What is a Call Provision?
The call provision is an important component of various types of debt agreements that provider the issuer of an agreement to exercise the privilege of calling or retiring the debt at some point before the maturity date is reached. While many types of callable agreements grant only the right for an early retirement of the entire outstanding amount, there are some examples of the call provision that allow the issuer to only call a portion of the remaining balance due.
One area in which the call provision is included is a matter of course is in many home mortgages. As part of the bond’s indenture specifications, the call provision allows the institution that holds the mortgage to call for full payment ahead of schedule, assuming that the conditions governing the call are met. Similar to an acceleration clause, the call provision can be implemented in situations where a default on the mortgage has occurred, or other factors have taken place that convince the lender that calling for the remaining amount due is in the best interests of the institution.
The call provision also is utilized in loans that are formulated to allow investors to take advantage of good deals on stocks and bonds. The investor can make use of the loan as a means of purchasing the security, and then use the security as collateral for the loan. Typically, the investor will seek to pay off 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 payment in full or in part.
The purpose of the call provision is to ensure that the lender is protected to a reasonable degree from adverse conditions that may arise with the borrower after the loan is granted. Lenders usually do not seek to use a call provision unless unusual circumstances take place that indicate 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 for secure the loan, and may use it as a means of settling at least part of the outstanding debt.
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