Question

Read the following scenario and answer the question in 5-10 sentences.

You are a loan officer at a bank. Two years ago, Smith Credit Union and Loan (SCUL) loaned Westwood Solar $100,000 to start a company selling solar panels to commercial and residential customers. The loan has an acceleration clause that permits the holder to immediately demand all payments plus the interest owed to date if Westwood Solar fails to pay an installment in any given month. Westwood Solar has made its loan payments for the past two years. However, sales of solar panels have proved more difficult than expected. SCUL is interested in selling you the loan in exchange for case. You are worried that the loan may not be negotiable because the acceleration clause does not create a specific time for repayment but is a flexible time for repayment that may not occur at all. Discuss whether this loan is negotiable. Assume all other criteria are met.

Answer 1

The acceleration clause has been invoked by the bank at the time of lending the funds to avoid any credit risks that might prevail. This clause would ensure the bank to mitigate any potential losses that may ensue due to the risks involved in the transaction. This being a risk mitigation strategy of the bank, there would generally not be a problem if the obligation of the loan is transferred from one party to another provided nothing to the contrary already prevails in the initial contract/ agreement entered upon by the lender and borrower. That is, Westwood Solar may still be able to transfer(sell) its business along the loan obligation if all other criteria have been satisfied. However, the acceleration clause would still prevail and the new owner of the business must ensure that the loan repayment is done as per schedule; else the bank can still demand to repay the remaining balance immediately if a loan payment is missed.