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Dear S. E.:

There are several statutory provisions under California law, which govern the administration and enforcement of “balloon payments”.

For example, Civil Code Sections 2924i(d) and 2957(b) define a “balloon payment loan” (a “balloon payment note”) as one which provides for a final payment that is more than twice the amount of any of the immediately preceding six regularly scheduled payments, or contains a “call provision” that is exercised.

A “call provision” is a loan contract term that provides the holder of the loan with the right to call the loan due and payable either after a specified period has elapsed following closing or after a specified date.

California law addresses balloon payments arising under two different situations. Civil Code section 2924i applies to balloon payment loans that are secured by a deed of trust or mortgage on real property containing one to four residential units, where at least one of the units is to be actually occupied by the borrower.

Civil Code Section 2966 applies to balloon payment loans involving the purchase of a dwelling for not more than four families, where the seller of the property agrees to extend credit to the buyer, and where an “arranger of credit” (i.e. a person or company who provides, and is compensated for, professional loan services, and who is not a party to the transaction) helps the parties prepare or complete the transaction. Both statutes limit their application to “balloon payment” loan transactions, which have a term for repayment for a period in excess of one year.

The primary similarity in how the two statutes are applied pertains to the advance written notice creditors under both statutes are required to send to affected borrowers. Specifically, both statutes require written notice of the balloon payment’s approaching due date must be sent to the affected borrower(s) at least 90 days, and no more than 150 days, prior to the date the balloon payment is due. With regard to, Civil Code section 2966 specifically, that statute also requires that underlying loan document (i.e. the promissory note) include the following written notice: “This note is subject to Section 2966 of the Civil Code, which provides that the holder of this note shall give written notice to the trustor, of his successor in interest, of prescribed information at least 90 days and not more than 150 days before any balloon payment is due”. However, the failure to include this language in the note does not invalidate the note.

In the event that the lender and borrower subsequently agree to a “modified” balloon payment due date, the notice requirements will apply to the modified date.

While a creditor’s failure to comply with the notice requirements will not relieve an affected borrower’s legal obligation to make a required “balloon” loan payment, the due date of the applicable balloon payment will be deemed automatically extended, until the creditor complies with the law.

Each real estate problem usually has its own distinct circumstances, and frequently is more complicated than realized by a layperson. Readers are also encouraged to consult with their own lawyers to obtain guidance concerning their problems when they first arise.

Readers are cautioned that these answers are not intended to be the basis for any action or reliance by the reader.
You are welcome to visit our web site at “www.dumanlaw.com”.

Certain Real Estate Residential Loans Having Balloon Payments Are Regulated