Where this fits on the exam
| Official syllabus topic | Loan Clauses and Default Remedies |
|---|---|
| Official PSI area | Financing |
| Published area weight | 10% of the national portion |
| Exam portion | National salesperson portion |
| Source edition | PSI Georgia Candidate Information Bulletin dated July 1, 2026 |
The Rule
PSI publishes the weight for the complete content area, not a fixed question count for this lesson. Learn the rule well enough to apply it when PSI changes names, numbers, or parties in a new scenario.
The lesson
Acceleration and due on sale
Acceleration follows a specified default or event under the documents and law. Due-on-sale language addresses transfer rather than ordinary missed-payment default.
Defeasance and prepayment
Defeasance requires the security interest to be released when the secured obligation is satisfied. A prepayment clause states whether and how the borrower may pay early and whether a permitted charge applies.
Subordination, assignment, and novation
Subordination changes priority. Assignment transfers contractual rights. Novation substitutes a new party or obligation and releases the replaced party when validly agreed.
Assumption and subject to
In an assumption, the buyer agrees to become liable on the debt, subject to lender and contract terms. A subject-to buyer takes title with the lien remaining but does not automatically promise the lender to pay the seller's debt.
Decision rule
Georgia-specific distinction
Worked example
Scenario. A buyer takes title while the seller's loan remains in place, but the lender never releases the seller and the buyer makes no promise to the lender.
Reason it through. The lien remains attached, yet the facts do not create buyer personal liability through assumption or novation.
Answer. This is a subject-to transaction, and the seller may remain personally liable.
Common exam traps
- Confusing acceleration with due on sale
- Calling subordination a payoff
- Treating subject to as assumption
- Assuming novation without creditor agreement
Original practice questions with detailed explanations
These questions were written for instruction and mapped to the current outline. They are not copied from PSI or any live examination. Choose an answer before opening the explanation.
Question 1An owner sells a home without paying off the loan. The security deed lets the lender call the entire balance due when title transfers. Which clause is the lender using?
- A. Defeasance clause
- B. Alienation clause
- C. Prepayment clause
- D. Subordination clause
Show answer and explanation →
Answer: B. Alienation clause
An alienation, or due-on-sale, clause lets the lender demand full payment when the property is transferred. Defeasance can look relevant because it also concerns the loan's end, but it requires the lender to release the security deed once the debt is paid.
- A. Incorrect. Defeasance concerns ending the security interest after repayment; this sale occurred without repayment.
- B. Correct. The alienation or due-on-sale clause allows a demand for the remaining balance upon a covered transfer.
- C. Incorrect. A prepayment clause addresses paying before maturity, rather than the lender's rights upon a sale.
- D. Incorrect. Subordination changes lien priority; it does not make the balance due because ownership changes.
Question 2A buyer takes title subject to the seller's existing loan, signs nothing with the lender, and later stops making payments. Who is personally liable on the note?
- A. The seller, who remains on the note
- B. The buyer, who now owns the property
- C. Both, jointly and severally
- D. Neither, since only the property is at risk
Show answer and explanation →
Answer: A. The seller, who remains on the note
In a subject-to sale the lien stays on the property, but the buyer never promises the lender to pay, so the seller remains personally liable. Choosing the buyer is the classic mistake of treating subject-to as an assumption.
- A. Correct. Taking title subject to a loan does not release the seller from the repayment promise in the note.
- B. Incorrect. Owning the property does not by itself make the buyer personally liable to the lender.
- C. Incorrect. The facts give no assumption agreement or other promise making the buyer liable alongside the seller.
- D. Incorrect. The property remains collateral, but the seller also remains personally obligated under the note.
Question 3A landowner holds a seller-financed security deed on a lot and agrees that a construction lender's new loan will have first priority. What document accomplishes this?
- A. A release deed
- B. A defeasance clause
- C. An assumption agreement
- D. A subordination agreement
Show answer and explanation →
Answer: D. A subordination agreement
A subordination agreement lets an existing lienholder move behind a newer loan in priority. A release deed is wrong because a release removes the security interest entirely instead of just changing its rank.
- A. Incorrect. A release would end the existing security interest rather than keep it in a lower position.
- B. Incorrect. Defeasance concerns satisfaction of the debt, not moving a loan behind a construction loan.
- C. Incorrect. Assumption transfers repayment responsibility under agreed terms, not the rank of the liens.
- D. Correct. The seller's lien stays in place but moves behind the new loan through the agreed subordination.
Ready to move on?
You are ready for the next lesson when all of these are true.
- Explain Loan Clauses and Default Remedies in one clear answer without notes.
- Separate Acceleration and due on sale from Defeasance and prepayment using a fresh example.
- Apply the decision rule to a new fact pattern and name the fact that controls the result.
- State the Georgia-specific point or explain why the national rule applies unchanged.
- Answer every practice question and explain the rule each rejected option misapplies.
- Revisit this topic later in mixed practice without category labels.
Recommended next lesson
Continue with Conventional and government loan programs. The loan types article moves from the clauses inside a security deed to the loans themselves, comparing conventional, FHA, VA and USDA financing and who insures or guarantees each one.
Return to the Financing hub to see every official branch and the complete lesson sequence for this content area.