Covenants in a security agreement are best described as provisions that ...

• A. Require compliance with certain actions by borrower.
• B. Guarantee immediate payoff of loan.
• C. Transfer ownership of collateral to lender.
• D. Eliminate default risk.

Answer: (A)

Covenants in a security agreement are promises the borrower makes to take or avoid certain actions to protect the lender. These can be affirmative, requiring actions like maintaining insurance, providing financial statements, or keeping certain financial ratios, or negative, restricting actions such as incurring more debt or selling assets. This is why the best description is that covenants require compliance with specific actions by the borrower. They are not guarantees of immediate payoff, they do not transfer ownership of collateral, and they do not eliminate default risk; they are contractual safeguards, with remedies available if a covenant is breached.