Buying and Selling Loans
Martin Goodman, Found and President of LoanMLS.com
In these stressful economic times, many private money lenders and their investors are
looking at acquiring existing loans, or are considering selling loans they currently own.
There are many reasons loans are bought and sold. Often times the reason has more to do
with the individual situation of the seller than of the note itself, or the condition of the
borrower. The most common reasons loans are sold are for liquidity, dissolution of a
partnership, change of financial circumstance, deterioration of the underlying collateral,
or the default of a borrower.
There are many opportunities for buyers and brokers to acquire loans at a discount to the
principal balance which may result in substantially better yields than originating a new
loan. Buyers and their brokers should consider several factors when purchasing a note,
including the strength and payment history of the borrower, the quality of the underlying
collateral securing the loan, and the strength of the guarantors, if any.
Loans can be purchased individually or in pools. Although the legal agreement differs
for each, the basic process flow is the same whether you are buying or selling one or
more loans. For simplicity purposes, I’ll refer to the transaction as a loan asset
transaction. The term “loan sale” and “note sale” will also be used interchangeably
throughout.
The basics of the purchase and sale process are relatively straight forward, but like any
transaction, the devil is in the details. Following are eight steps involved in the purchase
and sale of loan assets followed by a discussion of the most common pitfalls to avoid
throughout the transaction.
Step 1: Confidentiality and Non-Disclosure Agreement
It is customary to execute a confidentiality and non-disclosure agreement to protect both
parties. Sensitive borrower information is typically exchanged and both parties need to
agree to safeguard this information.
Step 2: Make an Offer
Make an offer for the loan asset in writing. Work with an attorney who has handled loan
purchase and sale agreements in the past and can walk you through the various nuances

to the agreement. An entire article can be written on the ins and outs of this agreement,
and is a topic for another time.
Step 3: Good Faith Deposit and Open Title
Typically a seller will provide a good faith deposit to get the process started, but this is a
point to be negotiated between the parties. It is a lot of work to gather the loan files
together and you want to make sure you have a serious buyer before you go through the
effort. You should also prequalify the buyer and verify that the funds are in place and
that this buyer isn’t going to try and “raise the funds” once they review your files.
After a deposit is received, the seller should open a title policy. Most of the time the
seller can buy an ALTA assignment endorsement (10.6-06) which insures the assignment
vesting and lien position to the new party. The endorsement is less expensive than a full
title policy and is recommended if it is available.
Step 4: Due Diligence
Once a deposit is received, conduct thorough due diligence on the loan asset. Your level
of due diligence will vary depending on the asset itself, and on the number of assets you
purchase. Most purchasers will conduct an independent appraisal, re-underwrite the loan,
examine the chain of title, review the original promissory note, review all correspondence
with the borrower, the trustee, and any other parties to the loan.
There are a number of third party companies that specialize in performing independent
due diligence on loan assets and generally charge $250 per loan depending on the type of
appraisal and underwriting conducted.
Most of the time you will not be able to inspect the interior of the property, or conduct an
interview with the borrower, but that can be a point of discussion between you and the
loan seller at the time the offer is negotiated.
Step 5: Sign Documents
Besides the purchase and sale agreement, two additional documents must be signed in
order to transfer ownership of a loan. The first is an assignment, which is a notarized
document referencing the original mortgage or deed of trust and is recorded in the same
county in which the real property securing the note is located.
The second document is a signed endorsement of the original promissory note. This
endorsement can be handled by either typing language on the back of the note (e.g. Pay to
the order of….) much in the way a check is endorsed when signed over to a third party.
If there is not room on the back of the note, another way to endorse the note is by
attaching an Allonge which effectively has the same language that would otherwise be
placed on the back of the Note. The Allonge must be securely attached and at all times
kept with the original promissory note.

Example of language that may be used in an Allonge is:
THIS ENDORSEMENT IS TO BE ATTACHED TO AND MADE PART OF
THAT CERTAIN PROMISSORY NOTE dated Month, Day, Year, made by
Borrower Name Here, in favor of ABC Company, the payee, in the original
principal amount of $x,xxx,xxx. Such Note is hereby transferred pursuant to the
following Endorsement with the same force and effect as if such Endorsement
were set forth at the end of such Note:
THIS PROMISSORY NOTE is herby Endorsed and Assigned without
recourse to: Acme Loan Buying Company
PAY TO THE ORDER OF: Acme Loan Buying Company
__________________________________
Seller
Step 6: Record the Documents
The last step is to provide the notarized assignment to the title company to record and
issue the policy specified in the title instructions and preliminary title report.
Step 7: Exchange Funds
Once the document is recorded and confirmed by the title company, funds may be
exchanged. Some parties use an escrow for this process, or you may use an attorney’s
trust account.
Step 8: Notify the Borrower
Once the financial exchange is completed, follow the laws with regards to notifying the
borrower of the new loan servicer, if any apply. Not every transaction results in a change
of servicing, and different laws apply to residential and commercial transactions.
Typically, the prior loan servicer provides a “good-bye” letter which indicates the loan
servicer is no longer servicing the loan and instructions on where to send payments.
Then the new loan servicer sends a “hello” letter introducing themselves and provide
required contact information, and information on where to send payments.
Although the eight steps of concluding a loan purchase and sale transaction seem fairly
straight forward, there are numerous pitfalls to avoid:

