Our core processor offers two payment collection sequences which are currently set to the following:
1) Regular payment sequence - interest, prin, esc, late charges
2) Over payment sequence - principal


Our regular payment collection sequence - applies to Interest, Principal, Escrow, then Late charges. However the issue we have with the late charges is the system won't apply any extra included in the payment towards the late charges unless the overage paid is for the full amount of the late charges billed. Also if they have any unpaid late charges built up over time none of their over payment will ever pay down late charges unless they specifically ask us to apply it to their late changes. Due to this issue our servicing department is asking if we can change our "over payment sequence" to apply to late charges first then principal? However our note states early payments will reduce principal so I don't think we can change the setup in this way. Am I headed in the right direction on this or do we have a right to go after the late charges this way? Our note doesn't give much detail on the collection of late charges and I can't find anything in state law addressing this either. Any input would be appreciate.