Balloon Payment

We currently do a 62 month balloon note. On the Loan Estimate, Loan Terms for Balloon Payment, how should this read? My LOS is stating it only shows whole years "you will have to pay $xxxx at the end of Year 5".

Thoughts?

Thank you

I think your LOS got it wrong. Section 1026.37(b)(7)(ii) and commentary say you have to use the term "at the end of". It does not define whether the remainder of that needs to be in whole years, months, or any specific time period. The model form in H-24(E) shows years, but that still doesn't mean "years" is the only legitimate time frame. I think you would be perfectly compliant to say "you will have to pay $XXXX at the end of 5 years and 2 months."

Not sure I agree, IMO in the Loan Terms section of the LE/CloD the due date for a 62 balloon s/b "You will have to pay $X at the end of year 6". I don't believe months are an option. Whole year only.

Here's (b)(7)(ii):

(ii) The dates required to be disclosed by paragraphs (b)(6)(i), (b)(6)(iii) and (b)(7)(ii) of this section shall be disclosed as the year in which the event occurs, counting from the due date of the initial periodic payment.

Here's (b)(8)(ii)

(ii) The dates required to be disclosed by paragraphs (b)(6)(i), (b)(6)(iii) and (b)(7)(ii) of this section shall be disclosed as the year in which the event occurs, counting from the due date of the initial periodic payment.

Here the OSC to (b)(8)

1. Whole years. For adjustments that occur after a period of whole years, the timing of information required by § 1026.37(b)(8) starts with year number “1,” counting from the date that interest for the first scheduled periodic payment begins to accrue for § 1026.37(b)(8)(i), or from the due date of the first periodic payment for § 1026.37(b)(8)(ii), or from the date of consummation for § 1026.37(b)(8)(iii). For example, an interest rate that is fixed for five years and can first adjust at the beginning of the 61st month from the date that interest for the regularly scheduled periodic payment began to accrue would be disclosed as beginning to adjust in “year 6.” A monthly periodic payment that adjusts starting with the 61st scheduled payment likewise would be disclosed as adjusting in “year 6.”

Mine shows

Loan Term: 5 yr 2 mo

Product: Year 6 balloon payment, Fixed Rate

ETA: Then under "balloon payment" it says YES, You will have to pay $xxxxxx at the end of year 6. (poor wording IMHO because it's closer to year 5, but just past it into year 6)

Joker, bad wording, you bet, correct wording yes. I've had lots of banker's look at me sideways when I explain this but it is what it is.

Jerod, thanks for picking me up. I blew it - only went back and referenced (b)(7)(ii) and it's commentary and the model - did not pick up on (b)(8)(ii). Of course, what I saw and said also made logical sense, so surely that must have been right, I thought. Color me embarrassed.

Yes, it is very strange indeed, Jerod. Creative math.

Just wanted to let everyone know that I spoke with a lawyer from the CFPB and she confirmed this should be listed as "at the end of year 6"

I appreciate the valuable guidance in this thread, but I have a twist.

If it is a 61 month balloon loan rather than 62, would you disclose "You will have to pay $xxxx at the end of Year 5" rather than Year 6, because of what the following provision in Reg. Z 1026.37(b)(8)(ii) says about (b)(7)(ii)?

(8) Timing.
*****
(ii) The dates required to be disclosed by paragraphs (b)(6)(i), (b)(6)(iii) and (b)(7)(ii) of this section shall be disclosed as the year in which the event occurs, counting from the due date of the initial periodic payment.

For example, the loan closes June 30, 2016. The first payment due date is August 5, 2016 and the balloon is due on August 5, 2021. The LOS is disclosing "You will have to pay $xxxx at the end of Year 6." But this rule seems to support that it is due at the end of year five.

I do see that the Commentary to 1026.37(b)(8) ends with: A monthly periodic payment that adjusts starting with the 61st scheduled payment likewise would be disclosed as adjusting in “year 6.” But that is a monthly period payment, not a balloon payment. I don't see anything in the whole paragraph of commentary (shown below) relating to the balloon. So it seems to me that the situation is governed by the quote from the Reg. itself that I started out with, up above.

Here is the full paragraph of Commentary:

37(b)(8) Timing.

1. Whole years. For adjustments that occur after a period of whole years, the timing of information required by §1026.37(b)(8) starts with year number “1,” counting from the date that interest for the first scheduled periodic payment begins to accrue for §1026.37(b)(8)(i), or from the due date of the first periodic payment for §1026.37(b)(8)(ii), or from the date of consummation for §1026.37(b)(8)(iii). For example, an interest rate that is fixed for five years and can first adjust at the beginning of the 61st month from the date that interest for the regularly scheduled periodic payment began to accrue would be disclosed as beginning to adjust in “year 6.” A monthly periodic payment that adjusts starting with the 61st scheduled payment likewise would be disclosed as adjusting in “year 6.”

Am I missing something???

Any guidance is surely appreciated.

The scheduled due date of the first periodic payment is the start of year 1, the 13th is the start of year 2, the 25th is the start of year 3, ... and the 61st is the start of year 6 (not the end of year 5).

Thank you, John. I appreciate the feedback. But are you saying I am not counting properly under 1026.37(b)(8)(ii)? Or is it that for some reason 1026.37(b)(8)(ii) does not apply? 1026.37(b)(8) offers three different rules on how to count the year in which an event occurs.

The event here is the year the balloon payment is due, to be disclosed under (b)(7)(ii).

(b)(8)(ii) seems to be telling me, for that purpose, to count from the due date of the initial periodic payment, which is leads to a different result than (i) (counting from when interest begins to accrue) or (iii) (counting from the date of consummation). There may be 61 payments from Aug 5, 2016 to Aug. 5, 2021, but the span of time counting from the first payment due date to the last is only five years, is it not?

(8) Timing.
(i) The dates required to be disclosed by paragraph (b)(6)(ii) of this section shall be disclosed as the year in which the event occurs, counting from the date that interest for the first scheduled periodic payment begins to accrue after consummation.

(ii) The dates required to be disclosed by paragraphs (b)(6)(i), (b)(6)(iii) and (b)(7)(ii) of this section shall be disclosed as the year in which the event occurs, counting from the due date of the initial periodic payment.
(iii) The date required to be disclosed by paragraph (b)(7)(i) of this section shall be disclosed as the year in which the event occurs, counting from the date of consummation.

Where am I going wrong?

08/05/16 - Beginning year one
08/05/17 - Beginning year two
08/05/18 - Beginning year three
08/05/19 - Beginning year four
08/05/20 - Beginning year five
08/05/21 - Beginning year six

Unless you have a calendar with thirteen months in it

What if it is a construction loan for 6 months with a balloon payment? Should this be at the end of 6 months or should it be at the end of year 1? Out LOS defaults to 6 months.

It should show "year 1" and then "Final Payment" being the balloon plus one month's interest