Representations and Warranties
In a typical loan purchase sale agreement there are representations and warranties that
provide certain remedies (e.g. a credit, or loan buy back, etc.) if one party provides false
information, or the loan is materially different, or the transaction is fraudulent, etc.
Be aware that the representations and warranties are only as good as the party making
them. Even if you are dealing with a large institution, that institution may not exist after
the transaction concludes. Even if the institution does remain in business, recovery may
require expensive litigation. The key to avoiding problems is to conduct very thorough
due diligence before the transaction is concluded. If you are in doubt of something
material to the transaction, notify the seller to get clarification and/or terminate the
transaction.
Chain of Title
The chain of title can be tricky in a loan purchase. Some notes may have been
previously transferred several times in the past, and if the vesting is off just slightly from
one transfer to the next, or there is a vesting gap between one assignment and the next, it
may be very difficult, if not impossible, to resolve. Vesting gaps in title chains are very
common and come about because parties receive assignments and then never record
them. Other times, a vesting gap occurs because a party receives an assignment, transfers
funds, and then discovers the assignment provided is un-recordable for a variety of
reasons, or there is just an error which goes undetected.
A title policy or assignment endorsement is a good protective measure, but understand
that your title policy covers you only after you incur a loss and not upon the discovery of
an error. Consider this example of a potentially prolonged title recovery: Buyer
purchases a 2nd lien and shortly thereafter the borrower stops making payments. The
lienholder forecloses, and the trustee discovers there is a vesting gap in the assignment of
title chain and the trustee will not foreclose. Meanwhile, the borrower continues to pay
on the senior lien and the junior lienholder is unable to foreclose or collect on a title
claim because the junior lienholder has not technically incurred a loss on the policy.
Your loss will only occur when the senior lien forecloses out your position which may or
many not happen depending on whether or not the borrower continues to pay the senior
lien.
Pull the original mortgage or trust deed and every recorded assignment and examine them
yourself and make sure you are satisfied that the chain of title is intact.
Property Taxes
Most taxing authorities have information available on the internet and you can check to
make sure property taxes are not delinquent prior to the purchase of the note. If the

property taxes are delinquent, make note of that county’s tax auction procedures and
decide if you still wish to continue with the note purchase.
Junior Liens
If you purchase a junior lien, be sure to obtain verification that the senior lien is current.
If the senior lien is not current, be sure you understand your rights to reinstate the lien in
the state in which the loan is recorded. In some states junior lien holders may not
reinstate senior liens and must instead pay them off, or protect their position at a trustee
sale.
Verify that the senior lien does not have language in the promissory note which prohibits
a second lien to be put in place. If a junior lien is prohibited, obtain the document
granting permission to the borrower to obtain the junior lien.
Obtain the promissory note of the senior lien holder, if possible. Since promissory notes
are not recorded documents, this is often not easily obtainable. If obtained, examine the
document for adverse changes in interest rates, balloons, or other terms that may
adversely affect your junior position.
Promissory Note
In many loan sale transactions, the original promissory note cannot be located and the
seller offers an Affidavit of Lost Note. Up until a few years ago an Affidavit was
sufficient to continue foreclosing, but because of the increase in the number of
foreclosures many judges refuse to permit a foreclosure without the original promissory
note. Once you obtain the original note, keep it in a fireproof vault for safekeeping.
Loan Underwriting
Many loans contain errors in the original underwriting. Depending on the type of loan,
the error could be significant. For example, in a residential loan, an error of more than
.125 on the APR presented in the borrower disclosures could enable the borrower to
rescind the loan. Re-underwrite the loan as if you were making a new loan and examine
every disclosure, the timing of the disclosures, and the details on any applicable rights of
cancellations.
Independent Confirmation of Loan Terms
If permitted in the terms of your loan agreement, it is a good idea to send an Estoppel
Certificate to the borrower. The loan Estoppel Certificate is a document which asks the
recipient to confirm the terms of the mortgage such as the outstanding balance, interest
rate and frequency and due date of payments. Independently verifying that the borrower
is in agreement with the loan terms can save a lot of aggravation down the road.

Borrower Cooperation
In some transactions, the borrower is skeptical that the loan was transferred and may not
pay the new note owner, especially in private, non-bank note sale transactions.
Anticipate potential borrower confusion and establish a procedure with the note seller in
the event they receive payments shortly after the transaction concludes. In addition to
the customary “good-bye” letter, you may wish to obtain a separate letter from the note
seller to the note buyer confirming the transaction and ensure that the note seller will
cooperate in speaking with the borrower if need be to confirm the sale transaction.
Purchasing and selling loan assets is a specialized transaction, but like everything else in
business, the more you do it, the better you get at it. If you’re buying or selling notes
for the first time, be sure to use experienced counsel and spend extra time on your due
diligence and the fruits of your labor will pay off with higher yields and fewer
unexpected surprises.
Martin Goodman is the founder and President of LoanMLS.com, a classified loan
advertising site for residential and commercial loans assets. He may be contacted by
email at mgoodman@loanmls.com .