Nationwide Mortgage Licensing System (NMLS) Practice Exam

What type of clause prevents a lender from pursuing additional recovery from a mortgagor if foreclosure proceeds are insufficient?

1. Forbearance

2. Escalation

3. Acceleration

4. Exculpatory

The correct answer is: Exculpatory

The correct answer is exculpatory clause. An exculpatory clause is a provision in a mortgage agreement that stipulates that if a borrower defaults and the property is foreclosed, the lender cannot pursue the borrower for any additional personal liability beyond the collateral itself (the property). In other words, the lender's recovery is limited to the proceeds from the foreclosure sale. If those proceeds do not cover the full amount owed, the lender cannot seek further payment from the borrower’s other assets or income. This type of clause is significant because it provides a measure of protection for borrowers, as it limits their financial consequences in the case of foreclosure. The clause effectively caps the lender's rights to recourse against the borrower, making the borrower's obligation to the lender strictly tied to the property they secured with the mortgage. Understanding this clause is crucial for both lenders and borrowers, as it defines the risk exposure for a borrower in the event of default and foreclosure.