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2.10.7.1 Generally

Mortgage loan contracts typically provide a grace period—for instance, ten or fifteen days beyond the due date of an installment payment—during which time borrowers may pay the installment without penalty. When the payment is made after the expiration of the grace period, the note may authorize the imposition of a late fee. Late charges may only be assessed to the borrower if the contract specifically authorizes them. Even when late fees are permitted under the agreement, the servicer must still comply with any applicable state law before assessing the fee to the borrower’s account.

Late fees are closely regulated and often charged incorrectly. There are a myriad of overlapping, and occasionally conflicting, limits on the assessment and collection of late fees. This subsection provides an overview of the issues that are more fully developed later.

There are several types of limits on late fees:

  • • Limit on the dollar amount charged for a late fee (usually a maximum of $10 or $15);
  • • Limit on the percentage of the payment due charged for a late fee (typically four or five percent);
  • • Limit on the payment amount on which the late charge is calculated (for example, the entire amount of the payment due, including escrow amounts, or only the principal-and-interest portion of the payment due);
  • • Limit on the date on which the late charge can be assessed;
  • • Limit on the triggering event (in other words, do all sums due, including fees, have to be paid to avoid a late fee, or only principal and interest?).

What is the amount of the late charge? Most prime, conventional loans permit late fees equal to five percent of the payment amount. However, state law or other regulation may set a lower percentage or lower dollar amount for late fees.199 In these cases the lower authorization should apply.

When the late fee is determined as a percentage, the question arises as to whether the fee is based on the entire payment due or just a portion of it. Contracts may limit the payment amount on which the late charge is calculated to “principal and interest.” In these cases the calculation of late fees should exclude escrow amounts or other fees. In the case of partial payments, the question arises whether the late fee is due on the entire payment or only the portion that is not paid. For example, if the principal and interest due on the first of the month is $550, and only $540 is paid on time, is the fee calculated on the whole $550, or only on the $10 that is late? Most contracts specify that if the entire payment is not made, then the entire payment is deemed to be late,200 so that the fee would be calculated on the entire $550. But some, especially older, contracts can be read to only permit the fee to be calculated on the amount which is unpaid. State law on late charges can also provide guidance on this issue.

Which limit applies? In some situations, more than one limit may apply to the imposition of late fees. Suppose, for example, that the note sets one limit (say five percent of the payment), state law at the time of the contract permitted a maximum $25 late fee, and state law at the time the late fee is imposed (based on a change in the law) allows a maximum $50 late fee. When more than one limit may apply to the imposition of late fees, the general rule is that the state law limit as of the date of the contract applies.201

When can a late charge be assessed? The general rule in state statutes and contracts is that late fees may be imposed only after the payment has not been received a certain number of days after it was due. For example, suppose a contract includes this language:

(A) Late Charges for Overdue Payments

If the Note Holder has not received the full amount of any monthly payment by the end of fifteen calendar days after the date it is due, I will pay a late charge to the Note Holder. The amount of the charge will be five percent of my overdue payment of principal and interest. I will pay this late charge promptly but only once on each payment.202

Many servicers will impose the late fee on day sixteen, but this would be improper under this language. The language specifically only permits the late fee to be charged after fifteen days after the payment was due. So if the payment is due on day one, then the end of fifteen days after day one is day sixteen, which means that the fee for the failure to make a timely payment can only be imposed on day seventeen, because the borrower should theoretically have the entire day of day sixteen in which to make the payment.

A related issue is whether the servicer has promptly credited the payment to the borrower’s account. Regulation Z, which implements the Truth in Lending Act (TILA), generally requires servicers to promptly process borrowers’ payments.203

Another important consideration is whether the consumer must be notified of its imposition within a certain amount of time after the late payment that triggered it.204 The servicer may be prohibited from assessing late charges after the loan has been accelerated.205 Again, these issues are governed by state law and the contract.

Claims that result from the overcharge of late fees can include:

  • • Breach of contract;
  • • Usury;206
  • • Unfair and deceptive acts and practices;
  • • Unjust enrichment;
  • • Breach of good faith and fair dealing; and
  • • Breach of fiduciary duty.

