Notice Requirements for a Balloon Payment in Business Loans.
Introduction:
Under California law, if there is a lump sum payment due on a secured Note (“balloon payment”), the lender is required to provide a specified notice to the borrower ninety days prior to the date the payment is due. But such balloon payment can exist in both consumer and business loans. Does the notice requirement differ if the Note is a business loan?
The Basic Law:
California Civil Code § 2924i and 2966 provide the requirements of notice for balloon payments of consumer loans.
Cal. Civ. Code § 2924i is applicable when balloon payment loans are secured by a deed of trust or mortgage on real property containing one to four residential units or is to be occupied by the borrower if the loan is for a period in excess of one year.
Cal. Civ. Code § 2966 is applicable when the balloon payment loan involves the purchase of a dwelling for no 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.
The two statutes contain virtually identical provisions regarding the required notices at maturity and the consequences of failure to give notice. Specifically, both statutes require written notice of the balloon payment’s approaching due date and 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. The notice must include the name and address of the person to whom the final payment must be made; the date on or before that the final payment is required to be paid; the amount of the final payment; or a good-faith estimate of the amount; and if the borrower has a contractual right to refinance the final payment, a statement to that effect.
The only difference between Cal. Civ. Code § 2966 and § 2924i, is that § 2966 also requires the 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, pursuant to Cal. Civ. Code § 2966 (d), 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.
Note that if the loan is not as described in the above code sections, no balloon notice is required. Thus, a balloon payment due on a Note to a business purchasing a warehouse or other commercial nonresidential structure would not require the ninety-day notice.
This lack of required notice, however, can be negated by requiring such notice in the actual note itself.