what is assignment of loan

Assignment Of Loan: Definition & Sample

Jump to section, what is an assignment of loan.

Under an assignment of loan, a lender (the assignor) assigns its rights relating to a loan agreement to a new lender (the assignee). Only the assignor's rights under the loan agreement are assigned. The assignor will still have to perform any obligations it has under the facility agreement.

The debtor, the recipient of the loan, must be notified when a debt is assigned. When there is an assignment of a loan, a Notice of Assignment (NOA) is sent out to the debtor informing them that a new party is now responsible for collecting any outstanding amount.

Assignment Of Loan Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.14 5 dex1014.htm ASSIGNMENT OF LOAN DOCUMENTS , Viewed October 21, 2021, View Source on SEC .

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Meet some of our Assignment Of Loan Lawyers

Kimbrelly K.

Attorney Kegler has been licensed to practice law in ​the State of North Carolina since 1998. Over the years,​ she has worked in firms that focused on small​ business financing, initial startup formation, to​ starting several businesses of her own with bootstrap​ financing to venture capital funding. As a Certified​ Dream Manager, she couples the skills of listening to​ understand the big picture to get to solutions that not​ only fit today's needs but also the long term needs of​ her entrepreneurial clients.​

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I am an attorney who has been practicing for over a decade, experienced in multiple areas of law, both from a litigation and more procedural side. The great thing about my practice is that it has trained me to deal with so many different types of problems and to find solutions in a variety of legal scenarios that are almost never similar.

Ferraro Law Firm was founded by Dean C. Ferraro. Dean earned his Bachelor's Degree from California State Polytechnic University, Pomona ("Cal Poly Pomona") in 1992 and his J.D. Degree from the University of Mississippi School of Law ("Ole Miss") in 1996. He is licensed to practice law in the State Courts of Colorado, Tennessee, and California. Dean is also admitted to practice before the United States District Courts of Colorado (District of Colorado), California (Central District), and Tennessee (Eastern District). Shortly after earning his law license and working for a private law firm, Dean joined the District Attorney's office, where he worked for five successful years as one of the leading prosecuting attorneys in the State of Tennessee. After seven years of practicing law in Tennessee, Dean moved back to his birth state and practiced law in California from 2003-2015. In 2015, Dean moved with his family to Colorado, practicing law in beautiful Castle Rock, where he is recognized as a highly-effective attorney, well-versed in many areas of law. Dean's career has entailed practicing multiple areas of law, including civil litigation with a large law firm, prosecuting criminal cases as an Assistant District Attorney, In-House Counsel for Safeco Insurance, and as the founding member of an online law group that helped thousands of people get affordable legal services. Pursuing his passion for helping others, Dean now utilizes his legal and entrepreneurial experience to help his clients in their personal and business lives. Dean is also a bestselling author of two legal thrillers, Murder in Santa Barbara and Murder in Vail. He currently is working on his next legal thriller, The Grove Conspiracy, set to be published in 2023.

Karl D. Shehu, has a multidisciplinary practice encompassing small business law, estate and legacy planning, real estate law, and litigation. Attorney Shehu has assisted families, physicians, professionals, and people of faith provide for their loved ones by crafting individualized estate and legacy plans. Protecting families and safeguarding families is his passion. Attorney Shehu routinely represents lenders, buyers, sellers, and businesses in real estate transactions, researching and resolving title defects, escrowing funds, and drafting lending documents. To date, Attorney Shehu has closed a real estate deal in every town in Connecticut. As a litigator, Attorney Shehu has proven willing to engage in contentious court battles to obtain results for his clients. While practicing at DLA Piper, LLP, in Boston, Attorney Shehu represented the world’s largest pharmaceutical companies in multidistrict litigations filed throughout the United States. He has been a passionate advocate for immigrants and the seriously injured, frequently advising against lowball settlement offers. He is willing to try every case to verdict, and he meticulously prepares every case for trial. Attorney Shehu began his legal career as a consumer lawyer, utilizing fee-shifting statutes to force unscrupulous businesses to pay the legal fees of aggrieved consumers. For example, in Access Therapies v. Mendoza, 1:13-cv-01317 (S.D. Ind. 2014), Attorney Shehu utilized unique interpretations of the Trafficking Victims Protection Act, Truth-in-Lending Act, and Racketeer Influenced and Corrupt Organizations Act (RICO) to obtain a favorable result for his immigrant client. Attorney Shehu is a Waterbury, Connecticut native. He attended Our Lady of Mount Carmel grammar school, The Loomis Chaffee School, and Chase Collegiate School before earning degrees from Boston College, the University of Oxford’s Said Business School in England, and Pepperdine University School of Law. At Oxford, Karl was voted president of his class. Outside of his law practice, Attorney Shehu has worked to improve the world around him by participating in numerous charitable endeavors. He is a former candidate for the Connecticut Senate and a parishioner of St. Patrick Parish and Oratory in Waterbury. In addition, Attorney Shehu has written extensively on the Twenty-fifth Amendment and law firm retention by multinational firms.

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Understanding the Assignment of Mortgages: What You Need To Know

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A mortgage is a legally binding agreement between a home buyer and a lender that dictates a borrower's ability to pay off a loan. Every mortgage has an interest rate, a term length, and specific fees attached to it.

Written by Attorney Todd Carney .  Updated November 26, 2021

If you’re like most people who want to purchase a home, you’ll start by going to a bank or other lender to get a mortgage loan. Though you can choose your lender, after the mortgage loan is processed, your mortgage may be transferred to a different mortgage servicer . A transfer is also called an assignment of the mortgage. 

No matter what it’s called, this change of hands may also change who you’re supposed to make your house payments to and how the foreclosure process works if you default on your loan. That’s why if you’re a homeowner, it’s important to know how this process works. This article will provide an in-depth look at what an assignment of a mortgage entails and what impact it can have on homeownership.

Assignment of Mortgage – The Basics

When your original lender transfers your mortgage account and their interests in it to a new lender, that’s called an assignment of mortgage. To do this, your lender must use an assignment of mortgage document. This document ensures the loan is legally transferred to the new owner. It’s common for mortgage lenders to sell the mortgages to other lenders. Most lenders assign the mortgages they originate to other lenders or mortgage buyers.

Home Loan Documents

When you get a loan for a home or real estate, there will usually be two mortgage documents. The first is a mortgage or, less commonly, a deed of trust . The other is a promissory note. The mortgage or deed of trust will state that the mortgaged property provides the security interest for the loan. This basically means that your home is serving as collateral for the loan. It also gives the loan servicer the right to foreclose if you don’t make your monthly payments. The promissory note provides proof of the debt and your promise to pay it.

When a lender assigns your mortgage, your interests as the mortgagor are given to another mortgagee or servicer. Mortgages and deeds of trust are usually recorded in the county recorder’s office. This office also keeps a record of any transfers. When a mortgage is transferred so is the promissory note. The note will be endorsed or signed over to the loan’s new owner. In some situations, a note will be endorsed in blank, which turns it into a bearer instrument. This means whoever holds the note is the presumed owner.

Using MERS To Track Transfers

Banks have collectively established the Mortgage Electronic Registration System , Inc. (MERS), which keeps track of who owns which loans. With MERS, lenders are no longer required to do a separate assignment every time a loan is transferred. That’s because MERS keeps track of the transfers. It’s crucial for MERS to maintain a record of assignments and endorsements because these land records can tell who actually owns the debt and has a legal right to start the foreclosure process.

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Assignment of Mortgage Requirements and Effects

The assignment of mortgage needs to include the following:

The original information regarding the mortgage. Alternatively, it can include the county recorder office’s identification numbers. 

The borrower’s name.

The mortgage loan’s original amount.

The date of the mortgage and when it was recorded.

Usually, there will also need to be a legal description of the real property the mortgage secures, but this is determined by state law and differs by state.

