Enforcing Purchased Loans: What Secondary-Market Investors Need to Know in Georgia
By Casey Baker
Institutional buyers and other secondary-market investors of real estate-secured loan portfolios necessarily enter Georgia’s lending and collection landscape not as originating lenders, but as assignees. These purchasers must take care to ensure that the enforcement rights they believe they are acquiring survive the transfer intact and remain available when a borrower ultimately defaults.
Chain of Title and Standing to Foreclose
One potential point of failure in the enforcement of a purchased loan in Georgia is a defective or incomplete assignment. In You v. JP Morgan Chase Bank, N.A., 293 Ga. 67 (2013), the Georgia Supreme Court held that the holder of a security deed is “authorized to exercise the power of sale in accordance with the terms of the deed even if it does not also hold the note or otherwise have any beneficial interest in the debt obligation underlying the deed.” Id. at 74. In other words, it is legal title to the security deed, and not equitable ownership of the underlying debt, that confers standing to foreclose under Georgia law. This holding is of particular importance to secondary-market buyers who acquire loan pools where the note and security deed may have been separated.
As a practical matter, a borrower’s ability to challenge the chain of assignments is extremely limited. It is well-settled in Georgia that a borrower, being a stranger to an assignment of the security deed from the originating lender to its assignee, generally has no standing to challenge its validity. See, e.g., Ames v. JP Morgan Chase Bank, N.A., 298 Ga. 732 (2016). Nevertheless, this general rule does not relieve a purchaser of the obligation to ensure that its own chain of title is sound. Rather, it simply narrows who may raise the objection. A loan buyer who cannot establish an unbroken chain from originator to seller to buyer, complete with properly executed and recorded assignments, may nevertheless be unable to convey insurable title through foreclosure, effectively limiting its enforcement remedies.
Preserving and Understanding Available Remedies
Assuming that chain of title is established, the issue becomes one of available remedies. Two questions inevitably arise: first, whether the remedies the loan purchaser expects to inherit have actually survived the transfer and subsequent activities; and second, whether and how those remedies can be exercised in a meaningful and cost-effective way.
Guaranty rights, for example, do not follow a real estate-secured loan automatically. The guaranties themselves, as free-standing contracts, must also be assigned to the purchaser to provide an avenue for recovery. In addition, Georgia law provides a specific statutory procedure, which may be unfamiliar to out-of-state institutional buyers, that must be followed before a foreclosing lender may pursue a post-foreclosure deficiency judgment, including against a guarantor. O.C.G.A. § 44-14-161 provides, in relevant part, as follows:
When any real estate is sold on foreclosure […] under powers contained in security deeds […] and at the sale the real estate does not bring the amount of the debt secured by the deed […], no action may be taken to obtain a deficiency judgment unless the person instituting the foreclosure proceedings shall, within 30 days after the sale, report the sale to the judge of the superior court of the county in which the land is located for confirmation and approval and shall obtain an order of confirmation and approval thereon.
O.C.G.A. § 44-14-161(a). At the confirmation hearing, the foreclosing lender must prove to the court’s satisfaction that the property “brought its true market value” at the sale. The court must also “pass upon the legality of the notice, advertisement, and regularity of the sale.” O.C.G.A. § 44-14-161(b),(c). Only after the sale is confirmed may the foreclosing lender file suit to collect any deficiency. Generally speaking, this confirmation process applies equally to primary borrowers and guarantors, although a guarantor may waive it. The statutory requirements, however, are strictly construed by Georgia courts. A failure to follow them will cut off a lender’s ability to pursue a deficiency, even where the underlying debt and security interest are otherwise valid. Since alternative remedies, such as a pre-foreclosure suit on the debt, may be available, it is important for the purchaser to understand and consider, with the assistance of its counsel, the time, cost, procedures, and risks involved in each option.
Borrower Defenses Unique to Purchased Debt
Loan purchasers often face arguments from defaulting borrowers that the originating lender may never, or at least less frequently, encounter. For example, claims that records from the original lender are incomplete or unavailable, disputes over the precise amount owed, and challenges to notice are all uniquely suited to be raised in purchased-loan enforcement simply because the change in ownership introduces a gap in the story. The most effective means of shutting down these arguments is to secure complete origination and payment history records from the seller at the time of purchase, and to independently document the calculation of amounts owed. Relying on the seller to preserve records that will, at some point, need to withstand judicial scrutiny introduces a substantial risk that those records will not be readily available when they are truly needed.
Litigation or Foreclosure Versus a Negotiated Workout
Once a loan is in default, the purchaser’s decision is not simply whether to enforce, but how. Litigation or non-judicial foreclosure may be the appropriate course where collateral must be secured promptly or where the borrower is unresponsive. However, a negotiated workout will often achieve the same recovery more quickly and at lower cost. This is particularly true where the borrower has the ability to pay and simply needs a restructured path to do so. That decision, like the others discussed above, is best made from a position of strength. A purchaser who has confirmed clean title, preserved its remedies, and obtained a defensible enforcement file from the outset will enjoy more options when that decision must be made.
A Practical Takeaway
In the secondary loan market, the old adage is true: an ounce of prevention truly is worth a pound of cure. The purchasers who avoid costly and protracted enforcement litigation are, more often than not, those who (1) understand and can anticipate and preserve their remedies, and (2) treat the diligence performed at acquisition, rather than the litigation strategy employed after default, as their first and best line of defense.