California Real Estate Practice Exam

A security instrument in a loan

1. Transfers legal title to the borrower

2. Hypothecates the property

3. Releases the lender from liability

4. Assigns rent in case of default

The correct answer is: Hypothecates the property

The correct choice highlights the process of hypothecation, which is a key concept in real estate loans. Hypothecation refers to the practice of pledging an asset as collateral for a loan while retaining ownership and control of that asset. In the context of a mortgage or a deed of trust, the property secures the loan, meaning that if the borrower defaults on the loan, the lender has the right to take possession of the property to satisfy the debt. The other options do not accurately describe the role of a security instrument. For instance, a security instrument does not transfer legal title to the borrower; instead, it grants the lender a security interest. Additionally, while it might limit a lender's liabilities in certain contexts, it does not inherently release the lender from liability. Finally, while assigning rent in case of default could be a separate provision within a loan agreement or security document, it isn't a foundational aspect of what a security instrument does. Therefore, the concept of hypothecation accurately reflects the function of a security instrument in a loan context.