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BALLOON PAYMENTS
NOTICE REQUIREMENTS FOR NOTES IN CALIFORNIA
Introduction:
A
promissory note
is a document providing for payment of an obligation to another, usually
in writing, and subjecting the borrower to legal liability if it is not
paid in a timely fashion under the terms of the note.
The terms of the
note depend on the negotiations between the parties but one type of
common note provides for a lump sum payments at a specified time, often
but not always including all accrued interest. Such lump sum payment are
called “balloon payments” in the industry and if secured with a
Deed of Trust, California law imposes strict requirements
on the lender who plans to receive a balloon payment on a California
note and enforce lack of payment by foreclosure on the Deed of Trust.
This article discusses the civil code requirements imposed upon the
lender, and the ramifications if the lender fails to meet those
requirements.
Basic Law of Notice
of Balloon Payment Requirements
California Civil
Code Section 2966 regulates balloon payments secured by Deeds of Trust.
The law is not complex: It provides, “In a transaction regulated by this
article, which includes a balloon payment note when the term for
repayment is for a period in excess of one year, the holder of the note
shall, not less than 90 nor more than 150 days before the balloon
payment is due, deliver or mail by first class mail, with a certificate
of mailing obtained from the United States Postal Service, to the Trustor or his or her successor in interest, at the last known address
of such person, a written notice to include….(name and address to whom
the balloon payment is required to be made, date of balloon payment, its
amount), a description of “Trustor’s right, if any, to refinance the
balloon payment, including a summary of the actual terms of the
refinancing or an estimate or approximation thereof, to the extent
know.”
In short, full
notice to any holder of a deed of trust (the borrower or Trustor) of all
details as to the balloon payment including any right to refinance. Note
that the notice cannot be given too early…it must be made within 150
days of when the due date occurs.
What if the notice
is not given? Again, the law is clear. “Failure to provide notice as
required by this subdivision does not extinguish any obligation of
payment by the Trustor, except that the due date for any balloon payment
shall be the date specified in the note or ninety days from the date of
delivery or mailing of the notice…whichever date is later. ..if the
operation of this section acts to extend the term of any such note,
interest shall continue to accrue for the extended term at the contract
rate and payments shall continue to be due at any periodic interval and
on any scheduled payment schedule specified in the note and shall be
credited to principal or interest under the terms of the note. Default
in any extended periodic payment shall be considered a default under
terms of the note…”
It should also be
noted that failure to comply with the above shall NOT effect the rights
of any bona fide purchaser of the property in the foreclosure sale. A
bona fide purchaser is a person who purchased the property without
notice or knowledge of the breach of notice provisions described above.
Notice Requirements
on the Note:
Equally important,
every note in which a balloon payment notice is required as above must
state in writing key provisions of the Civil Code section above. The
notice must state the following statements:
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 or his successor
in interest of prescribed information at least ninety and not more than
one hundred and fifty days before any balloon payment is due.
Again, failure to
have said notice does not invalidate the note as a whole but could be
used to seek to invalidate an effort to enforce the security.
Practicalities:
The rationale behind
this particular law was to protect consumers from losing their homes
because they did not plan ahead sufficiently to handle the massive balloon
payment due. Balloon payments are dangerous methods of borrowing since
one does not slowly work down a debt, as with amortized payments, but
instead faces a large single payment, sometimes with all accrued
interest already due. The Legislature felt that the danger was
sufficient to require some advance warning so that the consumer (the Trustor) could prepare and seek to raise the payoff cash.
But note that the
remedy is merely to delay the due date by a period of ninety days from
when the actual notice is given. While this does allow the borrower time
to seek alternative means of payment, the underlying obligation and all
its interest continues to exist and interest continues to accrue. The
relief afforded is delay, not removal of any obligation.
Further, if a bona
fide purchaser obtains the property at the Deed of Trust sale, the
borrower has no relief against the new owner. The remedy would to make
the buyer not “bona fide” and that means giving notice to the possible
buyer before sale of the failure to comply with the balloon payments
notice requirements.
If you are the
lender, it is vital not only to provide the correct wording in your
note, but to calendar your notice deadlines before the balloon payment
is due. While the note may be protected by the law, you face more than
mere delay since other creditors may be seeking to foreclose on the same
property and to have your own sale delayed could imperil your security. |
