What law governs Balloon Loans and what is the minimum balloon period?

The law that governs balloon loans is the Home Ownership and Equity Protection Act (HOEPA), which addresses specific forms of high-cost mortgage loans, including those with balloon payment features. Under HOEPA, a balloon loan needs a minimum balloon period of five years to comply with the regulations set forth, ensuring borrowers are not put in a high-risk situation where they have to make a large payment soon after receiving their loan.

In this context, balloon loans are designed to allow borrowers to make smaller payments for a period and then one large payment (the balloon payment) at the end of the term. By establishing a minimum balloon period of five years, HOEPA protects borrowers by providing them with a reasonable timeframe to manage their finances before encountering the final, larger payment. This reflects the intent of HOEPA to safeguard consumers against predatory lending practices associated with high-cost loans.