assignee,” and details about the lender’s and borrower’s rights.
Policy owners generally have control over policies. They may cancel or surrender coverage, change beneficiaries, or assign the contract as collateral. But if the policy has an irrevocable beneficiary, that beneficiary will need to approve any collateral assignment.
State laws typically require you to notify the insurer that you intend to pledge your insurance policy as collateral, and you must do so in writing. In practice, most insurers have specific forms that detail the terms of your assignment.
Some lenders might require you to get a new policy to secure a loan, but others allow you to add a collateral assignment to an existing policy. After submitting your form, it can take 24 to 48 hours for the assignment to go into effect.
Lenders Get Paid First
If you die and the policy pays a death benefit , the lender receives the amount you owe first. Your beneficiaries get any remaining funds once the lender is paid. In other words, your lender takes priority over your beneficiaries when you use this strategy. Be sure to consider the impact on your beneficiaries before you complete a collateral assignment.
After you repay your loan, your lender does not have any right to your life insurance policy, and you can request that the lender release the assignment. Your life insurance company should have a form for that. However, if a lender pays premiums to keep your policy in force, the lender may add those premium payments (plus interest) to your total debt—and collect that extra money.
There may be several other ways for you to get approved for a loan—with or without life insurance:
- Surrender a policy : If you have a cash value life insurance policy that you no longer need, you could potentially surrender the policy and use the cash value. Doing so might prevent the need to borrow, or you might borrow substantially less. However, surrendering a policy ends your coverage, meaning your beneficiaries will not get a death benefit. Also, you’ll likely owe taxes on any gains.
- Borrow from your policy : You may be able to borrow against the cash value in your permanent life insurance policy to get the funds you need. This approach could eliminate the need to work with a traditional lender, and creditworthiness would not be an issue. But borrowing can be risky, as any unpaid loan balance reduces the amount your beneficiaries receive. Plus, over time, deductions for the cost of insurance and compounding loan interest may negate your cash value and the policy could lapse, so it’s critical to monitor.
- Consider other solutions : You may have other options unrelated to a life insurance policy. For example, you could use the equity in your home as collateral for a loan, but you could lose your home in foreclosure if you can’t make the payments. A co-signer could also help you qualify, although the co-signer takes a significant risk by guaranteeing your loan.
Key Takeaways
- Life insurance can help you get approved for a loan when you use a collateral assignment.
- If you die, your lender receives the amount you owe, and your beneficiaries get any remaining death benefit.
- With permanent insurance, your lender can cash out your policy to pay down your loan balance.
- An annuity can be used as collateral for a loan but may not be a good idea because of tax consequences.
- Other strategies can help you get approved without putting your life insurance coverage at risk.
NYSBA. " Life Insurance and Annuity Contracts Within and Without Tax Qualified Retirement Plans and Life Insurance Trusts ." Accessed April 12, 2021.
IRS. " Publication 575 (2020), Pension and Annuity Income ." Accessed April 12, 2021.
Practical Law. " Security Interests: Life Insurance Policies ." Accessed April 12, 2021.
How to Use a Promissory Note for Collateral
Published on 26 Sep 2017
A promissory note is a written promise to pay a set amount of money by a specified time to the bearer named in the note. In general, it does not have to be officially recorded. All borrowers on the note must sign it but it is optional for you, the lender, to sign it. It is an enforceable note that is usually used between people who personally know each other and it is completely customizable. Collateral is property pledged to secure repayment of a loan.
Promissory note
Assignment paperwork
Ensure the borrower named in the promissory note has upheld the terms set forth in the promissory note, such as making timely payments.
Ensure that the interest you charged as set forth in the note is legal, not usurious.
Assign the promissory note to the person or institution who needs it for collateral to secure a loan for you. Do this with an addendum assigning your rights over or filling out formal assignment paperwork provided by the lender. In theory, a lender will only be interested in accepting your promissory note as collateral if at least a portion of the promissory note has been satisfied. In other words, there must have been some money paid back according to the terms of the promissory note.
Notify the borrower in the promissory note of the assignment.
The amount of money that the promissory note is worth as collateral is negotiable between you and your future lender.
To protect yourself, consult an attorney before making an assignment.
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Assignment of Accounts Receivable: Meaning, Considerations
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
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Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.
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Investopedia / Jiaqi Zhou
What Is Assignment of Accounts Receivable?
