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Banking Interpretations

General Regulations of the Banking Board Part 33 & Part 82

January 25, 2006

[ ]

Re: Interest only, adjustable rate mortgages

Dear [ ]:

I am in receipt of your letter, dated July 20, 2005, in which you asked for the New York State Banking Department’s (the “Department”) opinion as to whether a mortgage product with an initial, variable rate interest and possible negative amortization that changes to fixed rate of interest and monthly payments calculated to allow for a complete amortization of the loan, over a fixed period of time, involves a “balloon payment.”

Although neither the relevant sections of the General Regulations of the Banking Board (the “Regulations”) nor the New York Banking Law, covering mortgage products, defines a “balloon payment,” a useful definition can be found in Part 33 of the Regulations entitled, “Variable Rate Closed-End Personal Loans.” Part 33.7 indicates that a balloon payment is defined as “any payment which is two times or more the amount of an equal monthly payment,” and requires that lending institutions “give prior notice to the person primarily liable on [such] loan[s].” It is the Department’s opinion that this definition is applicable in the mortgage context as well, and would also trigger the disclosure requirements in Part 82.6(b) of the Regulations. In fact, the applicability of such definition and the ensuing disclosure requirements could, arguably, be more applicable in the mortgage than in the personal loan context: Consumers are at risk of losing their homes.

Applying the definition to your hypothetical, if when the loan converts from the variable rate, interest-only option to the fixed rate, fully-amortized option, monthly payments are more than double the payment on the interest-only option, then the loan would be considered to have a “balloon payment,” triggering the necessary disclosures.

I trust the foregoing is responsive to your inquiry.

Very truly yours,

Harry C. Goberdhan
Assistant Counsel

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