Co-Author: Tasha J. Power, Esq.
Question:
I have seen news reports explaining that banks and other mortgage lenders need to produce the original signed promissory note if the lender is going to foreclose on a piece of real estate. I’ve also heard that many lenders can’t produce the original promissory notes. Can I demand that my lender “produce the note” here in Colorado as a defense to a foreclosure?
Answer:
Generally, there are alternatives under Colorado law that permit a lender to produce documents other than the original promissory note in a standard public trustee foreclosure of property in Colorado. There are, however, cases in which a lender can be compelled to either produce the original promissory note or provide a borrower with some assurance that the lender is in fact the party with the right to take legal action with regard to a promissory note.
Mortgage Securitization
One reason that a lender may not actually possess the original promissory note for a given mortgage is because of the securitization of mortgages. Simply put, securitization is the process under which mortgages are sliced into pieces, repackaged, and then sold as securities to institutional and other investors. Commonly known as “mortgage backed securities” in the industry, mortgage securitization is a critical part of the mortgage loan industry for a number of reasons, including providing a level of liquidity to mortgage loan originators, and assisting mortgage lenders in meeting regulatory and capital requirements, among other reasons. On the other hand, the securitization of mortgages complicates matters greatly. For example, many economists argue that one important cause of the subprime mortgage crisis was that investors could not adequately assess the risk of mortgage back securities. Additionally, from a practical standpoint, throughout the securitization process, the original promissory note underlying a given mortgage loan may have changed hands many times, and ultimately may have been lost in the shuffle.
In light of this fact, borrowers in some states have had some success in demanding that their lenders “produce the note” before foreclosing on a mortgage loan. However, Colorado is a bit different. In Colorado, the effectiveness of the “produce the note” defense varies depending on whether you are involved in (1) a public trustee foreclosure or (2) a formal lawsuit for breach of the promissory note.
(1) Public Trustee Foreclosure
Colorado’s foreclosure process is unique because Colorado is one of the few states in the country that requires the use of a public trustee (rather than a private trustee) in foreclosure proceedings. As such, if a mortgage lender elects to foreclose on a property in Colorado, the lender is required to file certain documents and otherwise conduct the foreclosure process with the Office of the Public Trustee of the county where the property is located.
Pursuant to C.R.S. § 38-38-101, the lender is required to submit to the Public Trustee, among other things, the “original evidence of debt” (the promissory note) or one of the following as a substitute for the original promissory note: (i) a corporate surety bond in the amount of one and one-half times the face amount of the original note, (ii) a certified copy of the note, or (iii) a certified copy of a monetary judgment entered by a court. Accordingly, to foreclose on a property in Colorado under this statute, a lender is not required to provide the Public Trustee with the original promissory note as long as it can provide one of the three alternatives. Thus, the “produce the note” defense provides very little protection to borrowers in standard foreclosure proceedings conducted through the Public Trustee’s office.
(2) Suit on the Note
However, in Colorado, a formal lawsuit based on the breach of a promissory note is different. In these cases, it may be helpful for a borrower to demand production of the original note. For example, a lender may pursue such a suit after a foreclosure if there is deficiency or some amount outstanding on a promissory note over and above the value of the property foreclosed. In these cases, generally speaking, a lender may sue for a breach of a promissory note even if the lender is not in possession of such promissory note. However, under Colorado law, if a lender cannot produce the original note, the court must determine that a borrower is “adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument” before enforcing the note against the borrower. This means that where a lender cannot produce the original promissory note, such lender can be made to provide a guarantee or some assurance that no other party will sue the borrower on the same promissory note in the future. Some borrowers in Colorado have been pursued simultaneously by two separate lenders on the same mortgage obligation, and have successfully defended against such suits by using this section of Colorado law to their advantage. As a practical matter, lenders generally do not want to provide any sort of guarantee, and this requirement can be leveraged to try to settle such a suit.
Conclusion
While the “produce the note” defense is generally not effective in a standard Colorado Public Trustee foreclosure because of the various alternatives available to foreclosing lenders, borrowers should fully understand their rights in any legal action asserted by a lender, including adequate protection against future legal actions by other lenders where a plaintiff lender cannot produce the original note.
This article is intended to provide general information and, therefore, should not be treated as legal advice. If you have been sued for a deficiency or have questions about a specific legal issue, nothing will substitute for the advice of a qualified attorney.
For additional information please contact one of our Real Estate Attorneys.
