Loan Clauses and Texas Usury for the Exam

Loan clauses decide what happens when something changes: the borrower defaults, sells the home, or pays off early. The exam tests whether you can match each clause to what triggers it. This spoke sits under the types of mortgages and loans pillar and connects to the deed of trust and foreclosure spoke.

The clauses are mostly national concepts, but Texas adds two important layers: usury laws that cap interest, and strong protections on home-equity loans. Learn the clauses first, then the Texas rules. Let us go.

What are loan clauses?

Snippet answer: Loan clauses are provisions in the promissory note or the deed of trust that spell out the lender's and borrower's rights. Each clause is triggered by a specific event. Some protect the lender, like acceleration and due-on-sale. Some benefit the borrower, like a defeasance clause that clears the lien on payoff. The exam tests these by describing an event and asking which clause applies.

A loan is not just a rate and a payment. The note and the deed of trust contain clauses that govern what happens in specific situations. Think of each clause as an if-then rule: if this event happens, then this right kicks in.

The exam tests them by fact pattern. It describes an event, such as a missed payment or a sale, and asks which clause is in play. So the skill is matching the trigger to the clause. Learn each clause by its trigger, and the questions become easy.

The acceleration clause

Snippet answer: An acceleration clause lets the lender declare the entire unpaid balance due immediately when the borrower defaults, such as by missing payments. Without it, a lender could only sue for each missed payment as it came due. Acceleration is the step that makes foreclosure possible, because the lender must be able to demand the full balance before selling the property to satisfy the debt.

The acceleration clause is the lender's power switch. On default, usually missed payments, it lets the lender declare the whole remaining balance due at once, rather than chasing one late payment at a time.

This clause is the gateway to foreclosure. A lender cannot foreclose to collect just one missed payment, so it first accelerates the loan, making the entire balance due. Only then can it move to a foreclosure sale to satisfy that full debt. That is why acceleration and foreclosure are linked, as covered in the deed of trust and non-judicial foreclosure spoke.

The due-on-sale (alienation) clause

Snippet answer: A due-on-sale clause, also called an alienation clause, lets the lender call the entire balance due if the borrower sells or transfers the property without the lender's consent. It prevents a buyer from simply taking over the seller's existing loan. Due-on-sale clauses are regulated by the federal Garn-St. Germain Act, which exempts certain transfers, such as to a spouse, a child, or into a living trust.

The due-on-sale clause, also called the alienation clause, protects the lender against an unwanted new borrower. If the owner sells or transfers the property without the lender's permission, the lender can demand the full balance. This is really a type of acceleration, but triggered by a transfer instead of a default.

The practical effect is that a buyer usually cannot just assume the seller's loan. Because the sale triggers the clause, the lender can require the loan be paid off, which pushes the buyer toward new financing. The federal Garn-St. Germain Act governs these clauses and carves out exceptions where the lender cannot enforce it, including a transfer to a spouse or child, a transfer on the borrower's death, or a transfer into the borrower's own living trust. Remember alienation equals transfer, so the alienation clause is triggered by transfer.

Prepayment clauses and penalties

Snippet answer: A prepayment clause addresses paying the loan off early. Many loans allow prepayment freely, but a prepayment penalty clause charges a fee for paying off before a set time, compensating the lender for lost interest. Consumer-protection rules limit prepayment penalties on many home loans, and in Texas, a home-equity loan may not carry any prepayment penalty at all.

Prepayment is about paying the loan off ahead of schedule. Some loans welcome it, but a lender that wanted the interest may include a prepayment penalty, a fee for early payoff. The penalty exists to make up for the interest the lender loses when the loan ends early.

Modern rules have narrowed prepayment penalties on consumer home loans, and Texas goes further for one loan type. A Texas home-equity loan may not have any prepayment penalty, which is one of the special home-equity protections covered below. On the exam, know that a prepayment penalty charges for early payoff and that it is restricted, not universal.

