Despite its fancy name, an estoppel letter simply asks the note payor to confirm the essentials of the note. This lesson explains why you need one, what can go wrong without it, and includes a sample letter you can adapt.
What an estoppel letter does
Why should a broker or investor use one? Doesn’t he already have all the information in the documents? Yes. The purpose of an estoppel is not to get new information. It’s to make sure the payor agrees that the figures the broker or investor has are correct.
What can go wrong without one
Suppose you skip the estoppel. Here are three ways it can come back to bite you:
- The first payment the investor receives is $100 less than he expected. The payor says the note was renegotiated last year and proves it with a document the investor was never given when he bought the note.
- When the balloon comes due, it’s $50,000 short. The payor proves he made a $50,000 principal payment to the note seller long before the investor bought the note, but it was never reflected in the documents.
- The investor never receives the first payment, and the supposed payor says he knows nothing about owing on the mortgage and that the note is a forgery.
Estoppels and holder in due course status
There’s another reason to get an estoppel, especially if the note is in California, where it is known as a “trustor’s offset statement.” If it can be shown that the investor had any indication of possible defects in the note and failed to get an offset statement, he cannot enforce the note. As the California legal journal first tuesday puts it:
“A trustor’s offset statement is a primary step the trust deed investor must take toward establishing his status as a holder in due course, demonstrating he has purchased the paper in good faith without knowledge of defects.”
A primary step. That’s a good thing to remember.
What is a holder in due course? It’s a legal term for the owner of a note who is protected from certain defenses the payor might raise in a lawsuit. Suffice it to say, you want to be a holder in due course any time you buy a note. Check with your lawyer to make sure of your status before you buy.
When the payor doesn’t respond
What if the payor doesn’t respond to the estoppel? In fact, the payor has no duty to respond unless the note requires it. That makes a response clause valuable: look for it in the notes you buy, and include it to improve the value of the notes you create.
In at least one state, California, the payor’s non-response binds him to the figures in the offset statement if the trust deed contains a provision requiring him to respond.
Here’s the author’s tip for getting a response: inflate the figures. If the payor owes $500 a month, ask him to confirm he owes $1,000 a month. If the balance is $35,000, ask him to confirm a balance of $135,000. You’ll hear from him.
Sample estoppel letter
Send this letter to the payor by certified mail, return receipt requested. Fill in every bracketed item.
Dear [Payor name]:
Please take notice that [Note seller’s name], the payee of the Note dated [date], made by you to secure the payment of the principal sum of [amount], plus interest, secured by a [trust deed / mortgage / contract for deed] on the property located at [property address], is in the process of transferring the [trust deed / mortgage / contract] and note to [Your name and address].
The records indicate that as of [date], the outstanding balance of the Note is $[balance] and that all payments through [date] have been paid and received. The monthly payments on the note are $[payment]; [number] have been paid and [number] remain to be paid [if there is a balloon, add: “with a final payment in the amount of $[amount] due [date]”]. Further, the next payment of $[amount] is due [date].
Please acknowledge that these figures are correct by signing your name at the bottom of this letter where indicated and returning it in the enclosed self-addressed stamped envelope. It is important that we hear from you as soon as possible.
You will be notified when the transfer of your mortgage has been completed. Until that time, continue making payments as previously instructed.
[Your name]
[Address]
[Phone]
