Mortgages/security devices - Acceleration

Learning Outcomes

This article explains acceleration in mortgages and security devices, including:

• The doctrinal foundations and policy purposes of acceleration clauses in mortgage and deed of trust agreements, and how they interact with foreclosure and redemption on the MBE.
• The function and effect of standard acceleration provisions, distinguishing optional from automatic acceleration and clarifying when the full balance, rather than individual installments, becomes due.
• The structure and operation of due-on-sale and due-on-encumbrance clauses, and how unauthorized transfers, assumptions, and subject-to conveyances can trigger a lender’s right to accelerate.
• The types of monetary and non-monetary defaults that can give rise to acceleration; the notice, cure, and election requirements for valid exercise; and common drafting language that appears in exam fact patterns.
• The enforceability limits on acceleration clauses, including statutory and contractual borrower protections, waiver and deceleration through lender conduct, and the availability of reinstatement rights.
• The relationship between acceleration and statutes of limitation, including how acceleration starts the limitations clock on the entire debt and how deceleration can affect future installment actions.
• The analytical steps for approaching MBE-style questions involving acceleration, from identifying the triggering event and status of the clause to determining the correct remedy, party liabilities, and timing issues.

MBE Syllabus

For the MBE, you are required to understand the operation and consequences of acceleration clauses in mortgage and security device law, with a focus on the following syllabus points:

• 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 interacts with several core mortgage concepts tested on the exam: foreclosure, redemption, assumption and “subject-to” transfers, and statutes of limitation. Many questions turn on whether the lender has properly accelerated, what amount is currently due, and what rights the borrower or a transferee still has.

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

Purpose and Effect of Acceleration

An acceleration clause gives the lender the contractual right—after specified conditions are satisfied—to demand immediate payment of the full loan balance if the borrower breaches terms of the note or mortgage, such as:

• Failing to make scheduled payments.
• Failing to pay real estate taxes or required insurance.
• Committing waste or violating covenants (e.g., using the property for prohibited purposes).
• Transferring the property in violation of a due-on-sale clause.

Once properly accelerated:

• The entire remaining principal, plus accrued interest and allowable fees, becomes due at once.
• The lender can pursue foreclosure to satisfy the full accelerated amount, not just the missed installments.
• The borrower’s equitable right of redemption generally requires payment of the full accelerated debt, not just the arrears.

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

Optional vs Automatic Acceleration

Acceleration clauses can be drafted in different ways, and the distinction matters in exam questions.

Key Term: Optional Acceleration Clause
A clause giving the lender the option, but not the obligation, to accelerate the entire debt upon a specified default.

Key Term: Automatic Acceleration Clause
A clause providing that the entire debt becomes due automatically upon a specified default, without any further action by the lender.

Most modern residential mortgages use optional acceleration: the debt is not accelerated until the lender affirmatively exercises the option—usually by sending written notice or filing a foreclosure action. On the exam, assume:

• The lender must take some clear step to accelerate under an optional clause, consistent with the contract (e.g., written notice stating the loan is accelerated).
• Until acceleration, each missed installment is treated separately; the lender may sue only for overdue installments or later choose to accelerate the whole debt.

Under an automatic clause, acceleration occurs by operation of contract upon default, but such clauses are less common in standard mortgage forms.

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.

The primary purpose of a due-on-sale clause is to:

• Let the lender control who becomes the new property owner and hence who effectively controls the collateral.
• Allow the lender to renegotiate the loan or require a new loan if interest rates have changed or the transferee’s credit is different.

As a general rule (and for MBE purposes), due-on-sale clauses are valid and enforceable. Federal law (principally the Garn–St Germain Act) broadly permits institutional lenders to enforce due-on-sale provisions, subject to limited statutory exceptions (such as some transfers to a spouse or child, or on death). The exam is unlikely to test those detailed exceptions, so unless stated otherwise, assume:

• A voluntary transfer of the property in violation of a due-on-sale clause allows the lender to accelerate immediately, even if payments are current.
• The sale is still valid between buyer and seller, but the mortgagee can foreclose if the accelerated amount is not paid.

Some mortgages also include a related provision:

Key Term: Due-on-Encumbrance Clause
A clause permitting the lender to accelerate the debt if the borrower grants an additional mortgage or lien on the property without the lender’s consent.

Due-on-encumbrance clauses protect the lender from a junior lien that may reduce the value of its security or complicate foreclosure.