Footnotes

  • 199 {194} See, e.g., 11 U.S.C. § 1639(k) (capping late fees for HOEPA loans at 4% of past-due payment and requiring at least fifteen-day grace period); N.C. Gen. Stat. § 24-10.1 (late fee limited to 4% for certain loans); W. Va. Code § 46A-3-112 (5% of unpaid installment, not to exceed $15); 24 C.F.R. § 203.25 (limiting late fee on FHA-insured loans to 4% of installment payments more that fifteen days late). See also National Consumer Law Center, Mortgage Lending § 8.13 (3d ed. 2019), updated at www.nclc.org/library.

  • 200 {195} With respect to determining the amount on which the late fee is based, the Fannie Mae/Freddie Mac Uniform Note states:

    The amount of the charge will be _________% of my overdue payment of principal and interest. I will pay this late charge promptly but only once on each late payment.

    Fannie Mae/Freddie Mac Uniform Instrument, Form 3200: Multistate Fixed Rate Note (Jan. 2001), available at www.freddiemac.com.

    Freddie Mac specifically prohibits the charging of more than 5% of the principal-and-interest payment. On first mortgages, the fee is assessed if the payment has not been received within fifteen days after the due date. Freddie Mac Single-Family Seller/Servicer Guide § 9102.2 (Mar. 2, 2016), available at www.freddiemac.com.

  • 201 {196} The usury saving clause in most notes will prevent the imposition of a late fee that may be authorized by the contract but is in excess of what is allowed by state law. The Usury Savings Clause in the Fannie Mae/Freddie Mac Uniform Note states:

    Applicable Law. This Note shall be governed by federal law and, to the extent not inconsistent with or more restrictive than federal law or regulation governing the Lender, the laws of the jurisdiction in which the property defined in the Security Instrument as the “Property” is located. In the event of a conflict between any provision of this Note and any such law or regulation in effect as of the date of this Note, such law or regulation shall control to the extent of such conflict and the conflicting provision contained in this Note shall be without effect. All other provisions of this Note will remain fully effective and enforceable.

  • 202 {197} This is standard language from the Fannie Mae/Freddie Mac Uniform Note.

  • 203 {198} See § 4.2.4, infra (detailed discussion of payment processing requirements).

  • 204 {199} See, e.g., Cal. Civ. Code § 2954.5 (West).

  • 205 {200} See Rizzo v. Pierce & Associates, 351 F.3d 791, 793 n.1 (7th Cir. 2003) (collecting cases, but decided on other grounds); Sec. Mut. Life Ins. Co. of N.Y. v. Contemporary Real Estate Associates, 979 F.2d 329 (3d Cir. 1992) (under Pennsylvania law late charges cannot be imposed after lenders has accelerated note); United Cent. Bank v. Shree Ganesh Prop., L.L.C., 2013 WL 1718919 (S.D.N.Y. Mar. 4, 2013) (no post-acceleration late fees recoverable absent language to the contrary in mortgage), adopted in relevant part by 2013 WL 1703875 (S.D.N.Y. Apr. 19, 2013); 4 B’s Realty 1530 CR39, L.L.C. v. Toscano, 818 F. Supp. 2d 654 (E.D.N.Y. 2011); Mazzei v. Money Store, 2011 WL 4501311 (S.D.N.Y. Sept. 29, 2011) (denying summary judgment when disputed issues of fact remained regarding post-acceleration late fees); James v. Olympus Servicing, L.P., 2002 WL 31307540 (N.D. Ill. Oct. 9, 2002); In re River Valley Fitness One, L.P., 2004 WL 1171732 (Bankr. D.N.H. May 5, 2004) (collecting cases); In re Guarnieri, 297 B.R. 365 (Bankr. D. Conn. 2003); Lasalle Bank v. Shepherd Mall Partners, 140 P.3d 559 (Okla. Civ. App. 2005) (noting that the right to charge late fees ceases upon acceleration).

  • 206 {201} See National Consumer Law Center, Consumer Credit Regulation §§ 4.8, 5.7.1 (3d ed. 2020), updated at www.nclc.org/library.