Last week, I filed a brief for a pending appeal in the First Circuit Court of Appeals concerning a lost promissory note. This appeal concerns a critical issue of Massachusetts foreclosure law: the need for a lender to have a borrower’s promissory note to foreclose.
Overview of a Promissory Note
A promissory note is a legal term for a written promise to pay a definite sum of money. Often referred to as simply a “note”, this is a legal contract that a party signs, promising to repay a sum of money. In the context of real estate, a promissory note is signed by a lender and a home buyer, where the home buyer agrees to repay the money borrowed to purchase the home. While it is common for homeowner to refer to “paying my mortgage” when making payments on a home loan, a homeowner is actually making payments towards the promissory note (a mortgage, in contrast, is a security agreement, allowing a lender to foreclose if the debt is not repaid).
Most promissory notes for home loans are negotiable instruments, a legal document guaranteeing the payment of a specific amount of money at a set time. The critical importance of this is negotiability: the right of a mortgage lender to sell the promissory note. Mortgage lenders generally want to sell a mortgage loan as quickly as possible, for the purpose of maximizing their return on investment.
“Hold the Note” Requirement for Massachusetts Foreclosure Law
Massachusetts law requires a foreclosing entity to “hold the note” at the time of foreclosure. This comes from Eaton v. Federal National Mortgage Association, a landmark Massachusetts case that made this a requirement for the foreclosure process. A foreclosing entity does not need to have physical possession of the note; it is permissible for an agent (such as the loan servicer) to hold it on the note owner’s behalf.
A home owner who wishes to see their promissory note can generally request it from their lender through a qualified written request. Moreover, Massachusetts law requires a loan servicer to certify in writing to the borrower that they own the loan. A foreclosing entity must also record an affidavit in the land records certifying that they own the note. To the best of my knowledge, there is no requirement that a foreclosing entity must show the actual, physical note to the borrower prior to foreclosure.
What Happens When a Promissory Note is Lost?
If a promissory note is lost, the lender has the option of doing a lost note affidavit. The law for this, G.L. c. 106, § 3-309, only allows such an affidavit if the lender (among other things) previously had possession of the note and cannot obtain the note through a diligent search.
However, even with the the lost note affidavit law, a missing promissory note is a headache for a lender attempting to foreclose. For example, a 2017 Land Court decision held that a lender could not foreclose on the basis of a lost note affidavit due to problems arising from the change of the servicer for the loan.
In my appeal, I challenged whether the foreclosing entity made an adequate showing for each requirement of the lost note affidavit law. This is an area of law that continues to evolve and be relevant to matters of foreclosure defense. Stay tuned . . .
If you need help avoiding foreclosure, contact me for a consultation. The benefits of having an experienced attorney on your side can make all the difference in getting you the outcome you need.