Assignment of accounts receivable is a lending agreement whereby the borrower assigns accounts receivable to the lending institution. In exchange for this assignment of accounts receivable, the borrower receives a loan for a percentage, which could be as high as 100%, of the accounts receivable.
The borrower pays interest, a service charge on the loan, and the assigned receivables serve as collateral. If the borrower fails to repay the loan, the agreement allows the lender to collect the assigned receivables.
Key Takeaways
- Assignment of accounts receivable is a method of debt financing whereby the lender takes over the borrowing company's receivables.
- This form of alternative financing is often seen as less desirable, as it can be quite costly to the borrower, with APRs as high as 100% annualized.
- Usually, new and rapidly growing firms or those that cannot find traditional financing elsewhere will seek this method.
- Accounts receivable are considered to be liquid assets.
- If a borrower doesn't repay their loan, the assignment of accounts agreement protects the lender.
Understanding Assignment of Accounts Receivable
With an assignment of accounts receivable, the borrower retains ownership of the assigned receivables and therefore retains the risk that some accounts receivable will not be repaid. In this case, the lending institution may demand payment directly from the borrower. This arrangement is called an "assignment of accounts receivable with recourse." Assignment of accounts receivable should not be confused with pledging or with accounts receivable financing .
An assignment of accounts receivable has been typically more expensive than other forms of borrowing. Often, companies that use it are unable to obtain less costly options. Sometimes it is used by companies that are growing rapidly or otherwise have too little cash on hand to fund their operations.
New startups in Fintech, like C2FO, are addressing this segment of the supply chain finance by creating marketplaces for account receivables. Liduidx is another Fintech company providing solutions through digitization of this process and connecting funding providers.
Financiers may be willing to structure accounts receivable financing agreements in different ways with various potential provisions.
Special Considerations
Accounts receivable (AR, or simply "receivables") refer to a firm's outstanding balances of invoices billed to customers that haven't been paid yet. Accounts receivables are reported on a company’s balance sheet as an asset, usually a current asset with invoice payments due within one year.
Accounts receivable are considered to be a relatively liquid asset . As such, these funds due are of potential value for lenders and financiers. Some companies may see their accounts receivable as a burden since they are expected to be paid but require collections and cannot be converted to cash immediately. As such, accounts receivable assignment may be attractive to certain firms.
The process of assignment of accounts receivable, along with other forms of financing, is often known as factoring, and the companies that focus on it may be called factoring companies. Factoring companies will usually focus substantially on the business of accounts receivable financing, but factoring, in general, a product of any financier.
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Buying and Selling Real Estate Notes
Not as Simple as One Might Think by David J. Willis J.D., LL.M.
Introduction
Investors often buy and sell real estate lien notes, either singly or in a package, a transaction that is customarily effected by a Sale & Assignment of Notes and Liens . This transfer instrument is referred to in this article simply as an assignment.
The idea of buying or selling a note seems simple until one delves into it. Is the assignment to be made “as is” with all faults that may exist in the note and the lien instrument? Will there be representations and warranties made by the parties and, if so, how extensive? How long will they last? Will recourse provisions apply if the note goes into default, and if so what is the recourse mechanism? Will indemnities be included? The closer one looks the more questions arise.
Our focus in this article is on the final assignment instrument signed by the parties at closing of the transfer rather than preliminary agreements that may come before closing.
The Assignment Process
In the case of real estate lien notes, a completed assignment involves not just a transfer of a note but the liens securing payment as well, which is why the assignment instrument is referred to as an assignment of note and liens. Two liens may be involved: the vendor’s lien retained in the deed from the seller to the borrower and the lien granted by a deed of trust.
One must distinguish between an absolute assignment of a note (a permanent transfers to a new owner and holder) versus a collateral assignment (made to a lender as collateral for a loan). Notes may be assigned in either way.
This discussion addresses absolute assignments. Steps in the process are usually: (1) an initial letter of intent or preliminary contract phase when basic terms are agreed to—similar to an earnest money contract for real estate—with “outs” for the prospective buyer; (2) a due-diligence or inspection period when a prospective buyer studies and evaluates the note (or package of notes) along with the lien instrument(s) and supporting documentation; (3) a cure period for objections, if any, raised by the buyer; (4) a closing document negotiation phase in which the terms of the final assignment instrument are hammered out and agreed to; and (5) a closing where a final sale and assignment of note and liens is executed, the purchase price paid, and the original note and loan file are delivered to the buyer-assignee.
