San Francisco, California

January 15, 1975

Re: Banking Law – Section 1227(b)

Dear M ________:

This is in response to your letter of December 27, 1974, and will confirm our telephone conversation of December 26, 1974.

My statement on the telephone to you that the phrase “substantially equal installments” in Section 1227(b) of the Banking Law was aimed principally at prohibiting balloon payments and was hurriedly made and needs clarification.

The phrase “substantially equal installments” means that the monthly payments need not be exactly equal but that they should be substantially equal to pay the loan off in the legal maximum period of time allowed. We do not object to variations in the amount applied on principal because of adjustment in the interest rate or in the unpaid principal balance, but we do object to payment schedules that call for no, or practically no, principal reductions for an extended period of time with the payments, either principal including interest or principal plus interest, increasing rapidly as the loan nears maturity. It was in this concept that I used the phrase “balloon payments.”

We recognize that banks may wish to adjust the interest on a real estate loan as market conditions change. In this regard, we have no objection to a maturity date being set which is short of the maturity date permitted by the Banking Law, provided the monthly payments are substantially equal and will pay the loan off in the time permitted by the Banking Law. We have no objection to a balloon payment as it is used in this context because we would expect that under normal conditions the bank would extend the maturity date and permit the monthly payment schedule to remain in effect.

Very truly yours,

Superintendent of Banks

Chief Deputy Superintendent
bcc: Opinion File

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