By: Timothy A. Raty, Sr. Regulatory Compliance Specialist
On both the Loan Estimate and the Closing Disclosure (required to be provided under Federal Regulation Z and collectively referred to as “Integrated Disclosures”), creditors must disclose “a statement detailing any charge that may be imposed for a late payment, stated as a dollar amount or percentage charge of the late payment amount, and the number of days that a payment must be late to trigger the late payment fee, labeled ‘Late Payment.’” (12 CFR § 1026.37[m]; see also Ibid. § 1026.38[l]) The Official Staff Commentary to this provision promulgates the following:
“Many State laws authorize the calculation of late charges as either a percentage of the delinquent payment amount or a specified dollar amount, and permit the imposition of the lesser or greater of the two calculations. The language provided in the disclosure may reflect the requirements and alternatives allowed under State law.” (12 CFR Pt. 1026, Supp. I, Paragraph 37[m] – 2; emphasis added)
The auxiliary verb “may” indicates that creditors have the option of disclosing any limitations imposed under State law, in addition to “any charge that may be imposed for a late payment . . . and the number of days that a payment must be late to trigger the late payment fee.” The Model Forms for the Integrated Disclosures found in 12 CFR Pt. 1026, App. H provide the following “base” language to be used for this disclosure:
If your payment is more than ___ days late, your lender will charge a late fee of ___________________.
(see Form H-25[A])
And the following sample of the language for an example loan:
If your payment is more than 15 days late, your lender will charge a late fee of 5% of the monthly principal and interest payment.
(see Form H-25[B]; italics in the original)
No sample language is given illustrating how a creditor discloses any limitation imposed by State law, leaving it to the creditor’s discretion as to how this language is to be formatted.
While Regulation Z does permit a creditor to disclose any restrictions imposed by state law, doing so may not be consistent with the late charge promulgated in the promissory note executed by the consumer – especially when the uniform promissory notes published by the Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) are used. For example, Alabama law imposes the following restriction on late charges:
“When a scheduled payment in a consumer credit transaction is in default 10 days or more, the creditor may charge and collect a late charge not exceeding the greater of eighteen dollars ($18) or five percent of the amount of the scheduled payment in default, not to exceed one hundred dollars ($100). The late charge may be collected only once on any scheduled payment, regardless of the period during which the scheduled payment remains in default.” (Ala. Code Ann. § 5-19-4[a] )
Under this law, a creditor (or servicer) can impose a maximum charge of $100, with an optional minimum of $18.[i] Again, while no sample language is provided under Regulation Z for how to disclose these State-imposed limitations, a possible disclosure on the Integrated Disclosures could be as follows:
If your payment is more than 10 days late, your lender will charge a late fee of 5% of the monthly payment, but no less than $18 and no more than $100.
(italics to emphasize dynamic language)
However, this information would not totally align with the late charge language provided by FNMA’s and FHLMC’s uniform promissory notes, such as the following for a fixed-rate loan secured by property in Alabama:
“If the Note Holder has not received the full amount of any monthly payment by the end of ________ calendar days after the date it is due, I will pay a late charge to the Note Holder. The amount of the charge will be ____________% of my overdue payment of principal and interest. I will pay this late charge promptly but only once on each late payment.” (see FNMA Form 3200)
The instructions to these uniform notes do not permit creditors to modify them to include language concerning limitations on late charges imposed by state law (e.g., see “Summary” to FNMA Form 3200; note that while these instructions permit lenders to insert a “Notice” on the note if required by applicable law, Alabama’s late charge provision does not require a notice). While creditors are permitted to use notes other than the uniform ones for loans sold to FNMA (which includes non-authorized modifications to the uniform notes), doing so leads to increase scrutiny of the loan file and possible rejection (see FNMA 2017 Selling Guide A2-2.1-03).
Thus, in complying with both FNMA and Regulation Z requirements – and in utilizing the option to disclose state restrictions – a creditor would be providing a consumer with two different, albeit non-conflicting, disclosures concerning late charges. Currently, the only time where both would be provided without any differences would be when the uniform notes for West Virginia are used, since the state maximum is required to be listed in the note (see FNMA Form 3249).
(Please note that state law still supersedes any provisions of any promissory note. Just because the Alabama uniform promissory notes do not cap the late charges to the amounts specified under Alabama law, does not mean a servicer can charge any amounts up to the percentage specified in the note. The servicer must still abide by applicable law.)
When the requirements under Regulation Z were promulgated in 2013, for enactment in 2015 (see 78 FR 79730 ), we had to determine what the default treatment would be for the late charge disclosure on the Integrated Disclosures. Should we always disclose all state restrictions, even though the promissory notes omit them (for the most part)? Should we ignore them and just disclose the maximum percentage?
In making our determination, we decided to go back to the fundamentals of the closed-end disclosure requirements for Regulation Z, which are that “the disclosures shall reflect the terms of the legal obligation between the parties” (12 CFR § 1026.17[c]) and “the legal obligation normally is presumed to be contained in the note or contract that evidences the agreement between the consumer and the creditor.” (12 CFR Pt. 1026, Supp. I, Paragraph 17(c)(1) – 2). Thus, by default on the Integrated Disclosures generated in our system, the language of the late charge disclosure will reflect the terms of the promissory note generated for the loan.
For example, if a primary lien loan is secured by property located in Alabama, our version of FNMA Form 3200 will print, the language of which only specifies the maximum percentage charged on the delinquent payment. Therefore, the Integrated Disclosures which print in the packages for such loan will also only refer to such percentage and will not reference the $18 optional minimum and $100 maximum.
In contrast, for a primary lien loan secured by property located in West Virginia, our version of FNMA Form 3249 will print, which will specify both the maximum percentage charged, as well as the maximum dollar amount capped on such charge. The Integrated Disclosures which print in the packages for these loans will also refer to both the maximum percentage and the maximum dollar amount.
In this way, we are ensuring that the terms of the Integrated Disclosures and promissory notes (aka the “legal obligation”) are compatible, mitigating confusion on the consumer’s part, and ensuring compliance with Regulation Z.