Atwood, Haiman & Westerberg

Legal Topics December, 2001

Interim Principal Paydowns Are Not Balloon Payments For Purposes of Civil Code Section 2966's Notice Requirement
By Stanford H. Atwood, Jr. and Eric S. Haiman
When a third-party is involved in arranging seller financing for the purchase of a dwelling for not more than four families and the Note contains a balloon payment in excess of a year, Civil Code section 2966 requires that the holder of the Note provide notice of the balloon payment not less than 90 days and not more than 150 days after the payment is due.
This notice requirement of Section 2966 only applies when the balloon payment is the final payment on the Note. It does not apply to large, interim principal payments, even if these payments are regularly scheduled payments under the Note. Civil Code section 2957(b) defines a "balloon payment note" as follows:
"Balloon payment note" means a note which provides for a final payment as originally scheduled which is more than twice the amount of any of the immediately preceding six regularly scheduled payments or which contains a call provision; provided, however, that if the call provision is not exercised by the holder of the note, the existence of the unexercised call provision shall not cause the note to be deemed to be a balloon payment note. (Emphasis added.)
An interim principal payment, whether scheduled or not, does not make a Note a "balloon payment note" because it is not the "final" "scheduled" payment.
Civil Code section 2966(a) provides, in pertinent part, as follows:
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: . . .(Emphasis added.)
This section, read in conjunction with the definition of a balloon payment note recited above, makes it clear that the notice requirement only applies to a final, scheduled balloon payment in excess of a year of execution of the Note.