When a bank or mortgage company is trying to foreclose on a note that has been sold numerous times, their most common strategy is to add an endorsement on the note called an “endorsement in blank.”
For example, let’s say Bank ABC is your original lender and your loan gets sold to Bank XYZ. Bank ABC might add a stamp on the last page of the note which says “Paid to The Order of ____________ and it will be signed by a representative of the original lender.
The reason this endorsement is so significant is because whichever bank has possession of the original note can enforce it if the endorsement was on the note before the foreclosure suit was filed.
This seems a little crazy, doesn’t it? The reason they are allowed to do this is because our Uniform Commercial Code (“UCC”) permits it. Under the UCC, most promissory notes are considered negotiable instruments and can be endorsed to another party just like a check can (another negotiable instrument).
But what about a loan modification? Let’s go back to that last example but add in a loan modification. Let’s say your original note and mortgage is with Bank ABC but you eventually did a loan modification with Bank ABC. After you did your loan modification, Bank ABC sells your loan, including your loan modification to Bank XYZ.
As was explained in the previous blog article, a loan modification is not a negotiable instrument. It is viewed by the courts as a traditional contract so the original is not required to be produced at trial.
If you default on the loan modification, can Bank XYZ use an endorsement from Bank ABC to prove standing to foreclose on the modification?
I would argue “no.”
If a loan modification is not a negotiable instrument and only a negotiable instrument be transferred by an endorsement, it logically follows that a loan modification cannot be transferred by way of endorsement. I would argue that an assignment of the modification would need to be executed prior to the filing of the foreclosure suit. Remember that this would need to be raised by the borrower as an affirmative defense to the foreclosure action.
Ryan C. Torrens, Esq.
Consumer litigation attorney