Defeasance and subordination clauses

Snippet answer: A defeasance clause provides that when the borrower fully pays the loan, the lien is defeated and title is cleared, so the borrower ends up with clean title. A subordination clause makes a lien voluntarily rank behind a future lien that would otherwise be lower in priority. Both are common exam vocabulary, and each describes a change in the lien rather than a default.

Two more clauses round out the set, and both deal with the lien itself. A defeasance clause says that once the borrower pays the loan in full, the lien is defeated and the security is released, leaving the borrower with clear title. In a Texas deed of trust, this shows up as a release of lien recorded after payoff.

A subordination clause changes lien priority. Normally, liens rank by the order they are recorded. A subordination clause lets a lienholder agree in advance to rank behind a future lien, which is common when a landowner wants a construction lender to hold first position. Connect this to how real estate liens rank by priority.

Texas usury laws

Snippet answer: Usury is charging an illegal, excessive rate of interest, and Texas caps interest by law. Under the Texas Constitution, the maximum rate is 10 percent per year in the absence of other legislation, and rates above that are usurious unless a statute authorizes them. The Texas Finance Code then sets ceilings that allow higher, market-based rates for many loans. Charging a usurious rate exposes the lender to penalties.

Usury means charging more interest than the law allows. Texas has long limited interest, and the exam expects you to know the concept and the headline number.

The Texas Constitution sets the default: without other legislation, the maximum interest rate is 10 percent per year, and anything higher is deemed usurious. In practice, the Texas Finance Code then authorizes higher ceilings for many types of loans, which is how ordinary mortgages carry market rates legally. For the exam, hold two ideas: usury is illegally excessive interest, and the constitutional default cap is 10 percent unless a statute allows more. A lender who charges a usurious rate faces penalties under Texas law.

Texas home-equity loan protections

Snippet answer: Texas gives home-equity loans, which let owners borrow against their homestead, unusually strong protections in the state constitution. The loan plus all other liens cannot exceed 80 percent of the home's fair market value. The loan must be non-recourse, meaning no personal liability for the borrower or spouse absent fraud. And it may not carry a prepayment penalty. These safeguards reflect how fiercely Texas protects the homestead.

Texas is famously protective of the homestead, and home-equity loans carry special rules written into the constitution under Article XVI, Section 50. Three of them are exam-worthy.

These tie back to the deed of trust and foreclosure spoke, where you learned a home-equity loan also requires a court order to foreclose. Put together, the 80 percent cap, the non-recourse rule, the no-prepayment-penalty rule, and the court-order foreclosure make Texas home-equity lending some of the most borrower-protective in the country.

How to study loan clauses and Texas rules

Snippet answer: Study the clauses by their triggers: acceleration on default, due-on-sale on transfer, prepayment on early payoff, defeasance on full payment, and subordination on a change in lien priority. Then add the two Texas layers: usury caps interest at a 10 percent default under the constitution, and home-equity loans get an 80 percent cap, non-recourse treatment, and no prepayment penalty.

Make a trigger list and drill it. Default fires acceleration. Transfer fires due-on-sale. Early payoff involves prepayment. Full payment fires defeasance. A priority change is subordination. If you can name the trigger, you can name the clause.

Then layer the Texas rules on top. Usury is illegal interest, with a 10 percent constitutional default. Home-equity loans get the 80 percent cap, non-recourse protection, and no prepayment penalty. Keep this spoke tied to the foreclosure and note and deed of trust spokes, where these clauses live.

Frequently asked questions

What is the difference between an acceleration clause and a due-on-sale clause? Both let the lender demand the full balance, but the trigger differs. An acceleration clause is triggered by default, usually missed payments, and it is the step that enables foreclosure. A due-on-sale, or alienation, clause is triggered by selling or transferring the property without the lender's consent. A due-on-sale clause is essentially an acceleration clause set off by a transfer rather than a default.

Can a buyer take over the seller's existing loan? Usually not without the lender's approval, because most loans contain a due-on-sale clause. When the property transfers, the clause lets the lender call the balance due, which pushes the buyer to obtain new financing. The federal Garn-St. Germain Act exempts certain transfers, such as to a spouse or child or into a living trust, where the lender cannot enforce the clause.

