Distinguish between affirmative covenants and negative covenants with respect to collateral.

• A. Affirmative covenants require action (e.g., maintain insurance); negative covenants restrict actions (e.g., no further liens without consent, no sale of collateral).
• B. Affirmative covenants restrict actions; Negative covenants require action.
• C. Their definitions are the same.
• D. Negative covenants require action while affirmative covenants restrict actions.

Answer: (C)

The key idea is that covenants fall into two distinct types based on what they require or restrict about the collateral. Affirmative covenants are promises that the borrower must actively do something regarding the collateral—things like maintaining insurance, keeping the collateral in good repair, paying taxes, or providing regular financial statements. Negative covenants are restrictions on the borrower’s actions—such as prohibiting new liens on the collateral, banning certain disposals or sales, or limiting transfers of the collateral without the lender’s consent.

So, the correct understanding is that affirmative covenants require action, while negative covenants restrict actions. The other statements either treat the definitions as the same or invert the relationship, which doesn’t reflect how these covenants actually operate.