Non recourse loan?

[dashboy]

Found these little tidbits at http://www.extension.iastate.edu/agd.../pdf/c3-05.pdf

Non-recourse loan - A loan obligation that can be collected by the secured party only by taking the property used as collateral. In other words, the borrower has no obligation to repay other than what was used as collateral and the secured party cannot collect more than the collateral even if the remaining loan amount is more than the value of the collateral.

Recourse loan - A loan obligation where the borrower is liable for the full amount of the remaining balance of the loan, even if the collateral value is less than the remaining balance.

Purchase money loan - A loan used to purchase property that serves as its own collateral.


dashboy~

[gatorguy3]

So would this mean that all loans of that particular type be labeled as such? Meaning, would a car note be considered a non-recourse loan? Or would it have to be specified non-recourse on the note?

[Judge Roy Bean]

Originally Posted by gatorguy3

So would this mean that all loans of that particular type be labeled as such? Meaning, would a car note be considered a non-recourse loan? Or would it have to be specified non-recourse on the note?

Car loans would never be non-recourse because the financing of automobiles is more profitable than the buying and selling of the cars themselves.

[gatorguy3]

neither the definitions above nor the link herein suggest, imply, or state that profit is a motivator in these designations. I was only looking for clarification as to whether or not these designations would have to be specified.

[B Rookard]

An example of a nonrecourse/recourse mortgage.

When you give a mortgage in return for a loan to buy the house the lender has two options - (1) sue on the promissory note, or (2) foreclose the mortgage. The promissory note is the personal liability portion - you promise to repay the loan.

A typical mortgage is a recourse mortgage because the bank can sue on the note (they come after you personally since you promise to pay).

In a nonrecourse mortgage, the lender takes only the mortgage (a security interest in the property), without the promissory note. Thus, if you default the only thing that the bank can do is foreclose and sell the house.

Nonrecourse simply means that the lender can only go after and sell the collateral.

[gatorguy3]

So then it would be something stipulated in the contract/promisory note.

A car loan would be the same way, would it not?

Would it have to be stipulated in the contract, that is what I want to know.

Because, if the auto loan is non recourse, then the company can only reposess the auto and sell it for what they get. They would not be able to ask for repayment of monies above and beyond what they sell the vehicle for.

That is what I am trying to find out. Thanks.

Recourse or non-recourse should be stipulated in the contract, unless there is already a blanket provision in the state statutes.

For example, California is a trust deed state, which means that a mortgage holder may not sue for deficiency. Last I checked Colorado does allow lenders to sue for deficiency on real estate loans.

Here is an example where doubt might exist and it is imperative to stipulate. Many subprime mortgage lenders are originating first and second mortgage paper, and then taking a bundle of them and securitizing them. These are known as CMOs; Collateralized Mortgage Obligations. The mortgage pool has bonds issued against the pool, and the payment from the mortgages pays of the bonds principle and interest. So what happens if all the mortgages are paid off and there is not enough to cover all the bonds (as might happen if mortgage holders default)? The subprime lenders are typically structuring the bonds as non-recourse, meaning a deficiency when all the mortgages are paid can't be made up by suing the subprime lender who originated the bonds. A bond buyer better check to see if the CMOs are overcollateralized, else they may come up short on their investment since they have nobody to sue.

[B Rookard]

Originally Posted by gatorguy3

So then it would be something stipulated in the contract/promisory note.

A car loan would be the same way, would it not?

Would it have to be stipulated in the contract, that is what I want to know.

Because, if the auto loan is non recourse, then the company can only reposess the auto and sell it for what they get. They would not be able to ask for repayment of monies above and beyond what they sell the vehicle for.

That is what I am trying to find out. Thanks.

A lender will NEVER agree to an automobile loan on a nonrecourse basis for the very simple reasons that (1) the value of the car depreciates so fast that there really is no security in collateral (the car) and (2) because cars are subject to so much risk to things that affect their value (ie. - accidents, fire, theft, etc.).

Nearly all loans are recourse - the lenders want to be able to come after you personally or after the collateral - and recourse offers the better security.

A nonrecourse loan is viable where the security is greater than the loan amount so that the lender is safely secured by the collateral. Then they don't worry about suing you, they'll just foreclose on the collateral. Usually, you're going to have to be a pretty successful business or individual in order to get a nonrecourse loan - they don't just offer them to everybody.

[Judge Roy Bean]

Originally Posted by gatorguy3

So then it would be something stipulated in the contract/promisory note.

A car loan would be the same way, would it not?

Would it have to be stipulated in the contract, that is what I want to know.

Because, if the auto loan is non recourse, then the company can only reposess the auto and sell it for what they get. They would not be able to ask for repayment of monies above and beyond what they sell the vehicle for.

That is what I am trying to find out. Thanks.

Read your contract. It will have verbiage specifying what will happen if you fail to pay. The exact t's and c's vary from state to state.