What is usury in Texas? Usury is charging an illegally excessive rate of interest. Under the Texas Constitution, the maximum interest rate is 10 percent per year in the absence of other legislation, and higher rates are usurious unless a statute authorizes them. The Texas Finance Code sets ceilings that allow higher market rates for many loans, but charging a truly usurious rate exposes the lender to penalties.

Why are Texas home-equity loans so restricted? Because Texas strongly protects the homestead. The state constitution limits a home-equity loan, plus all other liens, to 80 percent of the home's fair market value, requires the loan to be non-recourse absent fraud, bars any prepayment penalty, and requires a court order to foreclose. These protections make it harder to lose a homestead to home-equity borrowing.

Practice questions

1. A borrower misses several mortgage payments, and the lender declares the entire loan balance due at once. Which clause allows this? A. The due-on-sale clause B. The acceleration clause C. The defeasance clause D. The subordination clause

Answer: B. The acceleration clause lets the lender declare the full balance due upon default, which is the step that enables foreclosure. Due-on-sale is triggered by a transfer (A), defeasance clears the lien on payoff (C), and subordination reorders lien priority (D).

2. A homeowner sells their house, and the buyer wants to take over the existing loan. The lender demands full payoff instead. This is due to the: A. Prepayment clause B. Defeasance clause C. Due-on-sale (alienation) clause D. Escalation clause

Answer: C. The due-on-sale, or alienation, clause lets the lender call the balance due when the property is transferred without consent, which blocks a free assumption. Prepayment addresses early payoff (A), defeasance addresses payoff and title (B), and an escalation clause is not the loan-transfer clause (D).

3. Under the Texas Constitution, absent other legislation, the maximum lawful interest rate is: A. 6 percent per year B. 10 percent per year C. 18 percent per year D. There is no cap

Answer: B. The Texas Constitution sets a default maximum of 10 percent per year in the absence of other legislation, and higher rates are usurious unless a statute authorizes them. The Finance Code then allows higher ceilings for many loans, but the constitutional default is 10 percent.

4. Which is a required feature of a Texas home-equity loan? A. A prepayment penalty for early payoff B. Personal recourse against the borrower in all cases C. A cap of 80 percent of the home's fair market value D. A balloon payment within five years

Answer: C. A Texas home-equity loan, with all other liens, cannot exceed 80 percent of the home's fair market value. It must be non-recourse absent fraud, and it may not carry a prepayment penalty, so options A and B are the opposite of the rule, and D is not a home-equity requirement.

Sources and methodology

This guide was written from primary federal and Texas sources and reverified on July 21, 2026. Loan clauses and Texas lending limits are technical, so confirm the current law before relying on a specific detail.

• The acceleration, due-on-sale or alienation, prepayment, defeasance, and subordination clauses come from standard real estate finance principles as applied in Texas notes and deeds of trust.
• The federal regulation of due-on-sale clauses and its exceptions come from the Garn-St. Germain Depository Institutions Act of 1982.
• The 10 percent constitutional default interest cap comes from the Texas Constitution, Article XVI, and is restated in the Texas Finance Code, Chapter 302, with higher ceilings authorized elsewhere in the Finance Code.
• The Texas home-equity protections, the 80 percent cap, the non-recourse rule, and the no-prepayment-penalty rule, come from the Texas Constitution, Article XVI, Section 50(a)(6).

Verify all clause and lending-limit details against the current Texas statutes and constitution before you rely on them in practice.

Official source links

• Texas Constitution, Article XVI, Section 50 (Homestead and Home Equity)
• Texas Finance Code Chapter 302, Interest Rates
• Texas State Law Library, Maximum Interest Rate FAQ
• Garn-St. Germain Act, 12 U.S.C. 1701j-3

This article is exam-prep education for the Texas real estate sales agent license. It is not legal or lending advice, and it does not create an agency relationship. Loan clauses, usury limits, and home-equity rules are technical and depend on the specific documents and current law. Always confirm the current Texas statutes and constitution and work under the supervision of your sponsoring broker before acting.