A collateral file is the set of original documents that prove a loan exists, that a property secures it, and that the person selling it owns it. It holds the original note, any endorsements, the recorded mortgage or deed of trust, every assignment, and the title policy if one was issued.
A note is a right to be paid, and that right is only as good as the paper behind it. If the borrower pays every month until the loan is finished, nobody may ever ask to see the file. The day a payment is missed or you want to resell the note, somebody will ask. The file then has to show who owes what, which property stands behind the debt, and an unbroken trail from the person who first made the loan to the person now selling it to you.
Collateral file and servicing file
| Collateral file | Servicing file | |
|---|---|---|
| Purpose | Proves ownership of the debt and the lien | Shows how the loan has behaved |
| Contents | Original note, endorsements, security instrument, assignments, title policy | Payment history, letters to the borrower, tax and insurance records, notes of calls |
| Form | Originals, kept physically secure | Copies and data, often electronic |
| If it is incomplete | Enforcement can be harder or blocked | You know less about the borrower, but ownership is not in question |
You need both to judge a note, but only the collateral file answers the question a court or a later buyer will ask first: do you have the right to collect on this loan?
The documents, one at a time
The original promissory note
The note is the borrower’s signed promise to repay, and it is the debt itself. A clean copy of a recorded document is workable, because the county holds the record. The note is generally not recorded anywhere, so the signed original is the evidence, and you want it delivered at closing.
Check that the borrower’s name, the amount, the rate, the payment and the dates match the summary you were given, that every page is there, and that nothing has been altered by hand without initials. If the terms were changed later, look for a signed modification agreement, because the note alone will no longer tell you what is owed.
Endorsements and allonges
A note changes hands by endorsement, in much the same way a check does: the holder signs it over to the next owner. When there is no room on the note, the endorsement goes on a separate sheet attached to it, called an allonge.
The chain has to be unbroken. If the note was made payable to A, sold to B and is now offered to you by C, it needs an endorsement from A to B, one from B to C, and one from C to you.
The mortgage or deed of trust
This is the security instrument. It ties the debt to the property and lets the lender take the property if the borrower defaults. Which one you see depends on the state, and some seller-financed deals use a land contract instead, where the seller keeps legal title until the price is paid.
The instrument should be recorded, with the county’s stamp showing the date and the recording reference. Its legal description of the property should match the deed and the title work, and the borrower it names should be the person who signed the note. An unrecorded instrument is a serious problem, because recording is generally what gives a lien its place in line.
Assignments
An assignment of mortgage transfers the security instrument from one holder to the next, and it is the public-record twin of the endorsement on the note. Each sale of the loan should have produced one, and each should have been recorded. Lay the two chains side by side: the names on the assignments should line up with the names on the endorsements, and where they differ you ask why before going further.
The title policy
A lender’s title insurance policy, issued when the loan was made, insures the lien’s position as of that date, subject to the exceptions listed in it. A seller-financed note may have none, if the parties did not buy one at closing. Where a policy exists, read the exceptions and confirm the insured amount and the legal description. With or without one you need a current search, because a policy is silent on liens, tax bills and judgments that arrived afterwards.
Supporting papers you may also find
- Modification, extension or forbearance agreements: anything signed that changed the terms.
- The settlement statement from the sale that created the note, which confirms the price and the down payment.
- Proof of hazard insurance naming the note holder.
- A personal guaranty, seen mainly with business notes, where someone other than the borrower promised to pay.
- Entity papers showing who had authority to sign, if the borrower or the seller is a company or a trust.
- A lost note affidavit, if the original cannot be found.
When the original note is missing
Originals go astray, above all when a note has sat in a private house for years. The remedy sellers offer is a lost note affidavit: a sworn statement that they owned the note, that it has been lost and that they have not sold or pledged it to anyone else, sometimes with a promise to cover the buyer’s loss if the original turns up in other hands.
Whether an affidavit is enough to enforce the note depends on state law and on the facts. A buyer who accepts one prices the weakness in, and an attorney in the property’s state should review the affidavit first.
When something else is missing
A missing assignment or endorsement can sometimes be cured by having the earlier owner sign one now, which gets harder if that owner has died or the company no longer exists. An unrecorded security instrument may mean the lien is not in the position you were told. You then have the same choices each time: have the seller fix the gap before closing, lower your price to reflect it, or pass. An ownership and encumbrance report lets you compare the file against the county record.
Who holds the file, and how to review it
On a seller-financed note the originals may be in the seller’s desk drawer or with their attorney. Larger holders use a document custodian, a company paid to store originals and release them on instruction.
- Ask for copies of every document early, and list anything described as missing.
- Trace the endorsement chain on the note from the first lender to the seller.
- Trace the assignment chain in the public record and compare the two.
- Match names, amounts, dates and the legal description across all documents.
- Order current title work and compare it with what the file says.
- Make delivery of the originals a condition of closing, and decide whether you, your attorney or a custodian will hold them.
The property and the borrower get their own checks, on the due diligence checklist for note buyers, and both belong to the wider purchase that the investor guide follows from start to finish.
The first thing to ask a seller
Before you price anything, ask where the original note is and who has held it since it was signed. Summaries sent to buyers who join the buyer list state which collateral documents the seller has and which are missing. Inspecting the originals before funding remains your job.
Related questions
Is a copy of the note good enough?
Expect to be given the original signed note. A copy may not be enough to enforce the loan, depending on state law. If the original is lost, a lost note affidavit is the substitute sellers offer, and an attorney should review it before you rely on it.
Who should hold the collateral file after I buy?
A document custodian or your attorney can hold the originals, so they are stored securely and can be produced when needed. Keeping them at home is possible but leaves them exposed to loss or damage.
What if an assignment in the chain was never recorded?
Have it fixed before or at closing where possible, by getting the missing assignment signed and recorded. If the earlier holder cannot be found, speak to an attorney in the property's state about the options and how they affect enforcement.