Acceleration Clause

Definition

An accelerated clause is a term in a loan agreement that requires the borrower to pay off the loan immediately under certain conditions.

Overview

An accelerated clause is typically invoked when the borrower materially breaches the loan agreement.

For example, mortgages typically have an acceleration clause that is triggered if the borrower misses too many payments. Acceleration clauses most often appear in commercial mortgages and residential mortgages. They also appear in some leases.

However, an accelerated clause may also specify that the borrower may pay off the loan in full prior to the loan's maturity date

In Ford Motor Credit Company v. Milhollin, 444 U.S. 555 (1980), the Supreme Court held that the Truth in Lending Act does not require that an acceleration clause be disclosed on the face of a credit agreement. 

Interest 

When a lender invokes an acceleration clause, the borrower must immediately pay the unpaid balance of the loan’s principal, as well as any interest that accumulated before the lender invoked the acceleration clause. The borrower does not, however, have to pay the full amount of interest that would have come due had the loan been paid off normally. For example, most loans allow the borrower to accelerate the loan and pay off the loan early in a single lump sum to avoid paying interest for the remainder of the loan’s term.

Invoking Acceleration Clauses

Few acceleration clauses trigger automatically. Instead, after the conditions in the clause occur, the lender may choose whether or not to invoke the clause. Where a lender gains the right to invoke an acceleration clause due to a borrower’s default, the lender may lose that right if the borrower corrects his or her default before the lender actually invokes the clause. 

Transfer And Sale

Some mortgages have clauses (called “due-on-sale” clauses) that allow acceleration if the borrower sells or transfers the real property if the mortgage has not been paid in full. These clauses are intended to protect the lender’s security interest in the mortgage. Accordingly, some of these “due-on-sale” clauses only allow acceleration if the sale or transfer would impair the lender’s security interest, or if the borrower fails to get the lender’s consent in advance. These types of clauses may not be triggered if property ownership transfers because the borrower died and the property passed to his heirs. Due-on-sale and due-on-transfer clauses are regulated by the federal Garn-St. Germain Depository Institutions Act of 1982. The act only affects mortgages of real property.

Waiver

Parties may waive their rights to invoke acceleration clauses by either entering into an express agreement or through the contract doctrine of reliance

Home mortgages

Home mortgage acceleration clauses are designed to trigger in situations where the mortgagee might want to foreclose on the mortgage. This allows the mortgagee to attempt to recover the entire unpaid value of the mortgage, not just the value of a few missed payments.

In some jurisdictions, borrowers in this situation may undo the mortgagees’ invocation of acceleration clauses and avoid foreclosure by making up past-due payments and compensating the mortgagee for some or all of the costs associated with the borrower’s default. In most of these jurisdictions, the key idea is that the borrower must put the mortgagor in the position the mortgagor would have been in but for the borrower’s default.

Further Reading

For more on acceleration clauses, see this Florida State University Law Review article, this New York Law Journal article, and this St. John's Law Review article. 

 

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Other References

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