Notice Requirements

The original lender doesn’t need to provide notice to or get permission from the homeowner prior to assigning the mortgage. But the new lender (sometimes called the assignee) has to send the homeowner some form of notice of the loan assignment. The document will typically provide a disclaimer about who the new lender is, the lender’s contact information, and information about how to make your mortgage payment. You should make sure you have this information so you can avoid foreclosure.

Mortgage Terms

When an assignment occurs your loan is transferred, but the initial terms of your mortgage will stay the same. This means you’ll have the same interest rate, overall loan amount, monthly payment, and payment due date. If there are changes or adjustments to the escrow account, the new lender must do them under the terms of the original escrow agreement. The new lender can make some changes if you request them and the lender approves. For example, you may request your new lender to provide more payment methods.

Taxes and Insurance

If you have an escrow account and your mortgage is transferred, you may be worried about making sure your property taxes and homeowners insurance get paid. Though you can always verify the information, the original loan servicer is responsible for giving your local tax authority the new loan servicer’s address for tax billing purposes. The original lender is required to do this after the assignment is recorded. The servicer will also reach out to your property insurance company for this reason.  

If you’ve received notice that your mortgage loan has been assigned, it’s a good idea to reach out to your loan servicer and verify this information. Verifying that all your mortgage information is correct, that you know who to contact if you have questions about your mortgage, and that you know how to make payments to the new servicer will help you avoid being scammed or making payments incorrectly.

Let's Summarize…

In a mortgage assignment, your original lender or servicer transfers your mortgage account to another loan servicer. When this occurs, the original mortgagee or lender’s interests go to the next lender. Even if your mortgage gets transferred or assigned, your mortgage’s terms should remain the same. Your interest rate, loan amount, monthly payment, and payment schedule shouldn’t change. 

Your original lender isn’t required to notify you or get your permission prior to assigning your mortgage. But you should receive correspondence from the new lender after the assignment. It’s important to verify any change in assignment with your original loan servicer before you make your next mortgage payment, so you don’t fall victim to a scam.

Attorney Todd Carney

Attorney Todd Carney is a writer and graduate of Harvard Law School. While in law school, Todd worked in a clinic that helped pro-bono clients file for bankruptcy. Todd also studied several aspects of how the law impacts consumers. Todd has written over 40 articles for sites such... read more about Attorney Todd Carney

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Loan Participation Vs Assignment

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Sub-participation

Sub-participation is a form of loan participation in which a lender shares its risk with a second party. This type of loan participation does not change the documentation of the loan. This type of loan participation can also include future amounts for loans that have not yet been fully disbursed, such as a revolving credit facility.

The legality of sub-participation is dependent on the conditions of the loan agreement. In general, a loan participant cannot enforce the loan or proceed against the collateral on their own. Furthermore, the borrower may not even be aware that the loan participant is involved. However, the seller of the participation retains the right to enforce or compromise the loan, as well as to amend it without the consent of the participant.

As for drafting sub-participation agreements, there are many ways to do so. But it is important to include at least the following provisions: The term of the agreement, the rate of interest, and the repurchase provisions. These provisions should be included in the sub-participation or assignment agreement.

Assignment and sub-participation are standard terms in inter-bank transactions. We will examine the purposes of the loan participation and assignment agreements, as well as the terms of the transaction. While they are essentially interchangeable, they are fundamentally different.

Loan participation and assignment are both ways to transfer ownership of a loan. Assigning a loan to a third party or sub-assigning it to yourself is a common way to transfer the loan.

The terms “loan participation” and “assignment” are often used in the banking industry. Both terms refer to the transfer of a loan’s rights and payments between two financial institutions. We’ll look at what each term means and how they differ from each other.

Loan participation has long been a common form of loan transfer. Its advantages over other loan transfer methods include the ability to diversify a portfolio and limit risk. It also eliminates the need for loan servicing. However, this option can be problematic when it differs from underlying loans. For this reason, it’s important to structure loan participation carefully.

Whether a loan is a participation or an assignment depends on a variety of factors. The percentage of loan ownership, relationship with the other financial institution, and confidence in the other party are all important considerations. However, the basic difference between participation and assignment is that the former involves the original lender continuing to manage the loan while the latter takes on the responsibility of doing so.

As a rule, loan participation is a good option if the original lender does not want to keep the title of the loan. It allows the borrower to avoid the costs associated with the loan and is more attractive for borrowers. In addition, loan participation arrangements can be more flexible than outright assignments. However, it’s important to make sure that the arrangement you enter into is formal. This will prevent any confusion or conflict down the road.

Syndication

Understanding the differences between loan participation and syndication is important for lenders. Understanding these two options can help them find the best solutions for their lending needs. Syndication is a common type of lending program where lenders pool their loans together to reduce the risks of defaults. Loan participation programs can be more complex and require due diligence to be effective.

Syndicated lending allows lenders to access the expertise and business relationships of their fellow lenders while maximizing their exposure to deal flow. However, lenders who join a syndicated lending arrangement often give up some of their independence and flexibility to take unilateral action. In addition, these arrangements often involve the involvement of legal counsel, which can also be important.

A loan participation arrangement is a group of lenders coming together to fund a large loan. A lead bank underwrites the loan and sells portions of it to other financial institutions. Loan syndication, on the other hand, is an arrangement whereby multiple financial institutions pool their money together and make one large loan. In this type of arrangement, the original lender transfers the rights and obligations to the purchasing financial institution. The risk is then shared among the participating lenders, allowing them to share in the interest and the risks of the loan’s default.

A syndication contract can be structured in as many tranches as necessary to meet the borrowing needs of a customer. The underlying contract will contain a commitment contract that specifies the ratio of participation among the participants. Each tranche will have a borrower, which will be a common participant or may be different. The contract will require that each participant fulfill their commitments before the scheduled due dates.

Loan participation and assignment are standard transactions between banks. They are similar in some respects but have different purposes. 

There are many types of loan participation agreements. Some involve a full assignment, while others are a sub-participation. If you are involved in loan participation or assignment, you need to understand which type of agreement applies to your situation. There are several types of loan participation agreements, including sub-participation agreements, undisclosed agencies, and assignments.

Sub-participation agreements are typically used to assign part of the loan amount to a new lender, and the loan documentation remains unchanged. In addition, these types of agreements include future amounts, which may be provided as part of a revolving credit facility or a portion of a loan that hasn’t been fully disbursed.

Loan participation is a popular option for lenders to limit their exposure to borrowers. Lenders may sell a portion of the loan to an investor or sell a portion of their interest to another party. While the transfer of a loan portion does not always require the consent of the transferor, lenders must consider participating interest guidelines and the applicable rules.

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Mortgage Assignment Laws and Definition

(This may not be the same place you live)

  What is a Mortgage Assignment?

A mortgage is a legal agreement. Under this agreement, a bank or other lending institution provides a loan to an individual seeking to finance a home purchase. The lender is referred to as a creditor. The person who finances the home owes money to the bank, and is referred to as the debtor.

To make money, the bank charges interest on the loan. To ensure the debtor pays the loan, the bank takes a security interest in what the loan is financing — the home itself. If the buyer fails to pay the loan, the bank can take the property through a foreclosure proceeding.

There are two main documents involved in a mortgage agreement. The document setting the financial terms and conditions of repayment is known as the mortgage note. The bank is the owner of the note. The note is secured by the mortgage. This means if the debtor does not make payment on the note, the bank may foreclose on the home. 

The document describing the mortgaged property is called the mortgage agreement. In the mortgage agreement, the debtor agrees to make payments under the note, and agrees that if payment is not made, the bank may institute foreclosure proceedings and take the home as collateral .

An assignment of a mortgage refers to an assignment of the note and assignment of the mortgage agreement. Both the note and the mortgage can be assigned. To assign the note and mortgage is to transfer ownership of the note and mortgage. Once the note is assigned, the person to whom it is assigned, the assignee, can collect payment under the note. 