Transfers: “Subject-To” vs Assumption

Acceleration and due-on-sale issues arise frequently when the mortgagor conveys the property.

Key Term: Assumption of Mortgage
A transfer in which the buyer agrees to become personally liable on the existing mortgage debt in addition to the original borrower.

Key Term: Subject-to Mortgage
A transfer in which the buyer takes title subject to the existing mortgage but does not assume personal liability for the mortgage debt.

Without a due-on-sale clause, the borrower is generally free to transfer the property. The mortgage follows the land, so:

• If the buyer assumes the mortgage, both the original borrower and the buyer are personally liable to the lender (the buyer primarily; the seller secondarily), unless the lender releases the seller.
• If the buyer takes subject to the mortgage, only the original borrower remains personally liable. The lender can still foreclose against the property if payments are not made.

With a due-on-sale clause, a transfer—whether by assumption or subject-to—gives the lender the option to accelerate. If the lender instead consents (for example, allowing an assumption without acceleration), it is treated as a waiver of the due-on-sale clause for that transfer.

Triggering Acceleration

Acceleration can be triggered by a variety of events, depending on the mortgage terms:

• Monetary defaults

  • Missed principal or interest payments.
  • Failure to pay property taxes or required insurance premiums.

• Non-monetary defaults

  • Violating use restrictions (e.g., using residential property for commercial purposes).
  • Failing to maintain the property, committing waste, or breaching maintenance covenants.

• Unauthorized transfers

  • Selling or transferring the property in breach of a due-on-sale or due-on-encumbrance clause.

The lender must comply with any contractual requirements for notice or opportunity to cure before acceleration. Many standard mortgage forms require:

• Written notice specifying the default.
• A cure period (e.g., 30 days) during which the borrower can correct the default.
• A statement that failure to cure will result in acceleration and possible foreclosure.

Failure to follow these contractual procedures can render acceleration ineffective and may postpone foreclosure.

Enforcing Acceleration Clauses

To enforce an acceleration clause, the lender must:

• Ensure the mortgage contains a valid acceleration provision.
• Confirm that a triggering event has occurred (default, unauthorized transfer, etc.).
• Provide any required notice to the borrower, as specified in the contract or by statute.
• Clearly declare the loan accelerated after the triggering event, typically through written notice or by filing a foreclosure complaint that states the loan is accelerated.
• 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 (such as consumer protection statutes or anti-discrimination laws). Importantly, a lender generally does not need a court order merely to accelerate but will typically need court involvement to carry out a judicial foreclosure.

Waiver and Deceleration

Even after acceleration, the lender’s conduct may amount to waiver or deceleration:

• If the lender accepts late or partial payments after sending a clear acceleration notice, some courts treat that as waiving acceleration, returning the loan to installment status.
• Some mortgages explicitly state that acceptance of partial payments does not waive acceleration. The precise wording of the note and mortgage is important on the exam.

Borrowers sometimes have a statutory or contractual right to reinstate:

Key Term: Reinstatement
The borrower’s right, in some jurisdictions or under certain mortgages, to cure the default by paying past-due installments and costs, thereby reversing (decelerating) an earlier acceleration and restoring the original payment schedule.

If the right to reinstate exists, the borrower need not pay the entire accelerated balance, provided reinstatement occurs within the permitted time.

Relationship Between Acceleration and Redemption

Acceleration changes the amount that must be paid to save the property but does not eliminate the borrower’s fundamental rights.

Key Term: Equitable Right of Redemption
The borrower’s right, before a foreclosure sale, to stop the sale by paying the mortgage debt (usually the full accelerated amount plus interest and costs).

Once the loan is accelerated, the equitable right of redemption requires payment of the entire accelerated debt, not just missed installments.

In some states, borrowers also have a statutory right of redemption:

Key Term: Statutory Right of Redemption
A right granted by statute in some jurisdictions allowing the borrower (or other specified parties) to regain the property after a foreclosure sale by paying the purchase price plus additional amounts.

Statutory redemption, when available, typically arises after the foreclosure sale and depends on specific state statutes, which are generally beyond the level of detail tested on the MBE. The key exam point is that acceleration does not “clog” or destroy the equity of redemption; it simply affects the amount that must be paid to redeem.

Acceleration and the Statute of Limitations

Acceleration also affects the statute of limitations on actions to collect the debt:

• Without acceleration, each installment has its own limitation period, starting when that installment becomes due and unpaid.
• Once the lender validly accelerates, the statute of limitations for the entire remaining debt begins to run from the date of acceleration.

