The call provision allows the issuer of a debt agreement to withdraw the debt before the due date, and can be used in home mortgages and loans for investing. It protects lenders from adverse conditions and is only used in unusual circumstances.
The call provision is an important component of several types of debt agreements that provide the issuer of an agreement to exercise the privilege to call or withdraw the debt at some point before the due date is reached. While many types of callable agreements only entitle an early retirement of the full amount outstanding, there are a few examples of the call provision that allow the issuer to only call a portion of the outstanding balance.
One area where the call provision is included is of course in many home mortgages. As part of the surety contract specifications, the call provision allows the institution holding the mortgage to request payment in full ahead of schedule, assuming the conditions governing the call are met. Similar to an acceleration clause, the call provision can be implemented in situations where there has been a default on the mortgage or other factors that have convinced the lender that calling for the remaining amount due is in the best interest of the institution. .
The call provision is also used in loans that are designed to allow investors to take advantage of good deals on stocks and bonds. The investor can use the loan as a means to purchase the security and then use it as collateral for the loan. Typically, the investor will seek to repay this loan from the interest income generated by the investment. However, a change in the market could be a signal to the lender that it is time to activate the call provision and demand full or partial payment.
The purpose of the call provision is to ensure that the lender is reasonably protected from adverse conditions that may arise with the borrower after the loan is made. Lenders generally do not seek to use a call provision unless unusual circumstances occur that indicate that the borrower will soon be unable to meet the terms of the loan obligation. When the call provision is exercised, the lender often assumes control of the collateral used to secure the loan and may use it as a means to pay off at least part of the outstanding debt.
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