What if Your Lender CAN’T Produce the Note?

March 10, 2009

By Terry Smiljanich:

A growing number of homeowners around the country are using a foreclosure defense the Consumer Warning Network first told you about in June of last year.  It’s called “Produce the Note,” and we want you to know this is not a mere technicality that should be treated lightly by the lender or by the Court.

Everyone needs to understand the importance of the issue. When a lender can’t “produce the note,” allowing a foreclosure to proceed puts the homeowner at risk of owing that debt again to another party.  So great caution must be taken before a judge can allow someone who can’t “produce the note” to cash in on your home.

Can’t Produce the Note – What Happens?

So, what happens when the lender tells the Court it can’t produce the original note, because it is lost?

Let’s start with the basics. If a lender wants to foreclose on a property, it has to be able to show that it is, in fact, the appropriate person to whom the money is owed. That right to foreclose belongs ONLY to the person who has legitimate POSSESSION OF THE ORIGINAL NOTE – not a copy, not an electronic entry, but the original note itself with the signature of the person who allegedly owes the money.

So if you are faced with a foreclosure, you have every right to demand that the person trying to take your property, first, prove to the Court that it has possession of the original promissory note.

What the Lender Must Do

What often happens, however, is that the lender claims it doesn’t have the original note, because that note has been lost or destroyed. What does the law require the lender to prove?

The “Uniform Commercial Code” is a set of laws governing commercial transactions that many states, such as Florida, have adopted. It contains a specific provision on this subject (Section 3-309) which states that a person can enforce a promissory note without having the original, BUT only under certain limited circumstances.  All of the following must be proven:

  1. The person has to claim that it no longer has the original note;
  2. The person has to prove that it was properly in possession of the note and entitled to enforce it WHEN it lost possession of the note;
  3. The person has to prove it didn’t “lose” possession simply because it transferred the note to someone else (i.e., it’s not really lost); and
  4. The person has to prove that it cannot produce the original note, because the instrument was destroyed, or its whereabouts cannot be determined, or it was stolen by someone who had no right to it.

All of these matters have to be proven by the person trying to foreclose on the property. It is not the obligation of the borrower to prove or disprove any of this.  The borrower can challenge the right of the person trying to foreclose and demand proof.

The Court’s Important Role

It is up to the Court to determine whether the lender has satisfactorily explained why it no longer can produce the original note. The Court also has to be satisfied that when the original note was lost, the person trying to foreclose on the property had possession of the note at the time it was lost. Until the Court has been satisfied of all of this, the foreclosure cannot proceed.

It is also important for the Court itself to understand that this is not merely a “technicality,” and the judge should not be satisfied with anything less than full proof of this issue. Why? Because the Court itself needs to appreciate the fact that if it agrees that the original note has been legitimately lost and it allows the foreclosure to proceed without the original note, it is the borrower who is still at risk.

Why? Because incredibly, even if a Court has found that the original note is lost and the foreclosure sale is finalized, if someone later turns up with the original note and proves that it is the proper holder of the note, and not the person who foreclosed on the property, the original borrower is STILL LIABLE.

That’s right. Someone took your home, and the Court allowed it because it believed that the lender proved that the note was lost and it was the proper party. Then someone legitimate shows up with the actual note and you still owe that person the money even though your property was taken with the blessing of the Court. How fair is that!

If you ever find yourself in Court without a lawyer, be sure to bring all of this to the attention of the judge. It might help open the Court’s eyes to the care with which everyone should proceed.