How to Distinguish the Promissory Note from the Debt in a Loan Transaction

It seems nothing gets a judge angrier than being challenged on the court’s misconception of law. In 42 years of trial experience my conclusion is that sometimes you need to risk veins popping in the neck and even contempt  citation to get your point across. Yet in the heat of the moment it is easy to cross the line that the judge wants you to cross where it gets personal, nasty and genuinely contemptuous of the court. Having been cuffed twice, I recommend that this line need not be crossed.

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It is a common misconception that the note IS the debt. It isn’t and never was. At best the promissory note has only been EVIDENCE of the debt. But it has been used interchangeably with “the debt” because until recently in almost every case the debt and note were merged by the common law doctrine of merger which prevents two liabilities — one as maker of the note and the other as borrower of money.

Each of those, under law, creates a separate and distinct liability in which the payee under the note (or its successor) can recover damages for breach of the note and the lender of the money can recover damages to get repayment of the debt.

If the Payee on the note is the same as the party who loaned money to the borrower then the doctrine of merger applies and the note, while technically only EVIDENCE  of the debt is merged with it and the terms can be used interchangeably without doing violence to either the note or the debt.

TILA requires that the actual lender be disclosed along with all compensation, profits, fees, commissions or anything else arising from the origination of the loan of money.


[NOTE: I believe that there is still a right of action under TILA to offset the entire balance demanded by claiming right to receiver under TILA, RESPA, FDCPA etc. all undisclosed compensation that rose by virtue of the origination of the loan. And I further believe that this is not barred by statute of limitations if contained in recoupment claims as part of affirmative defenses either in primary foreclosure cases in judicial states or secondary unlawful detainer cases in nonjudicial states. But I could be wrong about these issues being raised in nonjudicial states where the statute of limitations has otherwise expired]


SINCE AROUND 1997, most lending originated with investment banks who used money from their own assets or more likely from investors. To insulate themselves from liability for lending or servicing violations they invented a laddering scheme (a term invented by Goldman Sachs). Sham conduit entities [“remote entities] were created or used to sell loans posing as lenders. I dubbed them “pretender lenders.” In some cases actual banks served as as the sham conduit entities in the sense that they were not really loaning money. They too were pretender lenders.

At the beginning they didn’t even bother to disguise the loans. The “originator” executed a Purchase and Assumption Agreement in which all future loans were already deemed owned by an intermediary like Countrywide, who likewise was not lending any money. Later when foreclosure was an issue the investment bank contracted with LPS (Black Knight) to fabricate documentation that creating a false chain of title, as though a series of purchases and sales of the debt had occurred. No such transactions occurred.

Later they disguised the loans to have been made as funded by a “warehouse lender” but in all events the transaction was funded with real money by the investment bank, not the wholesale lender, the originator or the mortgage broker. However, the investment bank intentionally prohibited the use of its name on any documents connected with loans to consumers for residential mortgage loans even though the only real parties in interest were the homeowner(s) and the investment bank.

That chain of title was not accompanied by any correspondence or even agreements concerning any transaction because there was no transaction. No transaction was commercially possible since the sole investment in the loan was made by the investment bank at the time of origination who in turn sold the investment multiple times through a variety of “bonds” and “private contracts” (Credit Default Swaps for example); hence  no payment of value was ever made by any of the parties in the false chain of title. Under UCC 9-203 that precludes enforcement of the security instrument (mortgage) but under Article 3 the note could be enforced and a judgment could be obtained for damages for breach of the note.

It is true that many cases, judges and lawyers have stated that it is the note that is required to enforce the mortgage but that is only because of an assumption and in some cases a legal presumption that the promissory note represents the “title” to the debt. If it is a legal presumption then the homeowner is stuck with rebutting the presumption which actually is not difficult in discovery although it will be hard fought since the opposition will be fighting not only to win the case but also to avoid jail for perjury or sanctions for perpetrating a fraud upon the court — with the fall out including possible loss of licenses for the attorneys, servicers, lenders and even securities, real estate and mortgage brokers — all of whom continue to reap outsize fees for looking the other way and playing along with the house of cards built by the investment banks who initiated this scheme.