Assignment of the mortgage agreement occurs when the mortgagee (the bank or lender) transfers its rights under the agreement to another party. That party is referred to as the assignee, and receives the right to enforce the agreement’s terms against the assignor, or debtor (also called the “mortgagor”). 

What are the Requirements for Executing a Mortgage Assignment?

What are some of the benefits and drawbacks of mortgage assignments, are there any defenses to mortgage assignments, do i need to hire an attorney for help with a mortgage assignment.

For a mortgage to be validly assigned, the assignment document (the document formally assigning ownership from one person to another) must contain:

• The current assignor name.
• The name of the assignee.
• The current borrower or borrowers’ names. 
• A description of the mortgage, including date of execution of the mortgage agreement, the amount of the loan that remains, and a reference to where the mortgage was initially recorded. A mortgage is recorded in the office of a county clerk, in an index, typically bearing a volume or page number. The reference to where the mortgage was recorded should include the date of recording, volume, page number, and county of recording.
• A description of the property. The description must be a legal description that unambiguously and completely describes the boundaries of the property.

There are several types of assignments of mortgage. These include a corrective assignment of mortgage, a corporate assignment of mortgage, and a mers assignment of mortgage. A corrective assignment corrects or amends a defect or mistake in the original assignment. A corporate assignment is an assignment of the mortgage from one corporation to another. 

A mers assignment involves the Mortgage Electronic Registration System (MERS). Mortgages often designate MERS as a nominee (agent for) the lender. When the lender assigns a mortgage to MERS, MERS does not actually receive ownership of the note or mortgage agreement. Instead, MERS tracks the mortgage as the mortgage is assigned from bank to bank. 

An advantage of a mortgage assignment is that the assignment permits buyers interested in purchasing a home, to do so without having to obtain a loan from a financial institution. The buyer, through an assignment from the current homeowner, assumes the rights and responsibilities under the mortgage. 

A disadvantage of a mortgage assignment is the consequences of failing to record it. Under most state laws, an entity seeking to institute foreclosure proceedings must record the assignment before it can do so. If a mortgage is not recorded, the judge will dismiss the foreclosure proceeding. 

Failure to observe mortgage assignment procedure can be used as a defense by a homeowner in a foreclosure proceeding. Before a bank can institute a foreclosure proceeding, the bank must record the assignment of the note. The bank must also be in actual possession of the note. 

If the bank fails to “produce the note,” that is, cannot demonstrate that the note was assigned to it, the bank cannot demonstrate it owns the note. Therefore, it lacks legal standing to commence a foreclosure proceeding.

If you need help with preparing an assignment of mortgage, you should contact a mortgage lawyer . An experienced mortgage lawyer near you can assist you with preparing and recording the document.

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The definition of assignment & assumption agreement.

By Rebecca K. McDowell, J.D.

October 19, 2019

Reviewed by Michelle Seidel, B.Sc., LL.B., MBA

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• Land Contract Law in Florida

Assignments and assumptions are part of contract law and refer to the transfer of someone's duties and benefits in a contract to another. Assignments and assumptions are common with respect to contracts for loans or leases. A lender or lessor may assign its rights to another lender or lessor, and a borrower or lessee may find someone to assume the loan or lease and make the payments.

The Elements of a Contract

A contract is legally formed when two or more parties enter into an agreement with certain elements, which include:

• An offer. For instance, in a mortgage transaction, the lender offers to loan money to the borrower.
• Acceptance of the offer. The mortgage borrower agrees to borrow the money.
• Consideration. Consideration in a contractual relationship means the things the two parties give to each other in exchange for entering the contract. A mortgage lender loans money to the borrower, and in exchange, the borrower agrees to repay the money and give the lender a lien on the house. The loan, the repayment with interest and the mortgage lien are consideration for the contract.
• Mutuality. The parties must have come together and agreed upon the terms of the contract Read More: How Does a Contract Work?

Burdens and Benefits of a Contract

The contract sets forth what the parties are required to do during the contractual relationship. With a mortgage, the lender is required to loan the money and apply the payments correctly in accordance with the agreement, and then release the lien when the loan is paid. The borrower is required to pay the loan back with interest, pay the property taxes and make sure the property has insurance.

These contractual obligations create both burdens and benefits on both sides. The lender has the burden of making the loan and applying the payments correctly, but it has the benefit of receiving interest on the loan. The borrower has the burdens of making payments and insuring the property but has the benefit of owning the home.

Assigning a Contract

An assignment occurs when one party to a contract transfers, or assigns, its rights and obligations under the contract to another party. This happens frequently with mortgage loans, as lenders sell loans to other lenders. The lender will enter into an assignment agreement and assign the note and the mortgage to another party. The borrower then must make the payments to the assignee. The assignee's right and obligations under an assignment are the same as the assignor's rights and obligations and cannot be changed without a new contract.

Assuming a Contract

An assumption is the other side of the coin, in a sense. Assumptions are common with respect to leases and mortgages and typically occur when the borrower or lessee wants to transfer the property to someone else without paying off the loan or lease. Assumption means someone is taking over the side of the contract that requires payment.

If the contract allows it, another person can agree to assume the original party's obligations under the contract – the obligations to make monthly payments, etc. – in exchange for taking over the ownership or the lease.

Not every contract can be assumed. The language of the contract will state whether the borrower or lessee is allowed to transfer the property or lease by assumption.

Assignment and Assumption Agreements

Assignments and assumptions are both conducted by written agreement. Sometimes an assignment and an assumption will occur in the same transaction, and one agreement will cover both; the parties are assigning the benefits and assuming the burdens.

Assignments and assumptions are both transfers of contractual benefits and burdens from one party to another. They differ from each other based on the original position of the transferring party and the duties and benefits being transferred.

• Bankrate: Assumable Mortgage: Take Over Seller's Loan
• The Law Dictionary: What is Assumption?
• Nolo: What Is an Assignment of Contract?
• U.S. Legal: Elements of a Contract

Rebecca K. McDowell is a creditors' rights attorney with a special focus on bankruptcy and insolvency. She has a B.A. in English from Albion College and a J.D. from Wayne State University Law School. She has written legal articles for Nolo and the Bankruptcy Site.

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Assignment, novation or sub-participation of loans             

Transfers of loan portfolios between lending institutions have always been commonplace in the financial market.  A number of factors may come into play – some lenders may wish to lower their risks and proportion of bad debts in their balance sheets; some may undergo restructuring or divest their investment portfolios elsewhere, to name a few.  The real estate market in particular has been affected by the announcement of the “three red lines” policy by the People’s Bank of China in 2020 which led to a surge of transfers, or attempted transfers, of non-performing loans.  Other contributing factors include the continuous effects of the Sino-US trade war and the Covid-19 pandemic.

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Transferability of Loans

The legal analysis regarding the transferability of loans can be complex.  The loan agreement should be examined with a view to identifying any restrictions on transferability of the loan between lenders, such as prior consent of the debtor and, in some cases, whether such consent may be withheld.  Other general restrictions may apply given that most banks have internal confidentiality rules and data protection requirements, the latter of which may also be subject to governmental regulations.  Certain jurisdictions may restrict the transfer of loans relating to specific types of receivables – mortgage or consumer loans being prime examples.  It is imperative to conduct proper due diligence on the documentation and underlying assets in order to be satisfied with the transferability of the relevant loans.  This may be complicated further if there are multiple projects, facility lines or debtors.  It is indeed common to see a partial transfer of loans to an incoming lender or groups of lenders.

Methods of Transfer

The transfer of loans may be carried out in different ways and often involves assignment, novation or sub-participation.

A typical assignment amounts to the transfer of the rights of the lender (assignor) under the loan documentation to another lender (assignee), whereby the assignee takes on the assignor’s rights, such as the right to receive payment of principal and interest on the loan.  The assignor is still required to perform any obligations under the loan documentation.  Therefore, there is no need to terminate the loan documentation and, unless the loan documentation stipulates otherwise, there is no need to obtain the debtor’s consent, but notice of the assignment must be served on the debtor.  However, many debtors are in fact involved in the negotiation stage, where the parties would also take the opportunity to vary the terms of the facility and security arrangement.

