It has been requested that we post our loan payments in the order of late fees first, interest second, principal third. If the customer is late on their payment and does not pay the additional late charge payment it will make them delinquent I was just wondering how everyone else is handling their payments.

We post interest, then principal, then late fees, then additional principal. Late fees are tracked outside of the payment due date and if unpaid with the monthly payment are added on the loan payoff, not the loan balance.

You would have to post them in accordance with how they were disclosed on the note (if any). There may be some state law issues too.

Will that "delinquency" lead to more late charges?

Regulation AA Section 227.15 - Unfair Late Charges

That definitely will get the attention of your regulator. Unless the borrower pays the late fee in addition to the regular payment, you cannot collect it first and make the borrower delinquent. Bad idea.

My thoughts as well.

Per Reg. AA you cannot charge late charges on unpaid late charges nor can you charge late charges on principal that is the exact amount of the late charges and only past due because you paid the late charges first. This is a bad idea.

I would say that you are running the risk of a UDAP.

In addition, why would your senior management want to increase delinquencies? You may see a small up tick in non-interest income, but your delinquencies could result in additional regulatory scrutiny.

I agree with WKBanker, I'd be concerned with UDAAP.

I'm presuming UDAAP only becomes an issue for consumer loans. On a commercial loan you could collect late charges first, then escrow, then interest, then principal as long as you disclose that in the note, correct?

While consumer protection laws and regulations may not apply to commercial transactions, your state's unfair business practices statute may apply to your commercial transactions.

You may want to check those statutes and/or check with your bank counsel to determine (A) what posting order you should use if you don't disclose it in your commercial loan documents (and then decide if your bank should revise its loan documents to disclose the posting order), or (B) if any posting order you do disclose is acceptable under any applicable unfair business practices statute or how your state courts have interpreted the statute.

If we post interest, then late charges, then principal, but as long as the payment amount is for the full amount of the regular monthly payment AND the payment due date is bumped to the next payment date, will we be OK? We disclose in our note that this is the order in which the payments are credited.

The application of payments is a State law issue,