Questions and Answers

Here are some issues that occur to us. 

First, some states (particularly states with the Uniform Consumer Credit Code) give the consumer the right to refinance the balloon payment under the same terms as the original obligation if the balloon payment is more than twice the average of the preceding payments. 

Second, a mortgage with a balloon payment is considered an alternative mortgage transaction under the federal Alternative Mortgage Transaction Parity Act.  This act is intended to give parity to state-chartered institutions in the ability to offer alternative mortgage transactions.  An alternative mortgage transaction under this act is basically an adjustable-rate mortgage or a mortgage with a balloon payment.  The federal law says that state-chartered banks can make alternative mortgage transactions relying on the regulation of the Office of the Comptroller of the Currency; state-chartered savings associations can make alternative mortgage transactions relying on the regulation of the Office of Thrift Supervision; state-chartered credit unions can make alternative mortgage transactions relying on the regulation of the National Credit Union Administration. 

Third, Regulations Z includes within the term "variable-rate transaction" the following: 

Renewable balloon-payment instruments where the creditor is both unconditionally obligated to renew the balloon-payment loan at the consumer's option (or is obligated to renew subject to conditions within the consumer's control) and has the option of increasing the interest-rate at the time of renewal. 

The fact that Regulation Z treats these balloon loans as having a variable rate means that these loans are subject to special disclosure and calculation requirements.