Nationwide Mortgage Licensing System (NMLS) Practice Exam

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Prepare for the Nationwide Mortgage Licensing System (NMLS) Exam. Utilize flashcards and multiple choice questions, each with hints and explanations. Ensure your success by getting thoroughly prepared!

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Which clause in a mortgage allows a lender to increase the interest rate?

Defeasance
Escalation
Acceleration
Exculpatory

The correct answer is: Escalation

The escalation clause within a mortgage allows the lender to increase the interest rate under certain predefined circumstances. This type of clause is typically included in adjustable-rate mortgages (ARMs) or specific loan agreements where the lender may have conditions that trigger a rise in the interest rate. It provides lenders protection against varying economic conditions that can affect interest rates, allowing the loan terms to adjust in response to changes in market rates or other risk factors. This mechanism of adjusting the interest rate is significant because it gives lenders the flexibility to manage their risk and ensures borrowers are aware that their payment obligations may increase over time if specified conditions in the agreement occur. Such clauses are especially relevant in financial agreements where the initial rate may be low but can increase, offering transparency in how future interest obligations may change based on market conditions.