BUSINESS & COMMERCE CODE
Negotiable instruments.
A properly written and endorsed real estate lien note is a negotiable instrument for purposes of Business & Commerce Code Section 3.201 et seq. Specific requirements of negotiability are listed in Section 3.104:
Bus. & Com. Code Sec. 3.104(a). NEGOTIABLE INSTRUMENT. Except as provided in Subsections (c) and (d), “negotiable instrument” means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:
(1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder;
(2) is payable on demand or at a definite time; and
(3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain: (A) an undertaking or power to give, maintain, or protect collateral to secure payment; (B) an authorization or power to the holder to confess judgment or realize on or dispose of collateral; or (C) a waiver of the benefit of any law intended for the advantage or protection of an obligor.
A real estate note that does not qualify as a negotiable instrument may still be valid and enforceable, and it may still be sold and assigned, but common law rules relating to the assignment of contracts will apply—the negotiable instrument rules of the Business & Commerce Code will not.
The resale value of a note that is non-negotiable is likely to be discounted.
Statutory Warranties
Business & Commerce Code Section 3.416 provides minimal warranties for notes that are negotiable instruments. These are automatically in place unless the assignment instrument disclaims them:
Bus. & Com. Code Sec. 3.416(a). TRANSFER WARRANTIES. A person who transfers an instrument for consideration warrants to the transferee and, if the transfer is by indorsement, to any subsequent transferee that:
(1) the warrantor is a person entitled to enforce the instrument;
(2) all signatures on the instrument are authentic and authorized;
(3) the instrument has not been altered;
(4) the instrument is not subject to a defense or claim in recoupment of any party that can be asserted against the warrantor;
(5) the warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker. . . .
Unless contradicted or disclaimed in the assignment, these statutory warranties co-exist with contractual representations and warranties of the parties (discussed below).
DUE DILIGENCE BY BUYER-ASSIGNEE
Are the note and lien valid.
Determining the validity and enforceability of a real estate note and the lien(s) securing it is the core due-diligence task of any prospective buyer—who should obtain the whole loan file not just a copy of the note itself. A complete file will include (at least) the note; a copy of a recorded deed of trust; a copy of a recorded deed into the name of the property owner (the borrower); and a payment history. Even if only copies are being reviewed, the original note should exist and be available for inspection.
For a note to be valid, there must be consideration extended—money that is actually loaned. Hughes v. Belman , 239 S.W.2d 717, 720 (Tex.App.—Austin 1951, writ ref’d n.r.e.); and Bus. & Com. Code Sec. 3.303.
Generally, a note offered for sale should:
(1) be correct as to all material information including clearly identifying borrower and lender as well as the security property; (2) recite an unconditional promise to pay a sum-certain debt (and the numerical portion must match the written portion); (3) contain authentic signatures of all debtors and be dated; (4) provide clear terms of repayment; (5) be secured by a valid, recorded, and unreleased deed of trust; (6) contain the signature of both spouses if the property is homestead; (7) not contain any provisions that are illegal such as requiring usurious interest; (8) not be in default (monetary of technical) or the subject of any dispute with the borrower; (9) not be in litigation or bankruptcy whether existing, threatened, or anticipated; (10) not be the subject of any interest or claim by third parties; and (11) not have been previously sold or transferred in whole or in part.
This is a partial list. Sensible note purchasers will also want to perform minimal due diligence as to the value and condition of the security property since such factors may influence future note payment and performance. Does the property exist? Is it owner-occupied or occupied by renters? Is it in a state of good repair or is it underwater as a result of a recent flood?
If the parties to the note are registered entities (LLCs, corporations, or limited partnerships) it is important to verify that they are in good standing with the Secretary of State and the Texas Comptroller. If not, they do not have the legal capacity to do business, whether it is selling or buying notes or anything else.
All of the foregoing factors affect the quality of the note or notes being considered—and quality affects price.
The importance of thorough due diligence cannot be over-emphasized. A prospective buyer should engage an experienced attorney to assist in determining the validity and enforceability of the loan documents before substantial funds are committed.
Even when a note is being transferred entirely “as is” a prospective buyer-assignee should insist on an adequate due diligence/inspection period before closing.
REPRESENTATIONS AND WARRANTIES
Beyond statutory minimum warranties.
