To Record or Not to Record (a Note), That is the Question

[Jeff S.]

Our process is to use a broker to originate all of our loans. We fund the deal and then the Note and Deed of Trust are assigned to us at closing. Pretty standard stuff.

The DOT and Assignment of course must be recorded, but based on the recommendation of a broker we used early on; we also record the associated Note. A bit atypical but his reasoning was that in case we lost the Note or something happened to us, we or an heir could always get a certified copy. We liked the idea and we embraced it for all our deals.

Recently, a different broker we now use was speaking to an escrow company and the officer there had another opinion. Here’s a quote from his email to me:

“The escrow officer we dealt with was absolutely adamant that the Note cannot be recorded, that it’s not a recordable instrument and that she and title could not record it. She confirmed that a Deed of Trust referencing a Note and the amount are completely sufficient to protect the lender’s interest, and that attempting to record a Note could actually cloud title. “

When the property is sold and we're about to be paid off (these are always for short term flips in California) we normally sign and notarize a Substitution of Trustee and Full Reconveyance and submit it to escrow along with the original Note and sometimes, if they request it, the original DOT.

We’ve never had a problem. And yes, the whole idea here is to cloud title only while we’re owed money and we’re fully aware that recording the Note is not required. Further, we’ve never been told that we left any clouds the new homeowner would ultimately have to deal with.

My questions are:
1) Is this escrow officer correct?
2) What are your thoughts about recording Notes in general? Pros? Cons?
3) Should we turn ourselves into the local authorities in advance? (OK, no need to answer that one)

Thanks.

Jeff

[Account Closed]

Jeff: I'm not sure your broker's idea of using a "certified copy" to replace a lost note would fly, but I'm curious.

You don't need the original promissory note to foreclose in CA and there are already provisions in the CA Civil Code for lost instruments, so what's the real concern?

The promissory not is not typically notarized nor formatted for recording. So the escrow officer is correct in that a note is not a recordable instrument. If escrow has been recording notes for you previously, by submitting it as part of the DOT, IMO, that's an error on the part of the County Recorder. Escrow and title have to create documents that conform to the CA Recorder's Handbook and its annual legal updates. You can't just record something because you want to, you can't just make up doc called Note or Memorandum or Affidavit and get it recorded unless its format and parties and signatures are conforming. Deeds of Trusts in CA have trustors, trustees and beneficiaries. A promissory note could have any variety of parties, doesn't cite specific properties and doesn't attach to anything.

Does your broker have any cases where recording the note has done what he says it will do?

For non-CA readers, this response is 100% specific to CA deeds of trust and may not apply to anything outside of CA. In fact it may not apply to anything as it's just my opinions.