Which clause in a mortgage pledges the collateral property to the mortgage?
Also called “future-acquired property”. Show
[Last updated in June of 2021 by the Wex Definitions Team]
A negative pledge or "covenant of equal coverage" is a clause used in some loan contracts that prohibits a borrower from using the same collateral with multiple lenders. The clause is normally used for unsecured loans and is intended to minimize the chances of a lender losing out when a borrower fails to pay an unsecured loan. Why Include a Negative Pledge Clause in a Loan Contract?It is a standard practice for lenders to include a negative pledge clause in a contract for an unsecured loan. The negative pledge is basically a promise the borrower makes that states that he will not use the attached collateral for another loan from a different lender. For example, when a company obtains a $5 million loan from a bank and pledges its entire $5 million worth of assets as collateral for the loan, the bank can include a negative pledge clause in the contract. This means that should the same company seek another $2 million loan from another bank, if the second bank insists that the company pledges $2 million worth of its assets as collateral, the negative pledge the company made with the first bank prohibits it from entering the second loan agreement. The negative pledge can prevent the two lenders from scrambling for the same assets if the company fails to pay the loan. Limitations of the Negative Pledge ClauseA negative pledge clause has a number of shortcomings:
Scenarios Where the Negative Pledge Clause Is Used
What Happens When a Negative Pledge Is Breached?Sometimes, the borrower may breach the negative pledge. A number of options are available to the lender in such a scenario:
If you need help with a negative pledge clause in your loan contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb. What is a collateralization clause?A cross-collateralization clause generally provides that the same collateral, often real property, secures multiple loans from the same lender. In the construction loan context, a developer will often take out sequential loans from the same lender to finance particular phases of a project.
What is the term for a pledge of securities as collateral for a loan?Hypothecation. Hypothecation is another term for pledging collateral to secure or guarantee a loan or other debt obligation. The borrower, or hypothecator, pledges, or hypothecates, property to the lender.
What is a pledge of collateral?To pledge assets as collateral (or Pledging) is the act of offering assets as collateral to secure loans. Assets pledged can be in the form of security holdings and act as assurance for recovering the borrowed amount should a borrower fail to pay up.
What is pledging mortgage?A pledged-asset loan allows the borrower to retain ownership of the valuable possession. Borrower avoids tax penalties or capital gains taxes from selling the assets. Pledging assets avoids large loan down payments and PMI, if applicable. The borrower may receive a lower interest rate on the loan or mortgage.
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