Novation of a loan requires that the debtor, the existing lender (transferor) and the incoming lender (transferee) enter into new documentation which provides that the rights and obligations of the transferor will be novated to the transferee.  The transferee replaces the transferor in the loan facility and the transferor is completely discharged from all of its rights and obligations.  This method of transfer does require the prior consent of the relevant debtor.

Sub-participation is often used where a lender, whilst wishing to share the risks of certain loans, nonetheless prefers to maintain the status quo.  There is no change to the loan documentation – the lender simply sells all or part of the loan portfolio to another lender or lenders.  From the debtor’s perspective, nothing has changed and, in principle, there is no need to obtain the debtor’s consent or serve notice on the debtor.  This method of transfer is sometimes preferred if the existing lender is keen to maintain a business relationship with the debtor, or where seeking consent from the debtor or notifying the debtor of any transfer is not feasible or desirable.  In any case, there would be no change to the balance sheet treatment of the existing lender.

Offshore Security Arrangements

The transfer of a loan in a cross-border transaction often involves an offshore security package.  A potential purchaser will need to conduct due diligence on the risks relating to such security.  From a legal perspective, the security documents require close scrutiny to confirm their legality, validity and enforceability, including the nature and status of the assets involved.  Apart from transferability generally, the documents would reveal whether any consent is required.  A lender should seek full analysis on the risks relating to enforcement of security, which may well be complicated by the involvement of various jurisdictions for potential enforcement actions.

A key aspect to the enforcement consideration is whether a particular jurisdiction requires that any particular steps be taken to perfect a security interest relating to the loan portfolio (if the concept of perfection applies at all) and, if so, whether any applicable filing or registration has been made to perfect the security interest and, more importantly, whether there exists any prior or subsequent competing security interest over all or part of the same assets.  For example, security interests may be registered in public records of the security provider maintained by the companies registry in Bermuda or the British Virgin Islands for the purpose of obtaining priority over competing interests under the applicable law.  The internal register of charges of the security provider registered in the Cayman Islands, Bermuda or the British Virgin Islands should also be examined as part of the due diligence process.  Particular care should be taken where the relevant assets require additional filings under the laws of the relevant jurisdictions, notable examples of such assets being real property, vessels and aircraft.  Suites of documents held in escrow pending a potential default under the loan documentation should also be checked as they would be used by the lender or security agent to facilitate enforcement of security when the debtor defaults on the loan.

Due Diligence and Beyond

Legal due diligence on the loan documentation and security package is an integral part of the assessment undertaken by a lender of the risks of purchasing certain loan portfolios, regardless of whether the transfer is to be made by way of an assignment, novation or sub-participation.  Whilst the choice of method of transfer is often a commercial decision, enforceability of security interests over underlying assets is the primary consideration in reviewing sufficiency of the security package in any proposed loan transfer.

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Assignment of Rents – What, Why, and How?

Article by:

Madelaine prescott, esq., share this post:.

• November 29, 2023

These days, almost all commercial loans include an Assignment of Rents as part of the Deed of Trust or Mortgage. But what is an Assignment of Rents, why is this such an important tool, and how are they enforced?

An Assignment of Rents (“AOR”) is used to grant the lender on a transaction a security interest in existing and future leases, rents, issues, or profits generated by the secured property, including cash proceeds, in the event a borrower defaults on their loan. The lender can use the AOR to step in and directly collect rental payments made by the tenant. For an AOR to be effective, the lender’s interest must be perfected, which has a few fairly simple requirements. The AOR must be in writing, executed by the borrower, and recorded with the county where the property is located. Including an AOR in the recorded Deed of Trust or Mortgage is the easiest and most common way to ensure the AOR meets these requirements should it ever need to be utilized.

When a borrower defaults, lenders can take advantage of AORs as an alternative to foreclosure to recoup their investment. With a shorter timeline and significantly lower costs, it is certainly an attractive option for lenders looking to get defaulted borrowers back on track with payments, without the potential of having to take back a property and attempting to either manage it or sell it in hopes of getting your money back out of the property. AORs can be a quick and easy way for the lender to get profits generated by the property with the goal of bringing the borrower out of default. But lenders should carefully monitor how much is owed versus how much has been collected. If the AOR generates enough funds so that the borrower is no longer in default, the lender must stop collecting rents generated by the property.

Enforcement of an AOR can also incentivize borrowers to work with the lender to formulate a plan, as many borrowers rely on rental income to cover expenses related to the property or their businesses. Borrowers are generally more willing to come to the table and negotiate a mutual, amicable resolution with the lender in order to protect their own investment. A word of warning to lenders though: since rental income is frequently used to pay expenses on the property, such as the property manager, maintenance, taxes, and other expenses, the lender needs to ensure they do not unintentionally hurt the value of the property by letting these important expenses fall behind. This may hurt the lender’s investment as well, as the property value could suffer, liens could be placed on the property, or the property may fall into disrepair if not properly maintained. It is also important for lenders to be aware of the statutes surrounding the payment of these expenses when an AOR is being used, as some state’s statutes require the lender to pay certain property expenses out of the collected rents if requested by the borrower.

In addition to being shorter and cheaper than foreclosure, AORs can be much easier to enforce. In California, the enforcement of an AOR is governed by California Civil Code §2938. This statute specifies enforcement methods lenders can use and restrictions on use of these funds by the lender, among other things. Under CA Civil Code §2938(c), there are 4 ways to enforce an AOR:

• The appointment of a receiver;
• Obtaining possession of the rents, issues, profits;
• Delivery to tenant of a written demand for turnover of rents, issues, and profits in the correct form; or
• Delivery to assignor of a written demand for the rents, issues, or profits.

One or more of these methods can be used to enforce an AOR. First, a receiver can be appointed by the court, and granted specific powers related to the AOR such as managing the property and collecting rents. They can have additional powers though; it just depends on what the court orders. This is not the simplest or easiest option as it requires court involvement, but this is used to enforce an AOR, especially when borrowers or tenants are uncooperative. Next is obtaining possession of the rents, issues, profits, which is exactly as it seems; lenders can simply obtain actual possession of these and apply the funds to the loan under their AOR.

The third and fourth options each require delivery of a written demand to certain parties, directing them to pay rent to the lender instead of to the landlord. Once the demand is made, the tenant pays their rent directly to the lender, who then applies the funds to the defaulted loan. These are both great pre-litigation options, with advantages over the first two enforcement methods since actual possession can be difficult to obtain and courts move slowly with high costs to litigate. The written demands require a specific form to follow called the “Demand To Pay Rent to Party Other Than Landlord”, as found at CA Civil Code §2938(k). There are other notice requirements to be followed here, so it is essential to consult with an experienced attorney if you are considering either of these options. California Civil Code §2938 specifically provides that none of the four enforcement methods violate California’s One Action Rule nor the Anti-Deficiency Rule, so lenders can confidently enforce their AORs using the above methods with peace of mind that they are not violating other California laws.

Whether you are looking to originate a new loan, or you are facing a default by your borrower, understanding what an Assignment of Rents is and how it operates can be extremely beneficial. Enforcing an AOR can be an easier option than foreclosure and can help promote a good relationship with your borrower when handled correctly. If you have any questions about AORs, or need further details on how to enforce them, Geraci is here to help.

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Understanding how assignments of mortgage work.

The bank or other mortgage lender that provides a borrower with the funds to purchase a home often later transfers or assigns its interest in the mortgage to another firm. When this happens, the borrower will start sending monthly mortgage payments to the new owner of the mortgage instead of the original lender. Some other things, such as the available modes of payment, many also change.  However, the general terms of the mortgage, such as the interest rate and payment amounts, will stay the same.

