What’s wrong with this picture? A reader wrote in with a problem that many new note people run into without realizing it:
“I’m brokering a note. At closing, it’s assigned to me, then I assign it to my investor. The investor’s attorney says this is a problem (usury: he looks at the discount as points, etc.). Also, I think there’s a possibility the investor could sue me if the note goes bad.”
The trouble starts with the first four words. Before structuring any deal, you need to know which role you are playing.
Broker or principal: decide which you are
The writer needs to clarify his position in the paper business. Is he going to be a broker, “one who acts as an agent for others in negotiating contracts, purchases, or sales in return for a fee or commission,” as The American Heritage Dictionary puts it? Or is he going to be a principal for his own account, buying at one price and selling (at the same time or later) at a higher price and profiting on the spread?
If he is going to be a broker, he should act like one. He structures transactions the way real estate agents and others who work on commission do. With an appropriate brokerage agreement in place to represent the seller, he can bring the seller and his investor together and let them work out the details.
His statement “I’m brokering a note” notwithstanding, I suspect being a broker was not his intention. His next statement, “At closing, it’s assigned to me, then assigned to my investor,” indicates (at least to me) that he wanted to be a principal in the transaction.
Four steps that protect a principal
With a bit of planning and research, such as asking others how the transaction might have been structured, he could have eliminated or at least reduced his worry about being sued. Here are the steps he could have followed.
1. Sell only to experienced institutional investors
Bill Mencarow has given this advice countless times, and it is no less valuable with the passage of time. In the example above, an attorney for an experienced institutional investor would know that the note holder was simply selling an asset he owned, his note, and that he had the right to sell it at any price he agreed to.
And because the transaction did not affect the note’s maker financially, points and usury were not at issue.
2. Use the investor’s purchase agreement, naming yourself “or assigns”
By using the investor’s own purchase agreement and naming himself “or assigns” as the buyer, the principal usually satisfies the institutional investor’s appetite for form. The investor and its attorney are familiar with the document, and that’s half the battle.
3. Let the investor do its due diligence
Although the agreement starts out between the note seller and the principal “or assigns,” the institutional investor will almost always do the necessary due diligence: title search and policy, property valuation, document review, the maker’s creditworthiness and so on. So if there was any sign the note could go bad, the investor should have known about it.
4. Assign your contract rights with limited warranties
I go a step further and use an Assignment of Contract Rights agreement when I convey my interest to a later investor. Paragraphs 4 and 5 contain these statements:
“Assignor makes no warranties with regard to the Note and Mortgage/Deed of Trust beyond those expressly contained in this Agreement and does not adopt any of the Seller’s warranties set forth in Exhibit A.”
“Assignee acknowledges having read the Mortgage/Deed of Trust Purchase Agreement (Exhibit A) and assumes all of the responsibilities, duties, and liabilities of Assignor under the terms of that Agreement.”
How the assignment has worked in practice
I used this document with several investors over seven or eight years and had few, if any, problems. Some investors chose not to use this exact form, but they were willing to let me accomplish the same goal in their own way.
The bottom line: the letter writer, and anyone else who is unsure of his position in a note transaction, needs to get a better handle on how he intends to do business, as broker or principal, and structure his transactions to match.
Sample assignment of contract rights
Here is the full agreement. Replace each bracketed placeholder with your own details.
Assignment of Contract Rights
This Agreement, entered into this [day] day of [month], [year], by and between [Assignor name], hereinafter referred to as “Assignor,” and [Assignee name], hereinafter referred to as “Assignee.”
WHEREAS, Assignor is a party to a Full or Partial Note and Security Instrument Purchase Contract dated the [day] day of [month], [year], by and between Assignor as Buyer and [Seller name] as Seller, a copy of which Contract is attached hereto for identification and marked Exhibit A; and
WHEREAS, Assignee desires to purchase Assignor’s interest in said Contract upon the terms and conditions set forth hereinafter; and
WHEREAS, Assignor is desirous of selling and assigning to Assignee all of its rights, title and interest in said Contract upon the terms and conditions set forth hereinafter.
NOW, THEREFORE, THIS AGREEMENT witnesseth that for and in consideration of the sum of $[amount] paid by Assignee to Assignor, the receipt of which is hereby acknowledged, Assignor does sell, assign, transfer and set over to Assignee all right, title and interest in money now due and payable under the subject Mortgage/Deed of Trust Purchase Contract dated the [day] day of [month], [year], between Assignor as Buyer and [Seller name] as Seller, the subject of which is the purchase by Assignor from the Seller of the right to receive all or a portion of the periodic payments (including a balloon, if applicable) to become due under the terms of a Note executed by [Maker name], as Maker. The said Note is more specifically identified in the subject Note and Security Instrument Purchase Contract attached hereto as Exhibit A. The Parties to this Contract make the following Warranties:
1. Assignor warrants that there has been no breach of the above-mentioned Note and Security Instrument Purchase Contract by Assignor, and that there has been no known breach of the above-mentioned Contract by the Seller, or of the Note and Security Instrument by either the Seller or Maker thereto.
2. Assignor warrants that its rights, title and interest under said Note and Security Instrument Purchase Contract have not been assigned or encumbered.
3. Assignee is authorized to notify Maker of the subject Note to deliver subsequent required payments (including balloon payment, if applicable) to Assignee. Assignor (if not accomplished by Seller) shall also direct Maker to remit subsequent required payments to Assignee. Assignor shall execute documents as appropriate to effectuate this assignment, to include (but not limited to) an Assignment/Certificate of Transfer (or other appropriate document of similar purpose) in a form which may be recorded in the appropriate Public Records Office.
4. Assignor makes no warranties with regard to the Note and Security Instrument beyond those expressly contained in this Contract and does not adopt any of the Seller’s warranties set forth in Exhibit A.
5. Assignee acknowledges having read the Note and Security Instrument Purchase Contract (Exhibit A) and assumes all of the responsibilities, duties and liabilities of Assignor under the terms of that Contract. (Assignee’s initials: [initials])
6. This is the entire Contract of the Parties relative to the Assignment by Assignor to Assignee of all contract rights to the Note and Security Instrument Purchase Contract attached as Exhibit A. Waiver, modification or additions must be in writing to be effective.
This Contract is entered into the day and year first written above.
[Assignee signature]
Assignee[Assignor signature]
Assignor
