California Real Estate Practice Exam

What does an acceleration clause in a mortgage loan or trust deed allow?

1. The borrower to pay the loan off early without penalty

2. The lender to increase the interest rate

3. The lender to declare the entire loan amount due immediately

4. The borrower to make smaller payments

The correct answer is: The lender to declare the entire loan amount due immediately

An acceleration clause in a mortgage loan or trust deed serves a critical function for lenders. It allows the lender to demand the full outstanding balance of the loan be paid immediately if certain conditions are met, typically triggered by the borrower’s default on the loan. This clause protects the interests of the lender by ensuring they can recover the full amount owed without having to wait for the scheduled payments. The other options describe features that do not align with the purpose of an acceleration clause. For example, allowing the borrower to pay off the loan early without penalty is not related to the function of an acceleration clause, as that typically involves prepayment privileges. Similarly, increasing the interest rate or allowing borrowers to make smaller payments do not connect to the situation where an acceleration clause would be enacted. Thus, C accurately captures the essence of what an acceleration clause allows in the context of loan agreements.