The Loan Purchase Sale Agreement: What Note Investors Need to Know

The Contract That Governs Every Note Trade

The loan purchase sale agreement (LPSA) is the binding contract between the buyer and seller of a mortgage note. Some participants in the secondary market call it the PSA (purchase sale agreement), but regardless of terminology, this document defines every obligation, representation, and protection that governs the trade. Once both parties sign, the buyer is obligated to fund and the seller is obligated to deliver the assets along with the associated collateral files.

Unlike a letter of intent, which is typically non-binding, the LPSA is enforceable. Every clause carries weight. Understanding what each section means — and knowing which provisions to negotiate when they are absent — is one of the most important skills a note investor can develop.

This guide walks through the anatomy of a standard LPSA, explains the provisions that matter most, and identifies the areas where buyers should push for stronger protections.

Parties to the Agreement

The opening section of the LPSA identifies the seller and the buyer by their legal entity names and business addresses. This may seem like a formality, but it serves a critical verification function.

The seller named on the LPSA must match the last entity in the chain of title for the loans being sold. Specifically, the seller should be the party holding the most recent assignment of mortgage and the most recent allonge or endorsement on the promissory note. If the entity on the LPSA does not match the entity that holds the final vesting of those loans, you have an immediate problem — you may be buying from a party that does not actually own the assets.

During due diligence, cross-reference the seller's name on the LPSA against the assignment chain and the endorsement chain in the collateral documents. This is a basic but essential verification step.

Closing Date vs. Cutoff Date

Two dates in the LPSA deserve careful attention because they determine when ownership — and all the associated risk and reward — transfers from the seller to the buyer.

The cutoff date is the more consequential of the two. Everything that happens to the loan before the cutoff date is the seller's responsibility. Everything that happens on or after the cutoff date belongs to the buyer — for better or worse.

Consider two scenarios that illustrate why this matters:

Positive scenario. A borrower pays off the loan in full the day after the cutoff date. Those payoff proceeds go to the buyer. You funded the deal and immediately received a full payoff — an exceptional outcome.

Negative scenario. A senior lien forecloses the day after the cutoff date, wiping out your junior lien position. What was a secured loan at the time of purchase is now an unsecured debt. That risk falls entirely on the buyer.

In both cases, if the event had occurred the day before the cutoff date, the outcome would have been the seller's to absorb. The cutoff date is a bright line. Understand it, track it, and know exactly when your ownership clock starts.

Purchase Price and Loan Schedule

The purchase price is stated in the body of the LPSA and must match the detailed breakdown in Exhibit A — the mortgage loan schedule. This exhibit is a table appended to the agreement that lists every loan included in the trade. At a minimum, the loan schedule should contain:

The totals at the bottom of Exhibit A — total UPB and total purchase price — should match the corresponding figures stated in the body of the agreement. Verify these numbers before signing. A mismatch between the contract body and the exhibit schedule is a red flag that needs resolution.

If payments come in on a loan after the cutoff date but before the servicing transfer is complete, those payments belong to the buyer. The LPSA should specify how such payments are handled. Typically, they are forwarded to the buyer and do not reduce the purchase price, because the loan has already been sold — the buyer owns it, and the buyer receives the payments.

Transfer Date and Servicing Transfer

The LPSA specifies a transfer date — the deadline by which the seller must complete several post-closing obligations:

• Execute and deliver new assignments and allonges transferring the loans to the buyer's entity
• Ship the physical collateral files containing original loan documents
• Coordinate the servicing transfer with the current loan servicer to move the loans to the buyer's servicer through the boarding process

A 30-day transfer window is standard and reasonable. Some sellers may request 60 days, particularly for larger pools. The real bottleneck is often the loan servicer's internal scheduling — even when the seller initiates the transfer immediately after funding, the servicer may take additional time to process the onboarding on their end.

Know what to expect. If the LPSA says 30 days, hold the seller to it. If the servicing transfer is delayed beyond the contractual window, the LPSA gives you leverage to push for resolution.

Representations and Warranties of the Buyer

The LPSA includes a section where the buyer makes certain representations to the seller. These are typically straightforward compliance-related statements:

• The buyer is a duly organized entity in good standing
• The buyer has the legal authority to enter into the agreement
• The buyer maintains adequate insurance coverage (commonly a minimum of one million dollars in general comprehensive liability)

Most note investors will satisfy these requirements through basic business setup. The insurance minimums are worth noting — if you have not yet obtained errors and omissions (E&O) insurance or general liability coverage, the LPSA may be the prompt to do so. Sellers generally do not audit buyers for compliance with these representations, but signing a contract that includes them means you are legally affirming that they are true.

Representations and Warranties of the Seller

This is the most important section of the entire agreement. The seller's representations and warranties are formal, legally binding statements about the condition and characteristics of the loans being sold. If any of these representations turn out to be false, the buyer has contractual recourse — typically through a cure or repurchase mechanism.

A well-drafted LPSA includes the following seller representations:

Each of these representations exists to protect the buyer from unknowingly purchasing a defective asset. A loan with an incomplete chain of title may be unenforceable. A loan on which a 1099-C has been filed may have been legally discharged. A collateral file missing the original note creates significant legal hurdles in jurisdictions that require production of the original instrument to foreclose.

If you are reviewing an LPSA from a seller and any of these representations are absent, that is a negotiation point. You are not asking for unreasonable protections — you are asking the seller to stand behind the quality of what they are selling.

