I have looked in Reg AA and Z for guidance and have found nothing that imposes a cap on late fees. Specifically, we have a final balloon payment that has become due and payable. Obviously we won't impose a 5% late fee on the entire amount, but, where do I find guidance on this? Is this usually governed by individual state regulation?

I don't know about your state since I am in Alabama but here it is governed by State law.
I would think that is probably the case in your state. Reg.Z doesn't dictate how much can be charged such as interest rates and late fees but it does dictate how those fees must be disclosed.

bwest has it. There is nothing in Z other than that you disclose that there is a late fee. Otherwise, it is a state law issue. Check usury law also.

Don't forget that the OTS has regulations on late charges on real estate loans ... fifteen day grace period and 5%.