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With or Without Recourse? Clarifying the Endorsement When You Sell a Note

You should practice safe recourse, or at least be aware of the risks if you don’t.  When I buy a note, I need to have the note properly endorsed to me, very much like a check is endorsed from one person to another:

“For value received, pay to the order of Little Johnny Cakes,” signed and dated by the note seller.  This is written on the back of the note, or on a separate piece of paper that is then permanently attached to the note (an allonge).  But there’s another aspect to the endorsement . . .

After identifying the new owner of the note, it should say “with recourse” or “without recourse.”

June 12, 2008

For value received, pay to the order of Dawn Rickabaugh, with recourse.

Sigmond Seller:_____________________________________

With Recourse:

If the endorsement includes the words “with recourse,” it means that the note seller is guaranteeing the note.  If the Payor doesn’t make the payments, the note seller is agreeing to make the payments to the keep the note buyer whole.

If I’m the note buyer, then I would want the seller to agree to a recourse loan . . . that adds another layer of protection for me.  If a seller is willing to endorse “with recourse” it probably means he is expecting the note payments to keep coming in, and is not hiding some known problem with the note.

Without Recourse:

A note sold “without recourse” means that the note seller doesn’t have to be on the hook for the money if the payments stop coming in.

If I’m the note seller, I would probably want to sign “without recourse.”  I don’t want to take a big discount and then have to guarantee the note payments as well.  It’s a point of negotiation between buyer and seller.

The silent endorsement:  if nothing is mentioned about recourse either way, guess what?  The note is sold with recourse . . . that’s the “default” setting.  Sellers are often unaware of this, so it can become a point of contention if the note buyer all of a sudden starts demanding payments 2 years down the road when a problem arises.

It’s just better to discuss it and establish it clearly within the endorsement on the back of the note.  As always, it’s best to consult with an attorney to understand the complexities and variations in your state.

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  1. Cary

    I have a note endorsed without recourse from DOT bank 1 to bank 2. Then the note is endorsed again without recourse by Bank 2 to Bank 3. How can bank 2 now say Bank 3 is only the servicer and Bank 2 is the real party in interest? I haven’t read where mortgage servicers get a note endorsed in blank without recourse from a lender and then only have servicing rights…?

  2. Dawn Rickabaugh

    Hi Cary,

    I’m probably not qualified to talk about issues regarding bank policies. As a general rule, my whole business model does not include dealing with banks on any level.

    I do know I could sell a note but retain the servicing rights, so it’s possible that’s what happened in your situation.

    My best,

    Dawn

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