Question

Which clause is used in a security instrument to protect the original note holder if the security instrument is sold and the borrower subsequently defaults?

a) Due-on-Sale Clause
b) Acceleration Clause
c) Defeasance Clause
d) Alienation Clause

Answer 1

The Acceleration Clause is used in a security instrument to protect the original note holder if the security instrument is sold and the borrower subsequently defaults.

Step-by-step explanation:

The clause used in a security instrument to protect the original note holder if the security instrument is sold and the borrower subsequently defaults is the Acceleration Clause.

The Acceleration Clause allows the lender to demand immediate repayment of the entire outstanding loan balance if the borrower defaults on their payment obligations. This clause protects the original note holder by ensuring they can recover their investment in case of default.

For example, let's say a borrower sells their property without paying off the mortgage, and the new owner fails to make the required payments. In this scenario, the Acceleration Clause allows the original note holder to request immediate repayment of the full loan amount from the borrower or the new property owner.