I've got a question about the applicability of 12 CFR 1026.36(c)(1), which addresses crediting of payments on closed end mortgages.

We have a mortgage where the note says we can apply a payment to late fees, then interest, then principal. Accordingly, the note contradicts the current law. However, the loan was originated in 2011.

My understanding is that the referenced section was effective on 1/10/2014. Would that section apply to a loan that was originated in 2011?

Thanks in advance for any guidance!

Absolutely. In fact, the current wording isn't much different from what was there earlier. Compare the old wording with the new on this page: http://www.bankersonline.com/regs/12-1026/12-1026-036-2013.html#c1

If the customer's regular monthly payment is $350.00 and you receive a payment in that amount, even if it's late and a late charge has accrued, you cannot take the late charge first. The language in the note is trumped by the regulation.

Many thanks, John!

I agree with John, while the CFPB went out of its way to note that it is not intending to impact existing contracts with this change, I think in the situation John has laid out you have no choice but to apply the payment regardless of whether or not the application of payment language in your loan docs says you apply late fees first.

I seem to have received contradictory (UNOFFICIAL) guidance from CFPB on this matter. Every time I've talked to CFPB their first statement is to point out that you must follow your contract.

In a situation where the late charge is taken from the payment amount, and the posting order dictates the late charge is satisfied first - when you receive a 'periodic payment' of say $350 as John used in his example, you would be required to immediately credit and advance the due date. But the posting order would be per the contract. So if your contract says late charge first, use the funds to satisfy the late charge then follow the remainder of your posting order.

You still have a timely periodic payment (no late fees or late credit reporting), advanced the due date, but basically short the amount going to principal because those funds went first to late charges. The periodic payment was enough to satisfy the P/I/E for the billing cycle - I'm not going to delay the prompt crediting of the payment - I would just do it in a different order per my contract.

This specific example was discussed w/ CFPB fairly early on, so their unofficial guidance may have changed since then... but that's the info I received?

I'm struggling with this one. So, trout22, let's say that the borrower owes $350 for principal and interest (let's ignore escrow to keep this example simple). If the borrower incurred a $25 late fee last month, and now makes a payment of only $350 this month, my loan contract says that I have to apply it to late fee first, then interest and then principal. So, after applying that $350 I'm short $25 of principal for this month. That means that the borrower will now incur another late fee charge. That seems counter to the purpose of this change by the CFPB, no?

If we are not supposed to apply the amounts received to P,I and E first, then what is the purpose of this change in Reg. Z?

I think that the argument is that you can take late fees first as long as you advance the payment due date and don't report the loan as past due. And you can't charge a late fee if the date next due is advanced, even though the principal part of the payment was shorted. At maturity (or earlier payoff), instead of having a pile of unpaid late fees to pay off, there will be unpaid principal instead. If the Bureau says it's OK to adhere to contract verbiage that says that late fees are taken first, the argument holds water.

I hasten to add that I don't imagine the taking of late fees first is acceptable in most states.

Well, I know that many States really do not address the application of payments (I just had to do a little research on this issue).

If you have contracted for a monthly payment of X and the customer pays a monthly payment of X, how that monthly payment is applied is typically a matter of contact.

Regardless of how the monthly payment is applied, if the contractual agreement calls for a monthly payment of X and a monthly payment of X is made, the due is advanced.

That really is the only issue to focus on if your loan contracts have been reviewed and blessed by legal counsel after they have reviewed State law.

Yes John, that was exactly my thought process as well. You're going to end up with $25 in principal at maturity vs. late fees. Six in one, half a dozen in the other - the borrower owes the money either way, but you've followed the loan contract.

And I would certainly agree with Randy - the most important aspect is to make sure your contract has been reviewed by legal counsel to ensure it follows all applicable laws.