If the lender later decelerates (for example, by accepting reinstatement), some jurisdictions treat the clock as reset for future installments. Details vary by state, but the central exam takeaway is that acceleration starts the limitation period for the entire debt.

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 giving 30 days to cure and warning that failure to cure will result in acceleration. The homeowner does not cure. The lender then sends a written notice stating that the loan is accelerated and that the full balance is now due.

Answer:
The lender has properly exercised an optional acceleration clause. Because the borrower defaulted, received the contractually required notice and cure period, and did not cure, the lender may demand immediate payment of the entire outstanding balance. If the borrower does not pay the accelerated amount, the lender may initiate foreclosure proceedings. The borrower still retains an equitable right of redemption, but must now pay the full accelerated debt (plus interest and costs) to stop the foreclosure sale.

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 buyer takes the property “subject to” the existing mortgage and continues making payments on time. The lender learns of the sale and immediately accelerates the loan.

Answer:
The due-on-sale clause was triggered by the transfer, even though the loan was current. The lender is entitled to accelerate the debt and require full payment because the borrower transferred the property without consent. The sale remains valid between seller and buyer, and the mortgage still encumbers the property. If the accelerated amount is not paid, the lender may foreclose against the property. The original borrower remains personally liable on the note because the buyer took subject to rather than assuming the mortgage; the buyer risks losing the property in foreclosure but is not personally liable for any deficiency.

Worked Example 1.3

A mortgage permits acceleration upon default after 20 days’ notice. The borrower misses two payments. The lender sends a notice of default and then a letter accelerating the debt. Over the next several months, the lender accepts multiple partial payments without mentioning acceleration and without filing for foreclosure.

Answer:
The lender initially complied with the contractual requirements and validly accelerated. However, by repeatedly accepting partial payments without insisting on payment of the full accelerated amount, many courts would find that the lender waived acceleration or effectively decelerated the loan, restoring installment status. On an exam, if the facts emphasize the lender’s consistent acceptance of partial payments post-acceleration, the likely result is that the lender must re-accelerate before foreclosing for the full balance.

Worked Example 1.4

A note is payable in monthly installments for 20 years. There is an optional acceleration clause. The borrower misses payments for several years, but the lender does not accelerate. The jurisdiction has a five-year statute of limitations on actions to collect installments. The lender sues for all missed payments from years one through six, without accelerating.

Answer:
Because the lender did not accelerate, each installment has its own limitation period. Any missed payments that became due more than five years before suit are time-barred, but installments due within the five-year period are recoverable. The lender may also choose to accelerate prospectively (if the clause permits) and then sue for the entire remaining balance, starting the limitations period for the accelerated debt as of the date of acceleration.

Exam Warning

Many students confuse acceleration clauses with prepayment rights. Remember: acceleration allows the lender to demand full payment upon default or unauthorized transfer; it does not grant the borrower a right to pay early. A separate prepayment clause or statute governs the borrower’s ability to pay off the loan ahead of schedule.

Revision Tip

Always check the mortgage contract for specific notice and cure requirements before acceleration. Failure to give required notice may invalidate acceleration and delay foreclosure. Also, note whether the clause is optional or automatic and whether acceptance of late payments is treated as a waiver.

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.
• Most acceleration clauses are optional, requiring a clear act by the lender to accelerate.
• Due-on-sale clauses are a type of acceleration clause triggered by unauthorized transfers of the mortgaged property.
• Transfers can be structured as assumption or subject-to, affecting personal liability but not the lender’s right to accelerate if a due-on-sale clause exists.
• Lenders must follow contractual notice and cure requirements before accelerating.
• Acceleration is often a prerequisite to foreclosure for the full remaining debt.
• Borrowers retain an equitable right of redemption after acceleration but must pay the full accelerated debt to redeem.
• Statutes of limitation run on individual installments until acceleration; after valid acceleration, the limitations period runs on the entire debt.
• Waiver or deceleration can arise from the lender’s post-acceleration conduct, such as accepting partial payments.
• Courts generally enforce acceleration clauses as written, unless unconscionable or prohibited by statute.

Key Terms and Concepts

• Acceleration Clause
• Optional Acceleration Clause
• Automatic Acceleration Clause
• Due-on-Sale Clause
• Due-on-Encumbrance Clause
• Assumption of Mortgage
• Subject-to Mortgage
• Foreclosure
• Equitable Right of Redemption
• Statutory Right of Redemption
• Reinstatement