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2.10.7.4 Late Fees As Hidden Interest or Impermissible Penalties

Late fees, like any other payments made to a lender, are a potential source of hidden interest. A servicer’s ability to exclude late charges from interest on a contract varies widely from state to state.219 When a national bank or federal savings bank is involved in the transaction, the possibility of preemption must also be taken into account.220 Even if late fees are not treated as interest and no statute caps them, such fees are not necessarily immune from challenge. A number of states view late fees as liquidated damages.221 Contract provisions calling for liquidated damages may be valid if they represent a good faith effort of the parties at the time of the creation of the contract to assess and compensate for the damage that will be caused by a specified breach of contract. Courts may refuse to enforce a late-fee provision if it finds that the late fee is a penalty rather than liquidated damages. For example, one court held that a late fee calculated as a percentage of the outstanding loan balance, rather than as a percentage of the delinquent payment amount, may be void as a penalty.222

Footnotes

  • 219 {214} See National Consumer Law Center, Consumer Credit Regulation §§ 4.8.2, 4.8.3 (3d ed. 2020), updated at www.nclc.org/library.

  • 220 {215} See, e.g., Powell v. Huntington Nat’l Bank, 226 F. Supp. 3d 625 (S.D. W. Va. 2016) (state law governing when banks could charge late fees and how payments should be applied to previously missed installments impaired bank’s powers under the National Bank Act and was therefore preempted); Akopyan v. Wells Fargo Home Mortg., Inc., 155 Cal. Rptr. 3d 245 (Cal. Ct. App. 2013) (loans within statute limiting late mortgage payment charges, but claims preempted by Home Owners’ Loan Act and National Bank Act). See also National Consumer Law Center, Mortgage Lending Chs. 5, 8 (3d ed. 2019), updated at www.nclc.org/library (discussion of state law conflicts with the National Bank Act and HOLA and preemption of state interest rate limits in mortgage loans made by covered financial institutions).

  • 221 {216} See National Consumer Law Center, Consumer Credit Regulation § 4.8.4 (3d ed. 2020), updated at www.nclc.org/library.

  • 222 {217} In re Market Ctr. E. Retail Prop., Inc., 433 B.R. 335 (Bankr. D.N.M. 2010).