To Record or Not to Record (a Note), That is the Question

[Jeff S.]

Our process is to use a broker to originate all of our loans. We fund the deal and then the Note and Deed of Trust are assigned to us at closing. Pretty standard stuff.

The DOT and Assignment of course must be recorded, but based on the recommendation of a broker we used early on; we also record the associated Note. A bit atypical but his reasoning was that in case we lost the Note or something happened to us, we or an heir could always get a certified copy. We liked the idea and we embraced it for all our deals.

Recently, a different broker we now use was speaking to an escrow company and the officer there had another opinion. Here’s a quote from his email to me:

“The escrow officer we dealt with was absolutely adamant that the Note cannot be recorded, that it’s not a recordable instrument and that she and title could not record it. She confirmed that a Deed of Trust referencing a Note and the amount are completely sufficient to protect the lender’s interest, and that attempting to record a Note could actually cloud title. “

When the property is sold and we're about to be paid off (these are always for short term flips in California) we normally sign and notarize a Substitution of Trustee and Full Reconveyance and submit it to escrow along with the original Note and sometimes, if they request it, the original DOT.

We’ve never had a problem. And yes, the whole idea here is to cloud title only while we’re owed money and we’re fully aware that recording the Note is not required. Further, we’ve never been told that we left any clouds the new homeowner would ultimately have to deal with.

My questions are:
1) Is this escrow officer correct?
2) What are your thoughts about recording Notes in general? Pros? Cons?
3) Should we turn ourselves into the local authorities in advance? (OK, no need to answer that one)

Thanks.

Jeff