A well-drafted assignment may (and should) go beyond minimum statutory warranties to include contractual representations and warranties by the parties. It is possible for the assignment to include extensive reps and warranties, limited reps and warranties, or no reps and warranties at all—in which case the assignment is made “as is” and almost always without recourse. These terms should be expressly stated in the assignment instrument.
The goal of the seller-assignor is to minimize ongoing liability by limiting the number of reps and warranties. The buyer-assignee will instead prefer a longer list of assurances concerning note quality and completeness of the loan file.
Core representations and warranties of the seller-assignor include assurances that the note and lien(s) contain correct information and are legally valid and enforceable; that they are secured by a lawful vendor’s lien retained in a recorded general or special warranty deed plus a valid first-lien recorded deed of trust against the security property; that payments are current and there is no threat of monetary or technical default; that no adverse litigation is pending or threatened; and that the assignor is the sole owner and holder of the debt with power to transfer the note and liens.
There may be many more seller reps and warranties that a careful buyer will want to include. An example: if the seller-assignor was the original payee on a real estate note, and the note arose from seller financing, the buyer-assignee should want a specific warranty that the SAFE Act and Dodd Frank were fully complied with in the course of the original transaction.
There is the question of how long reps and warranties will survive closing (if at all)—30 days? 90 days? Forever?
Obtaining adequate reps and warranties from the seller-assignor does not substitute for thorough due diligence by a prospective buyer-assignee.
OTHER CLAUSES IN THE ASSIGNMENT
Assignments made “as is”.
What if the transaction is entirely “as is,” with no reps and warranties? There is certainly a market for this although the sales price of the note(s) will be discounted as a result. The key element in the assignment (for the seller-assignor) will be an effective “as is” clause similar to ones found in earnest money contracts and warranty deeds. Drafting these clauses can be tricky. Simplistic, one-liner “as is” clauses will not suffice since the seller-assignor needs not only to disclaim assurances regarding the note being transferred but also any reps or warranties concerning the condition and value of the security property.
Disclosure by the Seller-Assignor
Notwithstanding that an assignment is being made and accepted “as is,” a buyer should seek to obtain an agreement by the seller to make full disclosure of material facts. A sample clause might be: Assignor covenants and agrees to fully disclose to Assignee, prior to expiration of the inspection period, any and all material facts, conditions, and circumstances pertaining to the note(s), the lien(s), and the security property that could reasonably be expected to affect the Assignee’s decision to buy or not buy, even if this assignment is agreed to be “as is,”in present condition with all faults and without recourse.
Recourse by the Buyer-Assignee
Notes are sold with or without recourse by the buyer-assignee against the seller-assignor. Recourse comes in three varieties: none, full, or limited.
No recourse means what it says: if the borrower defaults then the buyer-assignee is stuck with a non-performing note (a near-worthless asset) and is solely responsible for pursuing the debtor and foreclosing on the security property.
Full recourse means that the buyer-assignee gets to give the note back to the seller-assignor if the debtor defaults. One of two things generally happen: (1) the buyer-assignee gets a credit or refund or (2) the buyer-assignee can substitute another note that is current and performing. There are other variations.
Limited recourse is, contractually speaking, all over the place. There are as many different provisions for limited recourse as there are creative attorneys to write them. Limited recourse provisions may state that there will be some sharing of effort and expense in collection or foreclosure, possibly with a reckoning after foreclosure sale of the security property. Remedies may be different when a batch of notes is involved: for example, if 100 notes are sold, the assignment might provide that the first 10 problematic notes will be full recourse, but the remaining 90 will not. In either case, there may be a hard limit on the total monetary amount of recourse available against the seller-assignor.
The availability of recourse—whether none, full, or limited—may also be contained within a specific time period. The availability of recourse is seldom indefinite.
Indemnity Provisions
If possible, the seller-assignor will want an indemnity clause holding him harmless against issues that may later arise in connection with the legality, enforceability, or collectability of the note. As with sellers of anything, the goal is no comebacks after closing.
Note buyers, on the other hand, resist not only taking the heat for defects in what they are purchasing but also paying the cost of defending against lawsuits arising from those defects. As with so many issues in real estate it comes down to quality and price. A seller-assignor may be able to get an indemnity provision included but it may be costly when it comes to the assignment sales price.
Indemnity provisions, although important, may be overrated since they are not self-executing. After all, the terms of an assignment can do nothing to prevent a borrower from suing both the seller-assignor and the buyer-assignee at some later time, resulting in inescapable up-front defense costs. One party to the assignment is left with a claim against the other based on the indemnity provision, often resulting in a second lawsuit.
