What Is a Non-Recourse Promissory Note?
A non-recourse promissory note is a loan agreement that restricts how the lender can seek repayment if the loan goes into default. Generally, with a non-recourse note, the lender will be limited to the value of the collateral for repayment of the debt, even if that value is less than the amount due on the loan.
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Loan Collateral
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A non-recourse loan will usually be secured by a lien on collateral, such as a mortgage on a piece of real property or a lien on business assets. The loan will be made up of several documents, including the non-recourse note that evidences the debt and a security agreement such as a mortgage that evidences the lien.
Recourse Loans
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With a recourse loan, the borrower executes a note making him personally liable to the lender for payment of the entire amount of the debt. That means that if the loan goes into default and the value of the collateral is less than the amount due, the lender can seek the difference (sometimes called the "deficiency") from the borrower. The lender may even choose to forgo the collateral and instead go after the borrower's other assets and income for the full amount of the debt.
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Loan to Value
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When banks make loans, they calculate the amount of the loan as compared to the value of the collateral. To make a non-recourse loan, the bank will look for collateral that is substantially more valuable than the amount of the loan. This is the only way the bank can protect itself from a loss if the value of the collateral decreases over the life of the loan. Therefore the bank will look for lower loan-to-value ratios for non-recourse loans in order to give itself a value "cushion" in the event of default.
Loan Guaranty
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A loan guaranty can turn a non-recourse loan into a recourse loan. If a bank makes a non-recourse loan to a business, secured by collateral, the bank is limited to the value of the collateral in the event of default. However, some banks will ask for a loan guaranty from the business owner. By signing a loan guaranty the signer becomes personally liable for the loan, even if the note is non-recourse as to the business.
Consult With Your Lawyer
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Read all loan documents carefully. Loan documents can be very complex. As with all legal documents, you should always have your own attorney review any loan documents before you sign them.
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