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2.10.7.3 Late Fees and Loan Modifications

Often borrowers seeking loan modifications have been assessed late charges for previous untimely mortgage payments. Additionally, the typical loan modification process requires borrowers to make payments under a trial or temporary modification agreement that are less than the contractually due payment amounts. Because these payments are less than the amount contractually due, the servicer will assess late charges to the borrower’s account, even when payments are made timely according to the trial modification agreement. The problem of accruing late charges is exacerbated by the length of time it takes for the servicer to approve or deny permanent loan modifications.

Under the Home Affordable Modification Program, late fees incurred prior to the start of the trial period and accrued during the period must be waived upon permanent modification of the loan.216 Similarly, HUD guidelines for loans insured by the Federal Housing Administration state that in the case of loan modifications or partial claims, all accrued late fees should be waived.217 For proprietary loan modifications, there are no limitations on how servicers deal with late fees. They may require the borrower to pay them, may capitalize them, or may waive them.

If a permanent modification is denied, the servicer will demand that payments be brought current, including late fees. While the borrower may be responsible for late fees incurred prior to entering a trial modification, there are good arguments as to why the borrower should not be obligated to pay late fees for reduced but timely payments made during a trial modification. In these cases, the borrower is making payments for less than the contractually due amount by agreement or on the instruction of the servicer. Borrowers may be able to raise claims based on breach of contract (the trial modification agreement), misrepresentation, and UDAP laws, or raise estoppel claims to prevent servicers from collecting these fees.218

Footnotes

  • 216 {211} MHAP Handbook for Servicers of Non-GSE Mortgages v.5.1 §§ 6.3.1.1, 9.3.2 (May 26, 2016) (prohibiting capitalization of late fees and requiring waiver of late fees and similar charges upon the borrower receiving a permanent modification).

  • 217 {212} See HUD Mortgagee Letter 2008-21 (Aug. 14, 2008) (FHA Loss Mitigation Program Update).

  • 218 {213} See McCaig v. Wells Fargo Bank, 788 F.3d 463 (5th Cir. 2015) (forbearance agreement conditionally waived right to collect late fees); In re Borin, 461 B.R. 719 (Bankr. W.D. Mich. 2011) (disallowing late fees accrued during forbearance period when debtor made timely payments in the amount instructed by the servicer).