What Are All Those Fees? Foreclosure And Late Charges

By Author: Nick Adama
Total Articles: 197
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When homeowners begin to fall behind on their mortgage, almost immediately, the bank begins adding numerous fees to the balance. A default of a couple months can balloon into a total amount behind equaling nearly half a year's worth of principal and interest payments. This is a result of the lender or servicing company adding as many and as high of fees as they can get away with by law.

But for the borrowers who are trying to get back on track with their loan payments, it can be almost impossible to determine how much money is actually owed. One reason for this is simply that lenders do a terrible job keeping records and accurate calculations of these fees. But another important cause for the confusion in fees is that servicing companies and their lawyers just make them up as they go along.

Late fees are almost always charged as soon as the grace period expires on a monthly payment. However, the amount of the charge is limited by several factors, including the following:

1. The date on which the fee can be charged to the account
2. The dollar amount of the fee charged
3. The percentage of payment ...
... allowed to be assessed as a fee
4. The amount of the monthly payment on which the fee can be charged
5. The event which triggers the imposition of the late fee

There are also a number of other factors which can affect how late fees are charged to borrowers. If the loan documents and state law allow for different late fees, it is often the maximum allowed by state law that can be used by the lender. However, the company may charge the higher amount allowed in the contract, and it will be up to the borrowers to fight this later on and have the fees reduced.

Also, if the state laws allowed for a certain percentage (for example, 5%) to be charged as a late fee when the contract was written, what happens if the laws are later changed? If the law later allows only a 4% maximum late fee, there are two potential limits that apply to the account if the borrowers default during the period state laws allow only 4% to be charged. In these cases, courts have decided that the limit allowed at the time the contract was executed is to be applied.

One practice that servicing companies may engage is but which is prohibited by law is pyramiding of late fees. New regulations will outright prohibit this action again, but laws and the courts have yet to stop crooked mortgage servicers from preying upon borrowers.

Pyramiding late fees refers to applying payments first to late fees and past due amounts, and then charging additional late fees on the current payment. This action results in late fees and interest being applied to an account over and over again, despite previous late fees having been assessed on a particular payment already. According to the Federal Trade Commission, pyramiding of late fees is unfair to consumers.

Of course, despite the fact that the FTC regards pyramiding of late fees as an unfair act, another government agency, Fannie Mae, specifically authorizes servicers to engage in the activity. However, the Fannie Mae guidelines that authorize the lender to "hold as unapplied" payments that are sent in without the late fee should not be taken to mean it overrides other federal laws and regulations. Even though it may seem that servicers can engage in the act due to the Fannie Mae guidelines, the FTC opinion should be preferred.

Finally, homeowners or their attorneys attempting to stop foreclosure need to examine the actual mortgage contract to determine how and when late fees may be assessed. Any limits placed in the contract relating to default and extra charges should be complied with by the lender before any fees are assessed. Thus, the charges can only be applied if they are authorized by the contract and are not in violation of applicable state laws.

There are a number of legal defenses to foreclosure that homeowners may have in relation to the imposition of late fees. Some may be full defenses to a foreclosure lawsuit, while others may serve to reduce or limit the amount owed on the mortgage. These include, breach of contract, violation of state usury laws, violations of state unfair and deceptive acts and practices statutes, unjust enrichment, breach of fiduciary duty, and breach of good faith and fair dealing.

Unfortunately, late fees are only one of the many ways that lenders can apply more charges to a borrower's account and eat up any equity in the property. A future article will look at a whole range of other charges that servicing companies add on to the balance of a loan, and which are ripe for abuse against homeowners. Late fees, though, should be carefully scrutinized by borrowers and their attorneys.
Nick writes for the ForeclosureFish website and blog, which educate homeowners on how they can avoid foreclosure and beat the bank. The site describes nearly a dozen ways to prevent losing a home, including deed in lieu, loan modification, defending foreclosure in court, and others. Visit the site today to get a free e-book explaining the basics of foreclosure and learn how to fight back against foreclosure: http://www.foreclosurefish.com/