If you need help with a mortgage, consider finding a financial advisor to work with .

Mortgage Assignment Basics

Mortgages are assigned using a document called an assignment of mortgage. This legally transfers the original lender’s interest in the loan to the new company. After doing this, the original lender will no longer receive the payments of principal and interest. However, by assigning the loan the mortgage company will free up capital. This allows the original lender to make more loans and generate additional origination and other fees.

At closing, borrowers sign a document granting the original lender the right to assign the mortgage elsewhere. This means the original lender doesn’t have to ask for permission to assign the mortgage but can do so whenever it wants to. Often this occurs within a few months after the closing, but it can happen at any time during the term of a mortgage. Once a loan has been assigned, it can be assigned again.

The assignment of mortgage document uses several pieces of information to accurately identify the specific mortgage that is being transferred. These generally include:

The name of the borrower

The date of the mortgage

The jurisdiction where it was recorded

The amount of money that was originally loaned

A legal description of the home or other property used as collateral to secure the loan.

Although a lender doesn’t need to request the borrower’s permission before assigning a mortgage, the lender does have to notify the borrower after the mortgage has been assigned. This notice will generally provide the new lender’s name, contact information and mailing address or other information need to make payments.

Effects of Mortgage Assignment

When a mortgage is assigned, the original terms of the mortgage remain unchanged. The monthly principal and interest, interest rate and total number of payments required to pay the loan off will be the same as on the mortgage when it was signed at closing.

A company assigned a mortgage may have different methods of accepting monthly payments, such as online payments, paper checks or money orders. A borrower who wants more payment methods may be able to get a new mortgage holder to provide them upon request.

Some things may change, however. For instance, the new owner of the mortgage may have a different method of handling escrow payments that are used to pay property taxes and the premiums for hazard insurance. The law requires mortgage companies to charge no more than one-twelfth the annual cost of property taxes and insurance each month. However, they can also require borrowers to maintain a cushion of up to one-sixth the annual total required to pay taxes and insurance. If a new mortgage company has a different policy on this cushion, it could change the total monthly payment.

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The borrower also does not need to notify the local taxing authorities or the hazard insurance provider about the assignment. The new holder of the mortgage is required to handle these notifications.

Borrowers should check the information about where payments are supposed to go. This need to be accurate so payments will be directed correctly to the holder of the mortgage and the borrower will receive credit for them.

Another important matter that may change when a loan is assigned is the procedure the mortgage company will follow in the event of default. Borrowers should make themselves familiar with the notification methods used by the new mortgage to let them know if payments are not being received and foreclosure is in the offing.

The Bottom Line

Home mortgages are often assigned by their original lenders to other companies. Assignment usually doesn’t change much for the borrower, except that the payments will go to a different address. The original loan amount, interest payment, term and monthly principal and interest part of the payment will stay the same. Assigning mortgages frees up money for the lenders to make more loans. Borrowers don’t have to be told a mortgage will be assigned, since they agree to this at closing. However, they must be notified after an assignment and told how to contact the new mortgage holder.

Mortgage Tips

A financial advisor can help you evaluate home buying and other important financial moves. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now .

Borrowers can find out whether and where their mortgage has been assigned through the Mortgage Electronic Registration Systems (MERS). This is an organization created by mortgage companies to track mortgage assignments. Borrowers can use a free online service provided by MERS to find out who owns their mortgage.

Mortgage rates are more volatile than they have been in a long time. Check out SmartAsset’s mortgage rates table to get a better idea of what the market looks like right now.

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The post Understanding How Assignments of Mortgage Work appeared first on SmartAsset Blog .

Assigning Loan Documents: Practical Reminders

The recent Supreme Court of Delaware case  J.M. Shrewsbury v. The Bank of New York Mellon ,   CA No. N15L-03-108 (Del. 2017), provides a reminder of the importance of clearly documenting the assignment of loan documents. The Court’s holding requires that prior to the assignee of a mortgage loan filing suit on the note or mortgage, the assignee must have received both an allonge/assignment of the note and an assignment of the mortgage. The case is a reminder of the importance of maintaining a precise chain of title when assigning loan documents. The facts of the case as described below demonstrate the need to make sure that you “don’t leave the note behind.”

In 2007, J.M. Shrewsbury and Kathy Shrewsbury signed a promissory note in favor of Countrywide Home Loans, Inc. Concurrently, the Shrewburys were granted a mortgage to secure their obligations under the note, which mortgage encumbered real property in Delaware. In 2011, the mortgage was assigned to The Bank of New York Mellon (Bank). In 2013, the Shrewsburys requested and received a copy of the original note, which contained no indication that the note had been assigned. Neither party disputed the fact that the Shrewsburys stopped making mortgage payments in 2010.

The Bank commenced a mortgage foreclosure action in 2015 in the Superior Court of the State of Delaware,  Bank of N.Y. Mellon v. Shrewsbury , C.A. No. N15L-03-108 CLS (Del. Super. Ct. Feb. 17, 2016). In holding in favor of the Bank, the Superior Court found that the Bank need only show that it had a valid assignment of the mortgage to enforce its rights. The Shrewsburys appealed the decision to the Court.

In reversing and remanding the decision of the Superior Court, the Court followed its reasoning in Iowa-Wisconsin Bridge Co. v. Phoenix Finance Corporation, Iowa-Wisconsin Bridge Co. v. Phoenix Finance Corporation , 25 A.2d 383, 389 (Del. 1942), stating that a debt is an essential requisite to a mortgage. While persuaded by wide-ranging case law and other respected authorities, the Court’s decision relied most heavily on the United States Supreme Court case  Carpenter v. Longan,  83 U.S. 271 (1872), holding that the “note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity.”

Practical Reminders

While this case involved a residential transaction, important considerations can be applied in commercial mortgage transactions whether in connection with construction, bridge or permanent mortgage financing, a loan sale, a transfer of a loan to an affiliate of the original lender, or other assignment of the loan.

Practical reminders include:

• Make sure that the chain of title is precise when assigning the mortgage, the note and other collateral documents such as assignments of leases and rents, guarantees and UCC’s. Don’t leave the note “behind.”
• Assign and endorse the note by allonge so that the chain of title is complete. Firmly affix the allonge(s) to the underlying note.
• Keep good records of all documentation, including recorded ( i.e. the mortgage an assignment of mortgage) and unrecorded documents. Retain originals in a safe place (such as under the control of a custodian or servicer or in a vault) and copies of all loan documents including assignment documents.
• When the loan is assigned, always deliver the original note along with the original allonge.

Members of our Real Estate and Finance Groups regularly handle commercial real estate financing and sales transactions throughout the country. If you have questions or would like further information, please contact Tim Davis ( davist@whiteandwilliams.com ; 215.864.6829) or Pat Haggerty ( haggertyp@whiteandwilliams.com ; 215.864.6811).

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• Assignment of Mortgage

Lenders or holders of mortgages often assign them to other lenders. The person or entity that receives the assignment will step into the place of the original lender. An assignment of mortgage should be in the appropriate format to provide notice to others. It should describe the property so that everyone understands which piece of property is attached to the assignment. It should also include the names of the various parties, contact information, and the date of the assignment. When a lender assigns a mortgage to another lender, the document will need to state the identity of the borrower. If a borrower assumes a mortgage, it should identify the lender.

Mortgages are often transferred to other lenders several times before being paid off. Lenders do not need to notify borrowers when selling a mortgage. Borrowers do not have a say in whether the mortgage is sold to another lender. However, the new lender is supposed to notify the borrower of the sale and give the borrower information on how to pay the new lender. In some cases, a borrower can try to renegotiate the terms of the loan, or, if the borrower does not want to continue with the new lender on the loan, the borrower can apply for a new mortgage to pay off the sold loan. When a new borrower assumes a mortgage, however, they must show that they have the financial ability to pay off the mortgage and that they understand the terms of the obligation that they have undertaken.

