24 CFR § 203.25 and FHA Single Family Handbook 4330.1 REV-5, ch. 4-2 allow mortgagees to charge a late fee of four percent of any full monthly mortgage payment (principal, interest, taxes, and insurance) that is delinquent, subject to any state law which restricts late fees to a smaller amount.
The language of the FHA promissory notes, which are based on model forms promulgated and required by FHA (see FHA Single Family Handbook 4155.2, ch. 6.B.3.a), follow these regulations in stating that the lender may collect a late fee of a certain percentage (capped at four) “of the overdue amount of each payment.”
38 CFR § 36.4313(e)(3) and VA Servicing Guide ch. 1.08 provide similar restrictions for loans guaranteed by the VA and the notes for these types of loans have similar language.
The amount of the percentage which will print on the note is subject to the restrictions imposed by ConformX, according to our Late Fee ConformX Matrix (available for download at http://www.docutechcorp.com/compliances/compliance-resources). Unless state laws have a lower percentage, four percent will print on all FHA and VA notes.
The language on the notes, however, may come in conflict with state laws which restrict late fees to percentages which are higher than FHA’s and VA’s limitations, but which are applied to a smaller amount than the full monthly payment.
For example, in California under Cal. Civ. Code § 2954.4, a lender may charge a late fee of six percent of the installment due, “that is applicable to payment of principal and interest on the loan,” or five dollars, whichever is greater.
Since six percent is greater than four, ConformX will disclose the four percent.* However, because a charge of six percent on the delinquent payment for principal and interest can sometimes be less than a four percent charge on a full delinquent payment, depending on how large tax and insurance payments are (see tables below), California’s late fee restrictions may actually limit the total charge to a smaller amount than allowed by FHA and VA.
|
Itemization of Delinquent Payment |
Amount of Item |
FHA Late Charge |
California Late Charge |
| Principal + Interest |
$1,000.00 |
x 6% = $60.00 |
|
| Taxes + Insurance |
$600.00 |
||
| Total |
$1,600.00 |
x 4% = $64.00 |
|
Itemization of Delinquent Payment |
Amount of Item |
FHA Late Charge |
California Late Charge |
| Principal + Interest |
$1,000.00 |
x 6% = $60.00 |
|
| Taxes + Insurance |
$300.00 |
||
| Total |
$1,300.00 |
x 4% = $52.00 |
In order to prevent the language of the FHA and VA notes from granting a mortgagee a right to collect a charge exceeding that allowed by state law, as well as to keep the language of the notes as close to the model forms (if any) as possible, we will be revising the text regarding late fees in these notes so that they will be substantially similar to the following:
“If Lender has not received the full monthly payment required by the Security Instrument, as described in Paragraph X of this Note, by the end of X calendar days after the payment is due, Lender may collect a late charge in the amount of X percent (X.XX%) of the overdue amount of each payment, unless such amount exceeds the maximum amount allowed by applicable state law, in which case the Lender may collect the maximum amount allowed by such law.”
Documents affected by this change are:
- FHA Note Fixed (Cx36)
- VA 3200 Note Fixed (Cx58)
- FHA ARM Note – Treasury (Cx861)
- 3501 – 1 YR Treasury – Modified for VA ARM (Cx3148)
- FHA ARM Note – LIBOR (Cx13045)
- FL Housing – FHA Note (Cx15130)
- FL Housing – VA Note (Cx15131)
- NY CEMA GAP – FHA Note Fixed (Cx16243)
- NY CEMA GAP – VA 3200 Note Fixed (Cx16244)
These changes will go into effect beginning February 21, 2014. If you have any questions or concerns about these changes, please contact Client Support at 1.800.497.3584.
February 13, 2014
DR 146883
* Please note: For conventional and RD loans, all late fees are restricted in ConformX to a maximum of 5%, per FNMA, FHLMC, and RD requirements.