Scratched Loan

Scratched loan refers to a loan that is removed from a loan pool before the transaction closes. Scratches occur during the due diligence period when the buyer discovers issues that make an individual asset unacceptable — common reasons include missing or defective collateral files, broken assignment chains, unresolvable title defects, material data discrepancies between the tape and actual loan documents, or active litigation that changes the risk profile.

The mechanics of scratching a loan are governed by the loan purchase sale agreement (LPSA), which defines the conditions under which a buyer may remove assets from the pool and how scratches affect the total purchase price. Most LPSAs allow the buyer to scratch a limited number or percentage of loans without renegotiating the deal, while excessive scratches may give the seller the right to terminate the transaction. Sellers also track which buyers scratch aggressively — a buyer who consistently removes a high percentage of loans from every pool may find themselves cut from future tape distributions.