In Massachusetts, unlike some other jurisdictions, an assignment or mortgage must be in writing and then filed in the Registry of Deeds. A blank assignment is invalid. This is an important point because under case law, if the assignment is blank, a foreclosure sale related to the mortgage will be void. A foreclosing entity must obtain an assignment of mortgage in order to foreclose.

Once a mortgage has been paid, the holder should record a satisfaction in the proper written format to give notice to others that it no longer has a lien on the property.

Our Boston real estate attorneys can help you understand the requirements related to an assignment of mortgage and the consequences of assuming or assigning a mortgage. Our firm also advises and represents sellers, lenders, buyers, and associations in Cambridge, Andover, and Quincy, among other Massachusetts communities. Contact Pulgini & Norton at 781-843-2200 or through our online form for a free consultation with a home mortgage attorney.

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Split-Dollar Life Insurance: What It Is and How It Works (2024)

with our comparison partner, Policygenius

Scott Karstens is a writer and accomplished insurance and financial services veteran. He’s the president of NFG Brokerage and founder and CEO of both Broker Backoffice and his new direct-to-consumer insurance platform, Quote Bot.

Tori Addison is an editor who has worked in the digital marketing industry for over five years. Her experience includes communications and marketing work in the nonprofit, governmental and academic sectors. A journalist by trade, she started her career covering politics and news in New York’s Hudson Valley. Her work included coverage of local and state budgets, federal financial regulations and health care legislation.

Our editorial team follows a strict methodology for reviewing life insurance companies.

A split-dollar life insurance arrangement is a planning tool that can be used to provide benefits for both an employer and its employees. It involves the sharing of premiums and death benefits related to a life insurance policy taken on the employee.

Split-dollar arrangements are often used as part of executive compensation packages, helping employers attract and retain key personnel. Split-dollar life insurance may also provide personal financial protection for individuals by allowing them to build up their own cash value within the policy or to help them afford the life insurance protection they need.

With such a wide range of possible advantages, split-dollar life insurance can be an effective way for businesses and individuals alike to plan ahead financially.

What Is Split-Dollar Life Insurance?

Split-dollar life insurance is an agreement where two parties — an employer and an employee — agree to split the benefits, and sometimes the costs, of a life insurance policy . The employer pays the life insurance premium, in whole or in part, on a cash value life insurance policy purchased on the life of the employee. It’s a common part of a C-suite’s executive compensation package.

Often in these arrangements, the employer retains the rights to the cash value and the death benefit up to the premiums paid by the employer. Sometimes, the employer earmarks an amount greater than the premiums paid.

In some split-dollar arrangements, the employee has rights to any cash surrender value in excess of the employer’s contribution to the plan. If the employee pays into the plan, the employee’s beneficiaries may be entitled to an amount that’s proportionate to the employee’s premium payments.

Advantages for the employer:

• The death benefit is specialized for each agreement.
• The business can plan its premium contribution for each agreement.
• The employer can control the flow of the cash value and death benefit you own.
• The business has significant flexibility in nearly every portion of the plan design.
• If the business is a C corporation, it may use the cash value to which it’s entitled for corporate needs.

Advantages for the employee:

• You may use your portion of the death benefit for your personal use.
• You can accumulate cash value more quickly due to the employer’s contribution.
• Your beneficiaries receive a tax-free death benefit.

How Split-Dollar Life Insurance Works

Split-dollar life insurance begins with an agreement. The following steps pertain specifically to corporate split-dollar agreements rather than private split-dollar agreements.

In a corporate split-dollar agreement, an employer and the employee are sharing the costs and benefits of a life insurance policy for whom the employee is the insured person. The agreement will describe how the death benefit is divided between each party, how each party can access cash (if applicable) and how each party can exit the agreement.

Final regulations provide two types of split-dollar life insurance arrangements: economic benefit regimes and loan regimes. Under the economic benefit regime, the employer owns the life insurance policy but allows the employee certain rights, such as the right to name beneficiaries. Under a loan regime, the employee owns the policy and awards an interest in the policy to the employer. The taxation of the arrangement depends on which regime is chosen.

Here’s how a split-dollar life insurance arrangement under the economic benefit regime might be created.

• Employer drafts a split-dollar agreement.
• Employee signs a notice and consent for the life insurance being purchased and signs the life insurance application as the insured person.
• Employer signs as the owner and payor of the life insurance policy and submits an application for life insurance on the life of the employee to the insurance company. Employer also sends along a split-dollar agreement.
• Employee completes a medical exam to qualify, unless it’s a no-exam life insurance policy .
• Once the life insurance policy is approved, Employee and Employer sign the split-dollar agreement.
• Employer and Employee pay the premiums pursuant to their agreement.
• Employer reports premiums by the Employer for coverage exceeding $50,000 as compensation on Employee’s Form W-2, Wage and Tax Statement .
• Employer files Form 8925 , Report of Employer-Owned Life Insurance Contracts , each year.
• Employer or a third party administrator tracks any change or fluctuation in benefit to Employee for tax purposes.

Example of a Split-Dollar Agreement

ABC Corp. and its executive enter a split-dollar agreement using the economic benefit regime. The policy provides a $1 million life insurance death benefit on the executive’s life. In their agreement, ABC Corp. owns the policy and, upon the termination of the agreement, is entitled to the greater of premiums advanced or the policy’s cash value. The executive (and whomever the executive names as a beneficiary) is entitled to death benefits paid under the policy in excess of the amounts owed to ABC Corp.

ABC Corp. reserves the right to use $500,000 of the policy’s death benefit for key person coverage. ABC also retains the right to all cash value as collateral for its contribution. The remaining $500,000 in death benefits is available for the executive to choose a beneficiary or beneficiaries.

Benefits of Split-Dollar Life Insurance Plans

Split-dollar life insurance arrangements seek to benefit both the employer and the employee.

First, the employer is allowed to individualize the agreement for each person covered, and the business receives the cash value and death benefit based on its contribution. It may also negotiate more favorable terms. This agreement lowers the cost, and possibly the tax burden, of providing an insurance benefit to the employee.

Also, the employee receives a death benefit at a discount or more cash value growth due to employer contributions.

Tax Benefits

In general, a corporation can’t claim a tax deduction for premiums payment provided for a split-dollar agreement. However, if the employer chooses to provide cash value to the employee at a future date, the employer can then take a deduction for the compensation to the employee.

Under the economic benefit regime, the employee pays a tax for the benefit they are able to control. Under the loan regime, premium payments by the employer are treated as a loan to the employee. In this agreement, the employee would pay tax on the interest for this loan.

Low Interest Rates

In the loan regime for split-dollar agreements, the employer is required to charge interest on the loan to the employee. Most often, the applicable federal rate (AFR) is used when calculating the interest for these loans. This rate is the minimum rate the employer can charge for a bona fide loan and is typically below market value interest rates.

Implications of Split-Dollar Plans

As an employee, when you enter into a split-dollar agreement, you are allowing life insurance to be owned on your life, directly (in an economic benefit arrangement) or through collateral assignment (in a loan arrangement), in exchange for what can often be favorable out-of-pocket expenses compared to buying a life insurance policy on your own.

Employers need to make sure they have the resources to keep up with the economic benefit calculations and make sure that loan terms and rates are up-to-date for each premium payment. Perhaps the most overlooked item is having the proper notice and consent from the employee on file and making sure the company files Form 8925 each year. Working with an experienced tax professional can be extremely valuable in navigating these complexities.

Types of Split-Dollar Life Insurance Policies

Final regulations published by the IRS and U.S. Treasury Department allow for two types of split-dollar life insurance arrangements.

Economic Benefit Regime

In an economic benefit arrangement, an employer owns and pays for the life insurance premium and will be the beneficiary of the policy up to some amount, which may be the greater of the employer’s contribution to the life insurance policy and a stated benefit needed for corporate planning.

The employee will name beneficiaries on the death benefit assigned to the employee. This assignment of death benefit provides a benefit to the employee similar to term insurance.

