In general, an exculpatory clause is a clause that eliminates a partys liability for damages caused by a breach of contract. A common type of exculpatory clause involves limiting liability on a loan to the collateral. In other words, if there is a default, the contract says that the damages will be limited to execution on the collateral (i.e., foreclosure on the property covered by the mortgage or deed of trust).
Arkansas Exculpatory Clause or Nonrecourse Provision in Mortgage is a legal protection for borrowers in Arkansas who default on their mortgage loans. This provision prevents lenders from seeking deficiency judgments against borrowers after a foreclosure or short sale. In the context of mortgage loans, a deficiency judgment is the difference between the unpaid balance of the loan and the foreclosure or short sale proceeds. With an exculpatory clause or nonrecourse provision, borrowers are shielded from being held personally liable for this deficiency. Arkansas has two types of exculpatory clauses or nonrecourse provisions commonly used in mortgage agreements. These are: 1. Full Nonrecourse Provision: This type of clause provides borrowers with complete protection against deficiency judgments. If the lender forecloses on the property or the borrower sells it through a short sale, the lender cannot pursue the borrower for any remaining balance, even if the sale proceeds are insufficient to cover the mortgage debt. 2. Limited Nonrecourse Provision: In this type of provision, borrowers are protected from deficiency judgments up to the fair market value of the property at the time of foreclosure or short sale. If the sale proceeds fall short of the fair market value, the lender may only seek a deficiency judgment for the difference between the outstanding loan balance and the fair market value. It is important for borrowers to carefully review the terms of their mortgage agreement to determine which type of exculpatory clause or nonrecourse provision applies to their loan. By understanding their rights under Arkansas law, borrowers can make informed decisions regarding foreclosure, short sales, and potential deficiency judgments. In summary, Arkansas Exculpatory Clause or Nonrecourse Provision in Mortgage offers borrowers crucial protection against deficiency judgments. By including either a full nonrecourse provision or a limited nonrecourse provision in mortgage agreements, lenders are restricted from pursuing borrowers for the outstanding loan balance after foreclosure or short sale, thereby providing borrowers with much-needed financial security.
