Currently, balloon payments are prohibited for HOEPA-covered loans having maturities of less than five years.
For example, a consumer may not understand that a loan with affordable monthly payments will not amortize the principal or that the consumer may have to refinance a balloon payment at additional cost.
The Board and HUD join in two recommendations to protect consumers who obtain HOEPA-covered loans; one addresses balloon payments, and the other addresses single-premium credit insurance.
These loans are made to appear attractive by monthly payments that are kept low, but they are often accompanied by a large balloon payment that the consumer must then refinance.
Of all of the provisions in section 2 of the bill, the substantive limitations on balloon payments, negative amortization, and prepayment penalties seem particularly focused on the problems associated with high-cost mortgages.
When the "dust settles," these borrowers may find that they have paid a high number of loan origination and broker points (often financed in the borrowed amount) and have agreed to a loan with an interest rate at the highest levels in the market--sometimes with monthly payments that even exceed their monthly income and often with a balloon payment due.
Fitch also assessed borrower and
balloon payment concentrations over the life of the transaction.
Each of the transactions contain varying percentages of retail level pay loans, balloon payment loans and deferred payment loans.
An attribute of both balloon payment loans and deferred payment loans is that loan amortization is slower relative to level pay retail loans.
The severity of residual loss for these
balloon payments and, therefore, how much would be realized on termination was estimated by comparing the booked residual values with the residual values for the collateral projected by the Automotive Lease Guide (ALG), which are based on historical data.