As is the case with many other types of contracts, it is often beneficial to include a mandatory mediation clause in the assignment.
Drafting Considerations Generally
An assignment of note and lien(s) should be a comprehensive document. (If it is one page or less, something is amiss.) All obligations should be express. Nothing should be implied. No one should be allowed to assume anything or rely on anything unless expressly stated in writing. Oral statements should be disclaimed. A poorly-written assignment that involves unwritten assumptions and reliance on oral statements can easily form the basis for future litigation.
The foregoing discussion is by no means intended to be an exhaustive list of possible provisions that can be included in an assignment of note and liens. (Such documents can easily run 10 to 20 pages.) It merely hits the highlights.
CLOSING OF THE ASSIGNMENT
Endorsement and delivery of the note.
The note itself should be marked or stamped appropriately and the endorsement (or indorsement as it is referred to in the Business & Commerce Code) signed by the seller-assignor. The endorsement should include wording appropriate to the circumstances such as “payable to assignee without representations, warranties, or recourse” and would include the effective date.
Where does one place the endorsement? “For an instrument to be negotiable, indorsements must be written on the instrument or on a paper so firmly affixed thereto as to become a part thereof [sometimes called an allonge ]. An allonge is a piece of paper annexed to a negotiable instrument or promissory note, on which to write endorsements for which there is no room on the instrument itself.” Failure to properly endorse a note when it is transferred may impair its negotiability, resulting in the recipient being a mere transferee rather than having the superior status of a holder in due course [see Bus. & Com. Code Sec. 3.302].” Federal Fin. Co. v. Delgado, 1 S.W.3d 181, 185-86 (Tex.App.—Corpus Christi 1999, no pet.).
The original note(s) should be delivered to the buyer-assignee at closing.
Execution and Recording of the Assignment
Both the seller-assignor and the buyer-assignee should sign the assignment in order to indicate mutual assent to its terms and conditions. A properly-drafted assignment is not merely a unilateral transfer but represents a complex contract between the parties. The assigning party’s signature is not enough.
It is usually advisable for the buyer-assignee to record the assignment in the real property records of the county where the security property is located, so the assignment should be prepared in recordable form.
INVESTOR STRATEGIES
Notes are financial assets and their acquisition can be a part of an investor’s long-term buy-and-hold strategy. Like rents, a portfolio of mixed-age performing notes can produce a stream of income; however, unlike real property, there is no underlying equity that appreciates over time. In fact, the value of note assets depreciates so a stable portfolio requires continual replenishment. As notes age and mature new notes must be acquired in their stead if the income stream is to be maintained.
It is, of course, possible to acquire notes for other reasons. One aggressive strategy is to buy a secured note in default with the specific intention of foreclosing on the security property. A long-term hold is not the objective; acquiring the property is the objective. This scenario contemplates more of an “as is” approach to the note since its price is likely to be heavily discounted. In such cases, thorough due diligence is necessary in order to ensure that both the note and deed of trust are valid and enforceable with no obvious defenses available to the debtor.
Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. No attorney-client relationship is created by the offering of this article. This firm does not represent you unless and until it is expressly retained in writing to do so. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well.
Copyright © 2023 by David J. Willis. All rights reserved. Mr. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, www.LoneStarLandLaw.com .
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IMAGES
VIDEO
COMMENTS
THIS Assignment of Promissory Note as Collateral Security (the "Assignment") is entered into as of October 15, 2013 by and between WESSCO, LLC, a Delaware limited liability company, (the "Assignor") and THE BANK OF KENTUCKY, INC., a Kentucky banking corporation, (the "Assignee").
Using a Promissory Note to Pledge Collateral. Collateral refers to property pledged to ensure that a loan will be repaid. Take the following measures when collateral is pledged with a promissory note: ... This should be done with an addendum stating the assignment of your rights or the completion of the assignment paperwork required by the lender.
A collateral assignment involves granting a security interest in the asset or property to a lender. It is a lawful arrangement where the borrower promises an asset or property to the lender to guarantee the debt repayment or meet a financial obligation. Moreover, in a collateral assignment, the borrower maintains asset ownership, the lender ...
Practical reminders include: Make sure that the chain of title is precise when assigning the mortgage, the note and other collateral documents such as assignments of leases and rents, guarantees and UCC's. Don't leave the note "behind.". Assign and endorse the note by allonge so that the chain of title is complete.