So the actual law is that a transfer of the mortgage without the DEBT is a nullity. Transfer of the note without purchase for value may well entitle the transferee (indorsee, endorsee) to enforce the note but it does not entitle the transferee to enforce the mortgage.

12 Responses

  1. Re TILA violations by banks- Rescission rights in foreclosure:
    The disclosed finance charge is considered accurate if it does not vary from the actual finance charge by more than $35.

    The consumer can rescind if a mortgage broker fee that should have been included in the finance charge was not included.

    But the mortgage broker FEE (in form of profits from sales of securities, servicing fees, ect – are NEVER included….

  2. Banks usually lend you YOUR money under higher interest. If you invest in bank’s CDs for 18 months – maybe it get you 1.8% interest on deposit. Bank then collects many deposits and lend it to you under 4-5% as a mortgage. On 100K home profits are about 55K.

    Or bank goes to Fer.Res and borrow other people money under 2.5%, backed by other people money (deposits) – and lend it to you.

    Banks only make money when you are deep in debt, so they are not interested if your mortgage repayment because (1) the interest decrease as you pay; (2) banks fees decrease as loan gets smaller.

    Banks NEED your default because it is the only way to make more money plus – get paid by insurance companies if bank push you in default.

    Brilliant scam.

  3. Yes. I agree with all of the above. Very good thread.

    My problem/confusion is:

    if Fannie/Freddie tell homeowner they own the note …how is that a debt collector called a servicer is able to walk in court and fraudclose as plaintiff ???

    Serious question. I don’t understand how this is even allowed or still happening 10 years after the fact.

    Please explain.

  4. Bob G – I agree. And, that is why everyone has been losing for years.

    I have stressed to go back and see exactly what the last refinance did — if borrower did not pay off the prior loan (as the refinance is supposed to do) – then the note and debt are in question. And, yes to Hammertime too — no contract then too.

    This is what has been concealed.

  5. Neil has always stated that the note is not the debt, but merely memorializes the debt. So why should it come as no surprise that judges say that if note ownership can be proven, then that proves that the owner of the note also owns the debt? Case closed.

  6. @Javagold and no contract!

  7. Great info. With settlements the NMS Monitor Joseph Smith and agencies steered borrowers into loan mods imo without fulfilling the settlements’ own requirements for valid transactions and chain of title even if foreclosure laws did not supposedly require if documents were recorded and used to claim valid chain.

  8. Been away but SIGTARP propsed to Congress that a permanent law enforcement agency be established to crack down on fraud in financial institutions. The 2018 4th quarter report from SIGTARP states their top priority is fraud and abuse of TARP HAMP funds. Ocwen took $5 billion and Wells Fargo got $3.1 Billlion. The threat of abuse continues with $4 billion remaining funds until 2023 according to the report

  9. Yes – Java

  10. Unsecured Debt !!!!!

  11. This is good Neil.

    Yes- investments banks were ultimately the technical “Lender, ” but in name only. And, one needs a Lender under the law. But they were only a technical “lender.” – not an actual lender. . No actual money was ever lent by these investment banks for the notes- which should have been paid off by the borrower at refinance closing. They were not paid off because technically – there was no note — only a debt that did not need to be “funded.” Debt is transferred by assignment – not negotiable notes.

    The investment banks purchased collection rights from the GSEs (who did lend money at one point), and purchased those rights likely with insurance proceeds. Yet, at closing, the GSEs are not paid — because the loan is already charged-off. Warehouse lending was only for any “cash out” — that the investment banks did front.

    Bottom line — the mortgage remains with the GSEs — it did not transfer with sale of collection rights. That is the last actual mortgage. But the GSEs right to collection of the “debt” is long gone.

    No matter what the courts say — there was a separation of the mortgage and charged off actual note.

    Yes, LPS (Black Knight) produced the fake documents to control the fraud.

    And, what bothers me most is the settlements. Poor underwriting the government alleged. Of course every loan showed up as poor underwriting because they were ALL reported as in default – even though, at the time, none were in actual default.

    This is why none of the documents and parties make sense.

    Thank you.

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