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#2084322 - 06/21/16 12:41 PM Collecting Late Charges
terpsfan Offline
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I am struggling with when you can collect late charges without it potentially causing the pyramiding of late charges. For example a customer had 100 in late charges which were collected after the customer became current. The next payment is short 100. Do we have to reverse the application of pervious late charge payments so that they will not get another late charge since the amount the customer is short could have been covered by previously collecting late charges?

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#2084328 - 06/21/16 01:20 PM Re: Collecting Late Charges terpsfan
Rocky P Offline
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Florida
If the customer made the full payment, then you have to credit them with a full payment.

If the customer had accumulated $100 in late charges in 2015, but in January they made their regular payment and additionally paid the outstanding late charges. In February the payment was $100 short, then the Feb payment was not a full payment. The bank does not have to go back and reverse paid late charges from a prior period to bring the account current.
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#2084347 - 06/21/16 02:06 PM Re: Collecting Late Charges terpsfan
terpsfan Offline
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If a customer is billed for two payments and late charges and they only make enough for the P&I can any amount be applied to the late charges? For example:

02/15 Billed for 100 P&I due 03/01
03/15Billed for 100 P&I due 04/01
Late charged assessed on 03/16 of 5



Customer comes in and pays 200 on 03/20
Payment gets applied to 03/01 payment and then 03/16 late charge leaving on 95 for 04/01 payment causing another late charge on 04/16 of 5. Do payments have to be applied to all P&I billed for before being applied to late charges to not be pyramiding?

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#2084350 - 06/21/16 02:31 PM Re: Collecting Late Charges terpsfan
Amandak Offline
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Wisconsin
I think the payments should have been applied to the 03/01 payment and 04/01 payment before any late charges were collected as you had already billed the 04/01 payment prior to the payment being made. Had the customer paid on 03/14 then you would have collected the late charges.

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#2084367 - 06/21/16 04:20 PM Re: Collecting Late Charges terpsfan
Dan Persfull Offline
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Bloomington, IN
1. What does the contract say about how payments are applied? Generally late charges are the last to be collected after P&I and other charges if they are included in the application of payments at all.

2. What does your state law say about accruing and collecting late charges?

3. If you hold out $100 in late charges that causes the payment to be short and another late charge is added how do you explain that is not pyramiding late charges? IOWs you're charging a late charge because of late charges.

I know Reg. AA has been repealed but you may want to look at the following. I would consider your practice to fall under UDAAP if you are collecting late charges to short a payment and then charging another late charge due to that short fall.

(a) In connection with collecting a debt arising out of an extension of credit to a consumer, it is an unfair act or practice for a bank to levy or collect any delinquency charge on a payment, when the only delinquency is attributable to late fees or delinquency charges assessed on earlier installments, and the payment is otherwise a full payment for the applicable period and is paid on its due date or within an applicable grace period.

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#2084489 - 06/21/16 09:01 PM Re: Collecting Late Charges terpsfan
terpsfan Offline
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But if the customer is current we can collect the late charges and not worry about future short payments causing late charges correct?

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#2084495 - 06/21/16 09:20 PM Re: Collecting Late Charges terpsfan
Amandak Offline
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Wisconsin
Correct. It would be a problem if you collect the late charges when you have a payment billed.

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#2084530 - 06/22/16 12:59 PM Re: Collecting Late Charges terpsfan
rlcarey Online
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Galveston, TX
It is a matter of the contract. There is no law (unless State law applies) that says you cannot first credit payments to fees, interest and principal in any particular order. Almost all consumer loans are simple interest, so I am not sure what the problem would be. They have a $100 payment scheduled this month, they pay $100, they are not late regardless of how that payment is allocated. Might this result in a final payment that will be more than the projected remaining principal balance? Sure. But they will have fulfilled their payment obligation for the month in question so no additional late charges would be assessed.

It is purely a matter of your contract and the ability of your loan processing system to handle it correctly.
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#2084802 - 06/23/16 01:33 PM Re: Collecting Late Charges terpsfan
terpsfan Offline
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The state and contract allow them to be collected it is UDAP and the former Reg AA I am concerned with.

(a) In connection with collecting a debt arising out of an extension of credit to a consumer, it is an unfair act or practice for a bank to levy or collect any delinquency charge on a payment, when the only delinquency is attributable to late fees or delinquency charges assessed on earlier installments, and the payment is otherwise a full payment for the applicable period and is paid on its due date or within an applicable grace period.

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#2084807 - 06/23/16 01:53 PM Re: Collecting Late Charges terpsfan
rlcarey Online
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What I am saying is that the application of the contractual payment amount due has nothing to do with whether or not you are pyramiding late charges. Your contract and State law will dictate how you are able to allocate payments between fees, interest and principal. If the contracted payment amount is $100 - you can apply that $100 in any manner that your contract and State law allows. By applying the payment first to fees (if allowed) it does not impact the fact that they made the $100 and are current on the loan.
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#2084888 - 06/23/16 06:23 PM Re: Collecting Late Charges terpsfan
terpsfan Offline
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If it is applied first to fees how could it be current if the full P&I was not paid?

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#2084892 - 06/23/16 06:31 PM Re: Collecting Late Charges terpsfan
Dan Persfull Offline
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Bloomington, IN
Monthly payment due per the contract is $100 per month.

