Bailee letter
A bailee letter is the document under which a party holding original loan documents, such as a buyer or custodian, agrees to hold them for the warehouse lender’s benefit until the lender is paid.
How a bailee letter works
On a warehouse line, the provider’s security interest in a loan depends in part on controlling the original note. When the loan is sold, the provider ships the collateral file to the buyer before the purchase price arrives. A bailee letter goes with it: the buyer acknowledges that it holds the documents as bailee for the warehouse lender and will either pay the stated amount or return the documents.
That acknowledgment does legal work. Under Uniform Commercial Code § 9-313(c), a secured party takes possession of collateral held by someone else when that person authenticates a record acknowledging it holds the collateral for the secured party’s benefit. The bailee letter is that record, so the warehouse lender stays perfected while the note is out of its hands.
Bailee letter in mortgage lending: what a sample contains
In mortgage and private lending, a bailee letter is usually one page. A typical letter names the loan and borrower, lists the documents being shipped (original note, allonge, assignment of mortgage), states the amount the buyer must wire to the warehouse lender, gives the wire instructions, and says the buyer holds the documents as bailee for the warehouse lender until that payment is made or the documents are returned. Terms vary by warehouse provider, so treat this as a description, not a form to copy.
Why it matters to a private lender
Bailee letters are part of the friction of selling loans off a line: the provider releases the file only against a signed letter, and payment instructions must match exactly or funds go astray. Buyers that are slow to sign or pay keep the loan on the line longer and cost you interest.
Example
Hypothetical. A lender sells a $600,000 loan financed on its line. The provider sends the original note to the buyer with a bailee letter for $510,000 (its advance plus interest). The buyer wires that amount to the provider and the remainder to the lender, and the provider’s interest is released.
Read about selling loans without a line on sell your loans and the warehouse line alternative.
Where Lender Capital fits
Lender Capital places first-lien, business-purpose real estate loans with capital partners. You apply once, then submit each loan with the full file. We send it only to capital partners whose criteria it fits, one partner funds the whole loan at closing and it is assigned to them. You keep your points (less the placement fee), earn the spread above the partner’s rate and service the loan. You pay a placement fee only when a loan funds.
Lender Capital is a business-to-business platform. This page is general information, not legal, tax or securities advice. Terms of warehouse lines and other funding sources vary by provider; confirm them with each provider and your counsel.