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#1586434 - 08/02/11 06:01 PM late fees
Marnie Offline
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Where specifically would I find the reference that says how payments are supposed to be applied and in what order: interest, principal, then late fee? or interest, late fee, principal?

I have checked REG AA and REG Z, and while both talk about application of payments and fees, neither says specifically the order of application. My understanding has always been you can't apply late fees first, but need the back-up to this. Thanks.

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#1586446 - 08/02/11 06:11 PM Re: late fees Marnie
RR Joker Offline
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I think that's in state law...isn't it?
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#1586447 - 08/02/11 06:12 PM Re: late fees Marnie
Dan Persfull Offline
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State law and the loan contract.
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#1586454 - 08/02/11 06:19 PM Re: late fees Dan Persfull
Marnie Offline
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I'm checking state law. But I thought there was something that came out on UDAP that addressed that late fees could not be taken first as it could be pyramiding and charging a late fee on a late fee. With UDAP being such a hot topic now, I am concerned about a contract the specifies late fees will be applied first before interest.

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#1586456 - 08/02/11 06:21 PM Re: late fees Marnie
waldensouth Offline
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you cannot apply payments in such a way that you make a payment late in order to collect the late fee. If the customer only gives enough for P&I, then that's what you apply it to, otherwise you will have an outstanding late payment of Principal because you applied part of the payment to a late fee. You cannot collect late fees on what is basically the unpaid late fee even though you didn't apply it that way.
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#1586459 - 08/02/11 06:24 PM Re: late fees waldensouth
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The pyramiding of late charges is in Reg AA.
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#1586506 - 08/02/11 07:15 PM Re: late fees Dan Persfull
Marnie Offline
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I have checked state law and it doesn't specifically address the order in which the payment is to be applied; the contract billing statement section specifies late charges (and other fees) are to be applied first, followed by interest, followed by principal. So, Dan, I am concerned that REG AA kicks in as the the potential for pyramiding is there if more than one payment consecutively is late, and tracking this would be a nightmare from a system perspective. Your thoughts on this?

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#1586522 - 08/02/11 07:33 PM Re: late fees Marnie
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Not Dan, but I've never seen late charges first. That would be a red flag to me too.
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#1586718 - 08/03/11 01:25 AM Re: late fees RR Joker
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There is no prohibition against applying a payment to late charges first. If I am obligated to pay $100 this month and I pay $100, you can apply the payment in any manner State law allows. I am not late = I paid my $100. Now if you require me to pay both my normal monthly payment of $100 plus $20 in late fees and I only pay $100, you cannot apply $20 to late charges and $80 against my normal monthly payment and treat me late again.
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#1586764 - 08/03/11 01:01 PM Re: late fees rlcarey
waldensouth Offline
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I only pay $100, you cannot apply $20 to late charges and $80 against my normal monthly payment and treat me late again.


yes - what I was trying to say with my circular logic!

I guess it will also depend on what your loan system will do to those payments. I've never seen one that wouldn't treat that payment as late and apply a late fee - so from a practical matter, you may wish to collect late fees last.
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#1586783 - 08/03/11 01:27 PM Re: late fees waldensouth
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Yes...Randy said what I was thinking much better as it applies to system capabilities! smile
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#1586911 - 08/03/11 03:16 PM Re: late fees RR Joker
Marnie Offline
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Thanks for your responses. While no prohibition against applying late fees first, what you are all saying is that you can only do that if the late fee is included with the payment--if not, you can't take late fee if it causes the payment to be considered late the next time, thus pyramiding.

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