Under what circumstances are balloon payments not allowed in a High-Cost loan?

Balloon payments are a feature of some loan agreements where a large final payment is due at the end of the loan term. However, in the context of high-cost loans, regulatory restrictions prevent the inclusion of balloon payments to protect borrowers from potential financial strain that could result from such a large payment.

These regulatory measures have been established to ensure that lenders do not impose unreasonable repayment terms that could lead to defaults and foreclosures, particularly among borrowers who may be at higher risk due to the nature of high-cost loans. The intention is to promote fair lending practices and discourage predatory lending behaviors, which can exacerbate the financial challenges faced by borrowers in this category.

While secondary market requirements, borrower credit scores, and specific rules pertaining to government loans may influence loan terms in different contexts, the core reason balloon payments are prohibited in high-cost loans stems from established regulatory restrictions designed to protect consumers.