What Is a Call Clause?

Also known as an acceleration clause, a call clause is a provision in a financial contract that allows the lender to require immediate payment of a portion of or even the entire remaining outstanding balance, should one of several specified events take place. Found in mortgage agreements and a number of other types of loan contracts, this provision helps to protect the interests of the lender when there is evidence that the debtor is or will soon be unable to meet his or her obligations. Invoking the clause can pave the way for declaring the loan in default, allowing the lender to begin proceedings to seize control of the collateral and settle the account in full.

The inclusion of a call clause is often found in any type of mortgage contract. As part of the provision for this privilege, the lender has the right to ask for immediate payment in the event that the debtor misses one or more payments. Should the lender investigate the current financial circumstances of the debtor and determine that he or she now represents an unacceptable level of risk, the lender can require that immediate payment of the missed installment payment and possibly one or two more be made in order to avoid a breach of contract. Should the debtor be unwilling or unable to meet this demand, the lender is then free to proceed with declaring the loan to be in default and begin the process of foreclosure.

Once foreclosure is initiated, the debtor may still be able to correct the situation created by the failure to honor the call clause, typically by securing financing from another source and offering to settle the entire balance due on the loan, plus any penalties and fees that the lender has also assessed on the loan account. Alternatively, the debtor can allow the property to go into default, surrender the collateral used to secure the loan, and wait for the collateral to be sold. Assuming there are any funds remaining once the collateral is sold, that amount may be forwarded to the debtor and the matter is considered complete.

It is important to note that while most mortgages and several other types of loan arrangements may include a call clause, lenders will often attempt to work with debtors who are in temporary financial straits rather than invoke the clause. For example, if the debtor loses his or her job or is unable to work for a period of time due to an extended illness, the lender may use discretion in granting some sort of additional time to catch up the debt. Once the debtor is able to begin generating income once again, the two parties can make arrangements to catch up the missed payments or possibly refinance the loan. This approach is often preferable to invoking the call clause, since it helps to salvage the relationship and also avoids the time and expense associated with foreclosure and other legalities.