While the employee does not own or control the policy, the employee still receives value. This value is calculated each year based on the age of the employee and the death benefit available for the employee to assign to beneficiaries. The IRS provides a table of one-year term costs to calculate the economic value of death benefit available, which determines the taxability of the plan.

Loan Regime

Under a loan arrangement, the employee is the policy owner, and the employer generally pays the premium.

To ensure the employer is made whole, the employee grants an interest in the cash value and death benefit of the policy back to the employer through a collateral assignment. This assignment places restrictions on the policy, safeguarding the interests of both parties. For example, the employer may recover the loaned premiums to the employee if the employee were to unexpectedly pass away. This also makes it possible for the employer to recover their loaned premiums if the employee is no longer employed by the employer or at the termination of the agreement.

The premium payments made by the employer are treated as loans to the employee. Each year, these premium payments are considered as separate loans, allowing for flexibility in structuring them as either term or demand loans.

Moreover, these loans must be provided at an interest rate that complies with the applicable federal rate (AFR). The good news is that these loan rates will stay constant for each premium payment, so even though the interest rate can change each year, you will have known interest rates for each premium payment.

Determining If Split-Dollar Life Insurance Is Right for You

As an employer, a split-dollar plan provides you with a greater degree of benefits planning, while also providing ownership and control of the benefits. These agreements are very advantageous when looking to attract and retain key employees.

Before deciding if a split-dollar life insurance plan is right for you, it’s important to consider the benefits and implications of such an agreement.

Implementing Split-Dollar Life Insurance

To implement a split-dollar plan, you will need a split-dollar agreement. You may be able to find sample documents for these types of plans online, but for the complexity involved in these agreements it’s necessary to seek legal and tax advice.

Once you have this agreement, you will need to apply for life insurance for your employee, and they will need to qualify for life insurance. Once the plan is in place, you will need to do an annual review of the benefits to make sure you are properly accounting for the structure of the agreement in place.

How Split-Dollar Policies Are Terminated

Split-dollar plans are terminated at the earlier of the employee’s death or the termination date included in the agreement (often retirement or a benchmark of employment). There are three common ways that plans are terminated:

• The employee dies. If an employee were to pass away unexpectedly while the agreement is still active, the employer recovers either the premiums paid, cash value or the amount owed in loans per the agreement. Then, the employee’s named beneficiaries receive the remainder as a tax-free death benefit.
• The agreement terms end. If the employee completes the terms of the agreement in a loan regime agreement, all collateralized restrictions are released under the loan arrangement. In an economic benefit plan, the ownership of the policy may also be transferred to the employee as an added benefit. In either of these circumstances, this event would generate taxable income to the employee, which may be deductible by the employer.
• One party chooses to terminate. An employer could choose to exit the plan at the termination of the agreement, and the employer may recover all or a portion of the premiums paid or cash value. The employee then would own the insurance policy. The value of the policy is taxed to the employee as income tax and is potentially deductible for the employer.

The Bottom Line

A split-dollar plan is a valuable, non-qualified plan that can provide significant benefits to all parties when structured properly. An employer can provide additional benefits to key employees and an employee can benefit from the employer’s contribution to premium payments . Consider working with a knowledgeable insurance agent and a financial advisor when putting these plans in place.

Frequently Asked Questions about Split-Dollar Life Insurance

Why use a split-dollar plan.

The goal of a split-dollar arrangement is to lower the cost and/or tax burden of providing a life insurance contract for the benefited party.

What are the key components of a split-dollar agreement?

There are three key components that drive the tax implications of these agreements: the owner of the policy, the split of premium payments (if any) to the life insurance company and the division of equity between the parties.

What is collateral assignment?

In a loan split-dollar life insurance arrangement, a collateral assignment allows the employer to recoup its premium payments if the employee dies prematurely or exits the agreement. Collateral assignments apply to both the death benefit and the cash value in a life insurance policy.

What types of life insurance are used in split-dollar plans?

Typically, a permanent life insurance policy is used in split-dollar agreements. Permanent life insurance includes whole life, universal life, indexed universal life and variable universal life insurance.

What are the most common mistakes in split-dollar plans?

Common mistakes include: forgetting to document proper notice and consent prior to the implementation of the plan, forgetting to file Form 8925 annually for employer-owned life Insurance and improperly structuring benefits to the employee.

Methodology: Our System for Ranking the Best Life Insurance Companies

Our goal at the MarketWatch Guides team is to provide you with comprehensive, unbiased recommendations you can trust. To rate and rank life insurance companies, we created a thorough methodology and analyzed each company by combing through online policy information, speaking to agents via phone, reading customer reviews for insight into the typical customer experience, and reviewing third-party financial reliability scores.

After collecting this data, we scored each company in the following categories: coverage, riders, availability and ease of use and brand trust. To learn more, read our full life insurance methodology for reviewing and scoring providers.

If you have feedback or questions about this article, please email the MarketWatch Guides team at editors@marketwatchguides. com .

MarketWatch Guides may receive compensation from companies that appear on this page.
The compensation may impact how, where and in what order products appear, but it does not influence the recommendations the editorial team provides. Not all companies, products, or offers were reviewed.

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What Is a Personal Loan Agreement?

• What's in Personal Loan Agreements?

The Bottom Line

• Personal Loans

How to Write a Personal Loan Agreement

Step-by-step guide to creating a personal loan agreement

Ward Williams is an Editor focused on student loans and other financial products and services. He has five years of professional editing, proofreading, and writing experience. Ward regularly contributes to stories about government policy and company profiles. He received his B.A. in English from North Carolina State University and his M.S. in publishing from New York University.

Investopedia / Zoe Hansen

A personal loan agreement is usually a good idea whether you're lending money to family or friends or borrowing from them. It's a way for you to ensure that both parties understand the loan's terms.

Additionally, a personal loan agreement document can be enforced in court if something goes wrong, such as the borrower failing to make payments. Here's what you need to know about writing a personal loan agreement.

Key Takeaways

• A personal loan agreement document provides the borrower and lender with a way to review terms and expectations.
• Personal loan agreements are used when individuals loan money, not when banks loan money.
• Your personal loan agreement should include identifying information for all parties, clear terms (including the interest rate), and a repayment schedule.
• Personal loan agreements are enforceable by courts.

Personal loan agreements, sometimes called personal loan contracts, are designed as legally binding documents to outline the repayment terms of a loan, which helps the borrower and lender understand expectations .

A personal loan contract can also stipulate whether the arrangement includes collateral. While most personal loans are unsecured (i.e., there's no valuable asset used to secure the loan), it's possible for these arrangements to have some collateral . A secured personal loan contract should include the situations in which a lender could claim the valuable item used to offset the risk of making the loan.

Most personal loan agreement documents include information about the borrower and lender, loan amount, interest rate , fees, repayment terms and schedule, how disputes are settled, and what type of collateral (if applicable) will secure the loan.

Personal loan documents are considered enforceable in court, so a borrower who doesn't meet their obligations could have a judgment levied against them, such as a lien or wage garnishment .

What Should Be Included in a Personal Loan Agreement?

You typically utilize a prearranged contract when signing a personal loan contract with a traditional lender. If you're lending to or borrowing from friends and family, you might need to write your own personal loan agreement document.

