Recourse

What Is Recourse?

Recourse is the right a lender or buyer has to pursue a borrower or seller beyond the asset tied to a deal when a payment is missed. If a loan is backed by collateral, such as a house or a car, the lender can first take and sell that property after a default. With a recourse loan, the lender can also go after the borrower's other assets, such as savings or other property, to cover any remaining balance. The concept also appears outside lending, for example when a seller must buy back loans that fail to meet agreed standards.

How Recourse Works

The central question is how far a lender's claim can reach after default. In a full recourse loan, the claim extends to all of the borrower's assets, and in some places a court may issue a deficiency judgment for any unpaid balance left after the collateral is sold. A nonrecourse loan, by contrast, limits the lender to the collateral itself. If the collateral sells for less than the amount owed, the lender generally absorbs the shortfall.

Some agreements fall in between. Limited recourse may cap the lender's claim at a set amount or restrict it to specific assets. Certain conduct, such as fraud or misrepresentation by the borrower, can also change the outcome under the terms of the contract or applicable law.

A Simple Example

Consider a hypothetical loan of 300,000 secured by a property that sells for 240,000 after default. Under a recourse loan, the lender could pursue the remaining 60,000 from the borrower's other assets. Under a nonrecourse loan, the lender would typically keep the 240,000 from the sale and bear the 60,000 loss itself.

Why It Matters to Investors

Recourse determines how much risk stays with the party that made the loan or sold the asset. In a mortgage-backed security, for example, the originator may be required to repurchase loans that break the deal's promises, which moves some credit risk back to the seller. Knowing whether an obligation is recourse or nonrecourse helps explain how losses would be divided. Because these terms are set by contract and vary by jurisdiction and loan type, the exact rules depend on the documents and local law involved.