Mortgages/security devices - Acceleration

Learning Outcomes

After reading this article, you will be able to explain the function and effect of acceleration clauses in mortgages, distinguish between due-on-sale and standard acceleration provisions, identify when acceleration can be triggered, and analyze the enforceability of acceleration clauses in MBE-style questions.

MBE Syllabus

For MBE, you are required to understand the operation and consequences of acceleration clauses in mortgage and security device law. This includes:

  • Recognizing the purpose and effect of acceleration clauses in mortgage agreements.
  • Identifying the circumstances that allow a lender to accelerate a mortgage debt.
  • Distinguishing between standard acceleration and due-on-sale clauses.
  • Understanding the requirements for valid enforcement of acceleration clauses.
  • Applying these principles to questions involving mortgage transfers and defaults.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. What is the primary effect of an acceleration clause in a mortgage?
    1. It allows the borrower to pay off the loan early without penalty.
    2. It makes the entire loan balance due immediately upon default or transfer.
    3. It reduces the interest rate upon default.
    4. It prevents the lender from foreclosing.
  2. A mortgage contains a due-on-sale clause. The borrower sells the property without the lender’s consent. What can the lender do?
    1. Nothing; the sale is valid and the mortgage continues.
    2. Accelerate the loan and demand full payment.
    3. Only increase the interest rate.
    4. Only foreclose if the buyer defaults.
  3. Which of the following is NOT typically required for a lender to enforce an acceleration clause?
    1. A valid acceleration provision in the mortgage.
    2. Notice to the borrower if required by the contract.
    3. A court order before acceleration.
    4. A triggering event such as default or unauthorized transfer.

Introduction

Acceleration clauses are a central feature of mortgage and security device law. They allow a lender to declare the entire outstanding loan balance immediately due and payable upon the occurrence of certain events, most commonly default or unauthorized transfer of the property. Understanding how and when acceleration can be invoked is essential for analyzing mortgage enforcement and transfer scenarios on the MBE.

Acceleration Clauses: Purpose and Effect

An acceleration clause gives the lender the contractual right to demand immediate payment of the full loan balance if the borrower breaches specified terms, such as failing to make payments or transferring the property without consent.

Key Term: Acceleration Clause A mortgage provision allowing the lender to declare the entire debt due immediately upon default or other specified event.

Due-on-Sale Clauses

A common form of acceleration is the due-on-sale clause. This clause permits the lender to accelerate the loan if the borrower sells or transfers the property without the lender’s written consent, even if the borrower is not otherwise in default.

Key Term: Due-on-Sale Clause A mortgage provision allowing the lender to accelerate the debt if the property is sold or transferred without the lender's approval.

Triggering Acceleration

Acceleration can be triggered by:

  • Borrower default (e.g., missed payments, failure to pay taxes or insurance).
  • Unauthorized transfer of the property (if a due-on-sale clause is present).
  • Other breaches specified in the mortgage contract.

The lender must comply with any contractual requirements for notice or opportunity to cure before acceleration.

Enforcing Acceleration Clauses

To enforce an acceleration clause, the lender must:

  • Ensure the mortgage contains a valid acceleration provision.
  • Provide any required notice to the borrower, as specified in the contract or by law.
  • Declare the loan accelerated after the triggering event.
  • Proceed to foreclosure if the borrower fails to pay the accelerated amount.

Most courts enforce acceleration clauses as written, unless enforcement would be unconscionable or violate statutory protections.

Key Term: Foreclosure The legal process by which a lender sells the mortgaged property to satisfy the debt after default and acceleration.

Worked Example 1.1

A homeowner has a mortgage with an acceleration clause stating that the lender may declare the full loan balance due if the borrower misses a payment. The homeowner fails to pay the January installment. The lender sends a notice of default and, after the cure period expires, accelerates the loan.

Answer: The lender may demand immediate payment of the entire outstanding balance and, if not paid, may initiate foreclosure proceedings.

Worked Example 1.2

A borrower sells her house to a third party without notifying her lender. The mortgage contains a due-on-sale clause. The lender learns of the sale and immediately accelerates the loan.

Answer: The lender is entitled to accelerate the debt and require full payment, even if the borrower was not otherwise in default, because the due-on-sale clause was triggered by the transfer.

Exam Warning

Many students confuse acceleration clauses with prepayment rights. Remember: acceleration allows the lender to demand full payment upon default or unauthorized transfer, not the borrower’s right to pay early.

Revision Tip

Always check the mortgage contract for specific notice requirements before acceleration. Failure to give required notice may invalidate acceleration and delay foreclosure.

Key Point Checklist

This article has covered the following key knowledge points:

  • Acceleration clauses allow lenders to demand full payment of the mortgage upon default or specified events.
  • Due-on-sale clauses are a type of acceleration clause triggered by unauthorized transfers.
  • Lenders must follow contractual notice and cure requirements before accelerating.
  • Acceleration is a prerequisite to foreclosure after default.
  • Courts generally enforce acceleration clauses as written, unless unconscionable or prohibited by statute.

Key Terms and Concepts

  • Acceleration Clause
  • Due-on-Sale Clause
  • Foreclosure
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