If there's only a small amount involved, a simple promissory note might be sufficient. However, in some cases, you may need a more complicated contract. Here are some of the items that should be included when creating a personal loan contract:

• Identification : Those involved in the contract should share their full names and addresses. Driver's licenses and Social Security numbers (SSN) might also be used for further identity verification.
• Date : Dates for signatures, the time the agreement goes into effect, and other important dates should be identified in the personal loan agreement document.
• Loan amount : Include the total amount being borrowed. This is the principal of the loan.
• Collateral : If applicable, include what is being used to secure the loan, its value, and the conditions under which a lender can claim the property.
• Interest rate : The stated interest rate of the loan should be included, and designate whether it's a fixed rate or variable rate . Variable rates should include the provisions for determining a new rate and how often the rate changes. If you're charging any fees (such as origination fees ), you also need the annual percentage rate (APR) , which includes the interest value of the fees.
• Repayment schedule : Using the interest calculation, it's possible to work out a repayment schedule. Often repayment happens monthly, but your agreement can include other arrangements. Make sure the date of the last payment is clear.
• Penalties : Any personal loan contract should include penalties for late payments, in addition to the consequences of default.
• Jurisdiction : State where the agreement will be enforceable. Double-check state laws, as well as mediation requirements, when choosing a jurisdiction.
• Severability clause : This portion of the personal loan agreement is designed to ensure that most of the rest of the agreement remains intact, even if one part of the contract is found illegal or unenforceable.
• Entire agreement clause : Many contracts, including personal loan agreement documents, feature a section detailing that any other arrangements outside of what's documented in the contract aren't part of the agreement.
• Signatures : Finally, don't forget to have the borrower and lender each sign the document.

While not necessary, it might make sense to have others witness the signatures (and sign as well) or to get the services of a notary to officiate over the signing.

Other Clauses You May Find in Business or Bank Loans

While many personal loan documents are quite simple, some can become more complicated thanks to additional clauses that are often included in business or bank loans. Some items you might see include:

• Successors : This clause explains what happens if one of the parties passes away before the agreement is fulfilled.
• Legal expenses : This specifies who's responsible for paying different legal fees depending on the various outcomes of a dispute.
• Modification : You may want to include some steps the parties might take if they want to alter the agreement.
• Credit verification : Signing the agreement typically grants permission for the lender to request documentation designed to help verify your income. You might also see a clause granting the lender permission to review your credit history.

You can find personal loan agreement templates online, such as this one from the Law District:

Example of a Personal Loan Agreement

While you can write your own agreement from scratch, there are several templates that can make it easier to create a personal loan agreement document. Here are examples of how you might fill in template sections:

1. Parties : This Personal Loan Agreement (this "Agreement"), dated as of September 19, 2023 (the "Effective Date"), is by and between Jane Doe (the “Borrower”), with the mailing address of 123 Main Street, in the City of Anytown, in the State of Delaware, and John Doe (the “Lender”), with the mailing address of 123 Any Street, in the City of Everyplace, in the State of New Jersey.

2. Loan Amount : The sum loaned by the Lender to the Borrower will be: Ten Thousand Dollars ($10,000).

3. Payment : This Loan Agreement, which covers the entirety of the principal sum and any interest accrued, will be due and payable via the method specified below:

☐Single payment: The loan, any unpaid interest, and all other charges and fees are due either: On the demand of the lender / On or before ______/_____/20____

☐Weekly installments of __________ Dollars ($________) beginning on ____/_____/20___ and continuing every 7 days until the entire balance is paid in full.

X Monthly installments of one-hundred and eighty-eight Dollars ($188) beginning on 10/19/2023 and continuing every month until the entire balance is paid in full.

☐Quarterly installments of __________Dollars ($________) beginning on the ____ day of each quarter and continuing every quarter until the entire balance is paid in full.

☐Other:__________________________________

4. Interests : (Check one of the options below)

X This Loan Agreement bears interest at a rate of 4.95 percent (4.95%) compounded annually. This must be equal to or less than the maximum usury rate in the Borrower’s State.

☐ This Loan Agreement does NOT bear interest.

5. Late fee : (Check one of the options below)

☐ There is a late fee in this Loan Agreement. If the Borrower does not make a payment within_________ days of the contractual due date. Under this provision, the Borrower agrees to pay the Lender a late fee of ________% of the amount due at the time of the missed payment.

X There is NO late fee in this Loan Agreement.

6. Prepayment : (Check one of the options below)

X The Borrower of this Loan Agreement may pay back the loan in full or make additional payments at any time without incurring a penalty.

☐ The Borrower will incur a surcharge of ________% of the amount paid in surplus to the agreed payment schedule.

7. Income Verification :

The Lender reserves the right to require an income verification to the Borrower. This Verification may include, at least, the following:

• Earnings statement or W-2 form identifying employee and showing amount earned period of time covered by employment.

8. Events of Acceleration :

If any of the following events occur, this will constitute an “Event of Acceleration” under this Loan Agreement:

• The Borrower fails to pay any part of the principal or interest when it is due under the terms of this Loan Agreement; or
• The Borrower becomes insolvent or refuses to pay any debts when they become due.

9. Acceleration : If one of the Events of Acceleration above occurs, the Lender can, at their sole and exclusive option, declare this Loan Agreement immediately due and payable.

10. Remedies : The Lender has the right to remedy any breach of this Loan Agreement. Delays or omissions in exercising the rights granted under this Agreement by the lender do NOT constitute a waiver of these rights. Additionally, no omission, waiver, or delay may invalidate any of the stated terms, nor shall they restrict the Lender from enforcing this Agreement. The Lender’s rights and remedies shall be cumulative and can be pursued singly, successively, or together at their sole discretion.

11. Subordination : The Borrower’s obligations under this Loan Agreement supersede and subordinate all other indebtedness, if any, of the Borrower, to any unrelated third-party lender. 

12. Waivers : The Lender cannot be deemed to have waived any rights provided under this Loan Agreement unless they are provided in writing. This shall not, however, be construed as a future waiver of said rights or any other covered by these terms and conditions.

13. Legal Expenses : In the event any payment made under this Loan Agreement is not paid when due, the Borrower agrees to pay, in addition to the principal and interest owed, reasonable attorneys’ fees. The amount of these expenses shall NOT exceed the maximum usury rate in the State of New Jersey upon the outstanding balance owed by the Borrower under this Loan Agreement. This sum shall be added to any other reasonable expenses the Lender has incurred in exercising their rights and remedies upon default by the Borrower.

14. Governing Law : This Loan Agreement shall be governed by, and construed in accordance with, the laws of the State of New Jersey.

15. Successors : This Loan Agreement binds the Borrower and the Borrower’s successors, heirs, and assigns, however, the Lender may not assign any of their rights or delegate any of its obligations without the prior written consent of the holder of this Agreement.

16. Signatures : IN WITNESS WHEREOF, the Borrower has executed this Promissory Note as of the day and year first written above.

Lender’s Signature: Jane Doe Date: 9/19/2013

Print Name: Jane Doe

Borrower’s Signature: John Doe Date: 9/19/2013

Print Name: John Doe

The Securities and Exchange Commission (SEC) also has a template you can use to make a personal loan agreement.

Frequently Asked Questions (FAQs)

Does a personal loan agreement need to be notarized.

No, notarizing a personal loan agreement isn't usually required. However, it can help to have an "official" record of the contract to encourage both parties to take the terms seriously.

Can a Personal Loan Agreement Be Changed Over Time?

Yes, if all concerned parties are willing to change the agreement, it's possible to modify the original. However, there should be an agreed-upon process to follow.

If I'm Lending Money, How Much Interest Can I Charge on a Personal Loan?

In general, you should charge interest in line with the prevailing market. However, you are limited only by state laws (usually the borrower's). You can charge up to the amount allowed by state law.

How Is a Promissory Note Different From a Loan Agreement?

A promissory note is often considered a type of loan agreement. However, many promissory notes are much simpler than a full contract, simply stating the amount borrowed and when it should be repaid.

Anytime you borrow or loan money, consider having a loan agreement in place to protect both parties and to clarify terms, especially when lending money to family and friends . Writing a personal loan agreement document can provide all parties with information and it can reduce misunderstandings about the terms of the loan and its repayment.

Legal Information Institute. " Loan Agreements ."

Consumer Financial Protection Bureau. " What Is a Judgment? "

U.S. Securities and Exchange Commission. " Loan Agreement and Promissory Note (Example) ."

LawDistrict. " Personal Loan Agreement ."

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