Mortgage Loan Originator (MLO) Licensing Practice Test

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What clause in a mortgage prevents the lender from recovering additional assets from the mortgagor if there is a shortfall in the foreclosure proceeds?

  1. Due-on-sale clause

  2. Exculpatory clause

  3. Power of sale clause

  4. Acceleration clause

The correct answer is: Exculpatory clause

The clause that prevents the lender from recovering additional assets from the mortgagor if there is a shortfall in the foreclosure proceeds is known as the exculpatory clause. This clause effectively protects the borrower by limiting the lender's rights to only the property itself in the event of default. If the foreclosure sale does not cover the outstanding mortgage balance, the lender cannot pursue the borrower for the remaining debt. This is particularly significant for borrowers because it means that their personal assets cannot be targeted if the collateral—i.e., the property—falls short in value during the foreclosure process. This clause provides a form of financial security and encourages potential buyers to take on mortgages, knowing that their risk is limited to the property rather than their entire financial portfolio. The due-on-sale clause, power of sale clause, and acceleration clause each serve different functions within a mortgage agreement. The due-on-sale clause allows lenders to demand full payment if the property is sold without their consent, the power of sale clause provides a lender with the authority to foreclosure without judicial proceedings, and the acceleration clause enables lenders to require immediate repayment of the entire mortgage balance under specific circumstances, such as borrower default. However, none of these clauses provide the same level of protection to the borrower