This Assignment shall be governed by and construed in accordance with the laws of the District of Columbia, except to the extent that the laws of the jurisdiction in which the particular collateral is located are required to be applied pursuant to applicable choice of laws principles or rules. 8.
Whether a written, recorded assignment is needed depends on state law. Endorsements of Promissory Notes. When a loan changes hands, the promissory note is endorsed (signed over) to the new owner of the loan. In some cases, the note is endorsed in blank, which makes it a bearer instrument under Article 3 of the Uniform Commercial Code.
If the promissory note is being as signed only as collateral, the endorse ment should be in blank: "Pay to the Order of _____," with the name of the endorsee left to be filled in later, if the collateral as signment ever becomes an absolute assignment (after default). The en dorsement then becomes the equiva
A Note on Annuities . You may also be able to use an annuity as collateral for a bank loan. The process is similar to using a life insurance policy, but there is one key difference to be aware of. Any amount assigned as collateral in an annuity is treated as a distribution for tax purposes.
Collateral is property pledged to secure repayment of a loan. Things You Will Need. Promissory note. Assignment paperwork. Ensure the borrower named in the promissory note has upheld the terms set forth in the promissory note, such as making timely payments. Ensure that the interest you charged as set forth in the note is legal, not usurious.
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One must distinguish between an absolute assignment of a note (a permanent transfers to a new owner and holder) versus a collateral assignment (made to a lender as collateral for a loan). Notes may be assigned in either way. This discussion addresses absolute assignments. Steps in the process are usually: (1) an initial letter of intent or ...
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Examples of Collateral Assignment of Note in a sentence. Xxxxxx, Vice President and General Counsel of Woodbridge Mortgage Investment Fund 1, LLC, a Delaware limited liability company, to me known and known by me to be the party executing the foregoing Collateral Assignment of Note, Mortgage and Other Loan Documents instrument on behalf of said limited liability company, in favor of ...
ASSIGNMENT OF NOTE. THIS ASSIGNMENT is entered into effective this 18 th day of March, 2008 by and between Astraea Investment Management, LP., ("Assignor") and Global Casinos, Inc., a Utah corporation ("Assignee").. WITNESSETH. WHEREAS, Casinos U.S.A. Inc executed a Promissory Note originally payable to Assignee in the principal amount of Two Hundred Forty-Nine Thousand Four Hundred Eighteen ...
Collateral Assignment of Notes means those certain Collateral Assignment of Notes, executed and delivered by the applicable Credit Parties in favor of the Administrative Agent, for the benefit of the Lenders, collaterally assigning promissory notes issued by any Non - Material Domestic Subsidiary to a Credit Party. Sample 1 Sample 2 Sample 3.
- Once the assignment has been fulfilled the assignee will fill this portion out and return it to USAA for release of the collateral assignment. NOTE: The collateral assignment of any annuity or Modified Endowment Contract (MEC), where allowed, is likely to have significant tax consequences and we recommend that you consult your financial or tax
#2052494 - 12/04/15 03:22 PM Re: Assignment of a Note as Collateral terpsfan: rlcarey 10K Club Joined: Jul 2001 Posts: 77,140 Galveston, TX: If you take the property (deed), then I think it would be covered. _____ The opinions expressed here should not be construed to be those of my employer: PPDocs.com. Return to Top ...
Define Assignment of Notes and Liens. means a Collateral Assignment of Notes and Liens and Security Agreement duly executed by Borrower assigning to Bank and granting Bank a first priority security interest in certain Mortgage Paper relating to a Mortgage Loan, in recordable form, and all like intervening instruments that have been executed with respect to such Mortgage Loan and which is in ...
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Upon satisfaction in full of the Obligations, this Assignment shall be void and of no effect and, in that event, upon Assignor's request, the Assignee agrees to execute and deliver to the Assignor instruments evidencing the termination of this Agreement and/or release of Assignee's interest in the Note and the Mortgage.
Collateral Assignment of Promissory Note. Collateral Assignment The Owner may assign this contract as collateral security. The Company is not responsible for the validity or effect of a collateral assignment. The Company will not be responsible to an assignee for any payment or other action taken by the Company before receipt of the assignment ...
Collateral: In many cases, you'll need to provide assets to secure the loan, especially for larger amounts. This can be equipment, real estate, or other valuable business assets.