Nationwide Mortgage Licensing System (NMLS) Practice Exam

Which clause in a mortgage prevents a lender from foreclosing unless there's a default?

1. Defeasance

2. Escalation

3. Acceleration

4. Exculpatory

The correct answer is: Defeasance

The clause that prevents a lender from foreclosing unless there's a default is known as the defeasance clause. This clause is typically included in mortgage agreements to ensure that the borrower's right to redemption is preserved until they fail to meet the obligations of the mortgage. When a defeasance clause is present, it essentially stipulates that the borrower retains the right to ownership and possession of the property unless they default on their loan agreement. In practical terms, the presence of a defeasance clause means that as long as the borrower fulfills their payment obligations and adheres to the terms of the mortgage, the lender cannot initiate foreclosure proceedings. This adds an additional layer of protection for the borrower, as it requires clear evidence of default before the lender can act to reclaim the property. The other terms mentioned, such as escalation, acceleration, and exculpatory, relate to different aspects of mortgage finance. For instance, an acceleration clause allows the lender to demand the full loan amount if the borrower defaults on payments, while an exculpatory clause limits the lender's right to pursue the borrower for any deficiency after foreclosure. However, none of these clauses prevent foreclosure in the absence of a default, unlike the defeasance clause.