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Acceleration Clauses in California real estate loans – what they are, and how the work

Acceleration clauses are standard in loans secured by California real estate. The clause provides that on the happening of a listed event, the lender (or beneficiary) may call the entire loan balance due and payable immediately. The events stated are usually a) if the borrower (trustor) defaults on any provision of the loan, b) if the property is sold or otherwise transferred, and sometimes c) if the property is otherwise encumbered (most likely by taking out another loan). If the note or contract language provides for it, acceleration could also require payment of any prepayment penalty. If there is no contract provision allowing for acceleration, the lender is stuck – if the borrower defaults in one or two payments, the lender could only foreclose on those delinquent payments Lenders and borrowers concerned about acceleration, and how it is triggered, should consult with an experienced Sacramento real estate attorney.

Acceleration clause el dorado real estate attorney.jpgSome Contract defaults that may trigger acceleration

The typical default is where the borrower does not make an installment payment. Also common are failure to pay taxes, or property assessment, or HOA fees; failure to pay property insurance premiums, or allowing an insurance policy to lapse; or, failing to pay an obligation which is senior to the subject deed of trust.

How the Acceleration Clause is Exercised

Exercise of an acceleration clause is for the benefit of the lender (beneficiary) and is at their option and discretion. The lender can waive the default, deciding not to accelerate, though a waiver of one default does not waive others. If the beneficiary decides to accelerate and exercise the power of sale to conduct a non-judicial foreclosure, the Notice of Default must expressly state that the lender is electing to accelerate. However, in a non-judicial foreclosure, by statute the borrower may “cure the default” and reinstate the loan by paying all delinquencies, plus fees and costs, as if no acceleration had occurred. If pursuing a judicial foreclosure, the filing of the lawsuit acts as notice. Also, an election to accelerate may be made in writing.

Why Accelerate on Sale or Transfer of the Property?

The lender makes the loan based on the borrower’s creditworthiness, which it has (theoretically) closely studied. It does not have the same opportunity with the transferee, who may be a deadbeat, and not care if he loses the property. If it is a purchase-money loan, and the lender’s only recourse is to the property, it wants a reliable owner who will take care of it, protecting the lender’s security. An additional point – transfer is not always separately prohibited in the contract terms. If not, transfer is not a default. It would require the lender to accelerate, and the borrower to not pay the full balance of the debt, that would be a default.

Acceleration clause Sacramento real estate attorney.jpg – Exceptions
The Garn- St. Germain Depository Institution Act of 1982 (the Garn Act, 12 U.S.C.A. § 1701j-3) is a federal law that provides exceptions to allowing acceleration on transfer. These are:

(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;

(2) the creation of a purchase money security interest for household appliances;

(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;

(4) the granting of a leasehold interest of three years or less not containing an option to purchase;

(5) a transfer to a relative resulting from the death of a borrower;

(6) a transfer where the spouse or children of the borrower become an owner of the property;

(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;

(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

Due on Encumbrance Clause
This clause provides for acceleration if the borrower allows another encumbrance to be recorded -specifically, a junior loan. The principal is that it may be more difficult for the borrower to perform the senior loan if he has additional debt. However, state law prohibits such a provision if the property is an owner-occupied single family dwelling.