Application of payment per contract - 1. Late charges 2. other Fees 3. Interest 4. Principal

$100 payment received. 1. $100 applied to accumulated late charges. 2. $0 to other charges 3. $0 to interest 4. $0 to principal

The contractual payment of $100 was made. The fact you applied it all to accumulated late charges does not negate the fact the borrower paid his required monthly payment of $100. The problem you have in this type of payment application is you can throw the account into negative amortization.
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#2084899 - 06/23/16 06:47 PM Re: Collecting Late Charges terpsfan
MScarn6942 Offline
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Land Lacking in Lakes, IL
Dan, when you say that's a problem, are you meaning that it's an issue from a compliance standpoint and not being disclosed properly, or that it's an issue when the maturity date comes and the customer(s) are irritated that their loan did not pay off (even though they've been late...)
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#2084911 - 06/23/16 07:16 PM Re: Collecting Late Charges terpsfan
rlcarey Online
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Galveston, TX
Not Dan, but that is a risk when you structure the application of your loan payments in that manner. However, if allowed by State law, there would be nothing illegal about it as long as the application of payments was properly disclosed in the loan contract. Could the borrower be in for a surprise at maturity - you bet.
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#2084927 - 06/23/16 08:25 PM Re: Collecting Late Charges terpsfan
MScarn6942 Offline
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Land Lacking in Lakes, IL
Thanks rlcarey, appreciate it! That was kind of what I thought, but I didn't know for sure!

I know we have some customers who pay right before they get a late charge because they "don't have to pay until then so why should we pay before?" but they don't understand what will happen at the end of the loan... even though we've explained it to them several times and disclosed it...
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#2084937 - 06/23/16 08:46 PM Re: Collecting Late Charges terpsfan
terpsfan Offline
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If the note say interest, principal, then fees can we still require additional amounts once they are current to be applied to fees before allowing them to prepay? The note just says that it can be prepaid at any time without penalty and does not state how the prepayment will be applied.

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#2084956 - 06/23/16 09:18 PM Re: Collecting Late Charges terpsfan
rlcarey Online
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I'm sure your notes say that any prepayment does not impact their monthly payment obligations. If they paid more than the current payment due, I would think you could apply it to fees then principal.
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#2085220 - 06/24/16 08:52 PM Re: Collecting Late Charges terpsfan
terpsfan Offline
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Below is what the Fannie Mae Deed of trust says. What does it mean by "to the extent that, each payment can be paid in full"? Does this mean that if the extra does not pay the next full payment we can apply it to late charges?

2. Application of Payments or Proceeds. Except as otherwise described in this Section 2, all payments accepted and applied by Lender shall be applied in the following order of priority: (a) interest due under the Note; (b) principal due under the Note; (c) amounts due under Section 3. Such payments shall be applied to each Periodic Payment in the order in which it became due. Any remaining amounts shall be applied first to late charges, second to any other amounts due under this Security Instrument, and then to reduce the principal balance of the Note.
If Lender receives a payment from Borrower for a delinquent Periodic Payment which includes a sufficient amount to pay any late charge due, the payment may be applied to the delinquent payment and the late charge. If more than one Periodic Payment is outstanding, Lender may apply any payment received from Borrower to the repayment of the Periodic Payments if, and to the extent that, each payment can be paid in full. To the extent that any excess exists after the payment is applied to the full payment of one or more Periodic Payments, such excess may be applied to any late charges due. Voluntary prepayments shall be applied first to any prepayment charges and then as described in the Note.

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#2085256 - 06/25/16 12:37 PM Re: Collecting Late Charges terpsfan
rlcarey Online
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Yes.
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#2085267 - 06/25/16 05:30 PM Re: Collecting Late Charges terpsfan
terpsfan Offline
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So if the customer has 100 in outstanding late charges and a regular p&i payment of 200 if the customer is due for two payments and makes a 300 payment we can apply 100 to late charges even though if they later make a 100 payment they would have been current if we didn't apply the 100 previously to late charges?

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#2085278 - 06/26/16 11:46 AM Re: Collecting Late Charges terpsfan
rlcarey Online
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Galveston, TX
That, IMHO is exactly what this says:

If more than one Periodic Payment is outstanding, Lender may apply any payment received from Borrower to the repayment of the Periodic Payments if, and to the extent that, each payment can be paid in full. To the extent that any excess exists after the payment is applied to the full payment of one or more Periodic Payments, such excess may be applied to any late charges due.
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#2085279 - 06/26/16 02:42 PM Re: Collecting Late Charges terpsfan
terpsfan Offline
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So even under the former reg aa partial payments do not have to be applied to the periodic payment but can be applied to late charges

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#2086435 - 07/01/16 06:11 PM Re: Collecting Late Charges terpsfan
terpsfan Offline
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I have just always thought when a partial payment is received we still have to apply it to P&I due and not late charges since if more than one partial payment is received it can cause additional late charges. Can partial payments be applied to late charges without pyramiding?

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#2086436 - 07/01/16 06:15 PM Re: Collecting Late Charges terpsfan
terpsfan Offline
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Also what if the customer would like to go ahead and pay late charges outstanding?

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#2086442 - 07/01/16 06:21 PM Re: Collecting Late Charges terpsfan
rlcarey Online
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Galveston, TX
The applications of partial payments are a matter of you loan contract. If they come in a want to pay the late charges separately, then you let them if you want.
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