Under Reg Z, a payment qualifies as a periodic payment even if it fails to include late fees or other fees. (1026.36(c)(1)(i) defines periodic payment as an amount sufficient to cover principal, interest and escrow (if applicable) for a given billing cycle.

A “service” we offer is to allow automatic debit for mortgage loan payments. The system looks to satisfy P & I, escrow and late charges when taking an automatic payment. So, if a customer who is on auto debit does not have enough money in his account to make his payment, a late charge will assess. The system continues to look for a full payment (including the late charge). He makes a deposit to cover the P & I payment only. The system won’t take it because the late charge hasn’t been paid (which is how our specs are set up). Is this a problem? I’m thinking we have an issue as to mortgage loans. The late charge balance is always going to be there until it is paid – and the system will continue to look for the late charge to be satisfied before taking the auto debit payment. (Payments not on auto debit will be satisfied and bump the due date even if late charges are NOT paid - only the auto debit payments get hung up.) So, yes, we will take him off auto debit - but I'm wondering if we have an issue with our specs set up this way?

I think you already know what borrower expectations are -- if there's enough there in the deposit account to cover the periodic payment, the payment will be applied. I'm going to bet a nickel that you haven't informed your auto-debit borrowers of the eccentricities of your auto-debit program. Not taking the payment further disadvantages the borrower by increasing interest costs if your loans are on simple interest, plus the potential for creating a false negative credit report.

I recommend that your specs be tweaked.

Not to mention - mortgage loan or not - this is a classic example of the pyramiding of late charges. You might be facing a pretty serious look back on this issue.

Thank you very much for the responses!