Representations and Warranties
Also known as: reps and warranties, reps and warrants, R&W
Representations and warranties — commonly abbreviated as "reps and warranties" or "R&W" — are the legally binding guarantees that a note seller makes in the loan purchase sale agreement (LPSA) about the condition, characteristics, and legal standing of the loans being sold. These statements cover everything from the accuracy of the unpaid principal balance to the completeness of the collateral file to the enforceability of the lien. For note buyers, representations and warranties are the contractual foundation for post-closing protection — if any statement proves false, the buyer has the right to demand the seller cure the defect or repurchase the loan.
Standard Representations in a Note Sale
While every LPSA is different, a well-drafted agreement includes representations covering these core areas:
| Representation | What the Seller Warrants | Why It Matters |
|---|---|---|
| Accurate UPB | The unpaid principal balance stated in the loan schedule is correct as of the cutoff date | An overstated UPB means you paid too much relative to the actual debt |
| Valid and enforceable lien | The mortgage or deed of trust is properly recorded and creates an enforceable lien on the property | An unrecorded or defective lien cannot be foreclosed |
| Complete chain of title | The assignment chain is unbroken from the originator to the seller, with all assignments properly recorded | A broken chain prevents enforcement and delays foreclosure |
| Complete collateral file | The original promissory note, allonge/endorsement chain, mortgage, and assignments are present and deliverable | Missing documents compromise your ability to enforce the loan |
| No prior forgiveness | No 1099-C (cancellation of debt) has been filed for this loan | A 1099-C may indicate the debt was previously forgiven, undermining enforceability |
| Disclosed modifications | Copies of all loan modifications and forbearance agreements have been provided | Undisclosed modifications change the loan terms you thought you were buying |
| Lien position | The lien occupies the position (first or second) stated in the loan schedule | A misrepresented lien position fundamentally changes the investment's risk profile |
| No pending litigation | No lawsuits, bankruptcy filings, or regulatory actions related to the loan are pending that have not been disclosed | Undisclosed litigation creates unexpected legal costs and delays |
| Compliance with laws | The loan was originated in compliance with applicable federal and state laws | Predatory lending or TILA violations can create assignee liability for the buyer |
The Repurchase Remedy
Representations and warranties are only as valuable as the remedy they provide when breached. The standard remedy is a repurchase obligation: if the seller's representation proves false and the defect cannot be cured, the seller must buy the loan back at the original purchase price. The typical process:
- Buyer discovers the defect. This usually occurs during the post-closing collateral file audit — for example, a missing original note with no lost note affidavit, or a gap in the assignment chain.
- Buyer sends an exception report. A formal written notice identifying each deficiency and the specific representation it breaches.
- Seller has a cure period. The LPSA typically provides 30–60 days for the seller to correct the issue — by locating missing documents, recording a corrective assignment, or providing a lost note affidavit.
- If uncured, the buyer demands repurchase. The seller is contractually obligated to repurchase the loan at the original price, effectively unwinding the transaction for that asset.
Without a repurchase clause, your only post-closing recourse is a breach-of-contract lawsuit — expensive, time-consuming, and uncertain.
Negotiating Stronger Protections
Not every LPSA arrives with adequate representations and warranties. Sellers — particularly smaller operators or first-time sellers — may present contracts with minimal or vague language. Key areas to negotiate:
- Add missing representations. If the contract does not warrant that the collateral file is complete or that no 1099-C has been filed, request that language. These are standard provisions, not unusual asks.
- Specify cure timelines. A vague "reasonable time to cure" invites delay. Push for a defined window — 30 days is standard.
- Include a hard repurchase trigger. If the defect is not cured within the cure period, repurchase should be mandatory, not discretionary.
- Define what constitutes a breach. Broad language like "material breach" without examples creates ambiguity. Specific examples — missing original note, unrecorded assignment, incorrect UPB — make enforcement straightforward.
- Survival period. Representations should survive closing for a defined period (typically 6–12 months for smaller trades, longer for larger pools) to give the buyer adequate time to audit the collateral files.
Why Reps and Warranties Are Not a Substitute for Due Diligence
Strong representations and warranties provide post-closing protection, but they should never replace pre-closing due diligence. The repurchase remedy only works if the seller has the financial capacity and willingness to honor it. A small seller who has already spent your purchase proceeds may lack the funds to repurchase a defective loan. An offshore entity or shell company may be unreachable.
The practical approach: conduct thorough due diligence before closing to identify as many defects as possible, negotiate the strongest reps and warranties you can, and treat the repurchase clause as a backstop — not a first line of defense.
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