Purchasing a Note with Term Errors

[Mike Hartzog]

First things first... Happy New Year everyone!  I hope your 2015 is off to a good start. 

I have a hypothetical scenario for you to ponder. Let's say you are looking at purchasing a performing note, but after doing that math on the note terms you realize that the payment called out in the note is a bit higher than it should be. The P&I payment the borrower has been paying since 2009 translates to a rate .05% higher than the rate called out on the note. The note term is 25 years, so there is plenty of UPB remaining.

This is clearly not a great situation for the note purchaser but lets say for sake of argument that we are getting a very nice discount on the note so we are inclined to try to make the deal work.  Let's also say that the borrower has no idea there is an error and neither does the seller but you, the purchaser, are an ethical and honest business person so if you purchase the note you want to fix the issue rather than bury them.

So the question is, what would you do in this situation?  Would you walk away?  If not, how would you try to work with both the seller and the borrower?  What potential legal liabilities do you see here?