Assignments and Document Preparation

The LPSA addresses who is responsible for preparing the assignments and allonges that transfer the loans to the buyer. Some contracts assign this responsibility to the buyer; in practice, most sellers handle it as part of their closing process because the seller's entity is the one signing and notarizing the documents.

Regardless of who prepares them, verify that every assignment and allonge is executed correctly, notarized where required, and included in the collateral package. The assignment of mortgage must be recorded in the county where the property is located to establish your lien in the public record. The allonge does not require recording but must be physically attached to or associated with the promissory note.

Repurchase and Cure Provisions

The repurchase clause is your primary post-closing protection. It establishes what happens when a seller's representation or warranty turns out to be false.

The standard mechanism works as follows:

1. The buyer identifies a breach. After receiving the collateral files and reviewing the loan documents, the buyer discovers that a seller representation is inaccurate — for example, the assignment chain has a gap, or the collateral file is missing the original note with no lost note affidavit provided.

2. The buyer sends a collateral exception report. This is a formal notice to the seller documenting the specific deficiencies and the representations they breach. The exception report puts the seller on notice and starts any cure period defined in the LPSA.

3. The seller has the opportunity to cure. The LPSA typically gives the seller a defined window — often 30 to 60 days — to correct the deficiency. A cure might involve locating and providing a missing document, executing a corrective assignment, or obtaining a lost note affidavit.

4. If the seller cannot cure, the buyer can force a repurchase. The seller must buy the loan back at the original purchase price, refunding the buyer's capital. This is the ultimate remedy — if the seller sold you something that does not match what they promised, you get your money back.

Without a repurchase clause, your only post-closing recourse is general contract law, which means litigation. A contractual repurchase mechanism is far more efficient and far less expensive to enforce.

Indemnification

The indemnification section addresses liability for lawsuits and legal claims arising from the loans. If a borrower sues over a servicing issue that predates the sale, or if a third party challenges the validity of the lien, the indemnification language determines which party bears the cost of defense and any resulting damages.

Standard indemnification provisions allocate pre-closing liability to the seller and post-closing liability to the buyer. Review the scope carefully — some indemnification clauses are narrower than they appear.

Exhibit B: The Bill of Sale

Beyond the Exhibit A loan schedule, most LPSAs include an Exhibit B — the bill of sale. This is a receipt that the seller signs after receiving the purchase funds, formally acknowledging that payment was received and that ownership of the loans has transferred to the buyer.

The bill of sale serves as documentary evidence that the transaction was completed. In practice, it is sometimes treated as a formality — many buyers do not follow up to collect it, particularly in repeat trades with trusted sellers. However, the bill of sale becomes important if you ever need to prove the transaction occurred, enforce servicing transfer timelines, or demonstrate to a third party (such as a court or a loan servicer) that you are the rightful owner of the assets.

For first-time trades with a new seller, always obtain the executed bill of sale.

Negotiation Tips for Buyers

Not every LPSA arrives with every protection a buyer needs. Sellers — particularly institutional sellers moving large volumes — may use standardized contracts that favor the seller's position. Knowing where to push back is critical.

Add missing representations. If the contract does not include a representation that the collateral files are complete, or that no 1099-C filings have been made, request that language. These are reasonable, standard protections.

Define cure and repurchase timelines. If the LPSA includes a repurchase mechanism but does not specify a cure period, propose one. A 30-day cure window followed by a mandatory repurchase if the issue is not resolved is a common and fair structure.

Clarify the cutoff date. If the contract is ambiguous about when economic risk transfers, pin it down. Ambiguity in the cutoff date creates disputes about who is entitled to payments received during the transition period.

Specify collateral delivery requirements. The LPSA should state exactly what documents the seller is obligated to deliver, by when, and in what format. Vague language like "relevant loan documents" leaves room for incomplete files.

Use escrow for new relationships. If you have not traded with this seller before, propose using a third-party escrow agent. The escrow agent holds both the funds and the loan documents, releasing each side only when both parties have delivered. This adds a small cost but eliminates the risk of funding a trade and never receiving the assets.

When to Involve an Attorney

If you are purchasing your first mortgage note, or trading with a seller whose contract you have not reviewed before, have an attorney review the LPSA before you sign. The legal fee for a contract review is nominal compared to the cost of discovering post-closing that your contract offers no meaningful protection.

An attorney familiar with secondary mortgage market transactions will identify missing representations, weak repurchase language, and liability provisions that may be unfavorable. They can also advise on state-specific requirements that affect the enforceability of certain contract terms.

As you gain experience and develop relationships with repeat sellers, you will become proficient at reviewing LPSAs yourself. But even experienced investors occasionally encounter contract language that warrants legal input — particularly when buying from a new source, purchasing in a new state, or acquiring a larger pool than usual.

The LPSA as a Foundation for the Trade

The loan purchase sale agreement is not paperwork to skim and sign. It is the legal foundation of your investment. Every protection you have as a buyer — and every obligation you accept — is defined in this document. The representations and warranties section determines whether you have recourse if something goes wrong. The repurchase clause determines whether that recourse is practical or theoretical. The cutoff date determines exactly when you start bearing the risk and receiving the reward.

Read every clause. Verify the loan schedule against your negotiated terms. Confirm that the seller's entity matches the chain of title. And when a provision is missing or unclear, negotiate before you sign — not after you have wired the funds.