Late Fees:  Complying with North Carolina Law and Collecting Late Fees in a Reinstatement Context

Collectability of Late Fees 

Presuming that the applicable loan documents permit the note holder to seek late charges for the failure to timely remit the periodic loan payment, and almost all promissory notes will likely contain language similar to that found in the Fannie Mae/Freddie Mac Multistate Fixed Rate Note (“GSE Note”)¹, late fees are collectable conditioned on compliance with state law.

For closed-end loans (most mortgage loans) North Carolina caps the late fee at 4% of the past due payment, but requires the note holder to send a notice to the borrower each time it intends to collect the late fee.  More specifically, N.C.G.S. § 24-10.1(a) provides that “[s]ubject to the limitations contained in subsection (b) of this section, any lender may charge a party to a loan or extension of credit governed by the provisions of G.S. 24-1.1, 24-1.2, or 24-1.1A a late payment charge as agreed upon by the parties in the loan contract.”  § 24-1.1 governs “a loan, purchase money loan, advance, commitment for a loan or forbearance other than a credit card, open-end, or similar loan….”  § 24-1.1A governs “home loans”, defined to “mean a loan, other than an open-end credit plan, where the principal amount is less than three hundred thousand dollars ($300,000) secured by a first mortgage or first deed of trust on real estate upon which there is located or there is to be located one or more single-family dwellings or dwelling units or secured by an equivalent first security interest in a manufactured home.”  § 24-1.1A(e).  § 24-1.2 has been repealed.

The limitations referred to in § 24-10.1 include the prohibition on a late payment charge “[i]n excess of four percent (4%) of the amount of the payment past due”, (§ 24-10.1(b)(1)), and the charge may not be made “[u]nless the lender notifies the borrower within 45 days following the date the payment was due that a late payment charge has been imposed for a particular late payment which late payment must be paid unless the borrower can show that the installment was paid in full and on time.  No late payment charge may be collected from any borrower if the borrower informs the lender that non-payment of an installment is in dispute and presents proof of payment within 45 days of receipt of the lender's notice of the late charge.”  § 24-10.1(b)(6).  Note, this late charge notice requirement applies to all late charges the lender seeks to collect, not just post-acceleration late charges.

A further limitation is that a lender may not charge a late payment fee “[f]or any payment unless past due for 15 days or more; provided, however, if the loan is one on which interest on each installment is paid in advance, no late payment charge may be charged until the payment is 30 days past due or more.”  § 24-10.1(b)(3).

Late Fees in the Context of Reinstatement

Late fees for missed monthly payments due and unpaid after the note holder accelerates the loan are treated differently depending whether the borrower reinstates the loan or some other foreclosure-avoidance option is reached.  If there is a reinstatement, late fees for post-acceleration missed monthly payments are generally collectable, presuming the security instrument contains language similar to that found in the Fannie Mae/Freddie Mac North Carolina Uniform Instrument (“GSE DOT”), which provides a right to reinstatement conditioned, inter alia, upon paying the “Lender all sums which then would be due under this Security Instrument and the Note as if no acceleration had occurred….”  GSE DOT ¶ 19.  If the foreclosure-avoidance option chosen is not a reinstatement, such fees very likely are not collectible.

Court opinions addressing this issue are not in abundance, but those that have opined are in agreement.  In 2003 the United States Court of Appeals for the Third Circuit, relying on language substantially similar to that found in the GSE DOT, found the statement that “[t]he reinstatement provision of the mortgage language requires payment of all sums “which would then be due ... had no acceleration occurred”” to be unambiguous and to apply retroactively.  Rizzo v. Pierce & Associates, 351 F.3d 791, 793 (3d Cir. 2003) (emphasis in original).   “In other words, the monthly payments are deemed to have been due each and every month on the dates set out in the mortgage and note. We find this language to unambiguously require plaintiffs to pay the late fees.”  Id. at 793-94.  “Reinstatement essentially allows the borrower a second “bite at the apple.” It follows that the lender should not be penalized, nor the borrower rewarded, for a breach on the part of the borrower.”  Id.

The Rizzo court also made clear that a debt collector demanding the payment of late fees for post-acceleration missed monthly payments does not violate the FDCPA, specifically 15 U.S.C. § 1692f that “prohibits using “false, deceptive, or misleading representation[s] or means in connection with the collection of any debt” and “unfair or unconscionable means to collect or attempt to collect any debt.”  Rizzo, at 794.

The Court observed, however, “that the Rizzos are not obligated to pay the late fees in all cases. If, for whatever reason, the Rizzos did not want to pay the late fees, they were free to pay the loan as accelerated.  Such a payment would nullify any obligation to pay post-acceleration late fees.”  Id.  While there is no case directly on point in the United States Court of Appeals for the Fourth Circuit (with federal appellate jurisdiction for North Carolina and South Carolina) or in North Carolina’s appellate courts, the court’s logic in Rizzo is likely to be accepted.  

The result may not be the same, however, in the event of a Chapter 13 petition for bankruptcy.  In Wells Fargo Bank Minnesota, N.A. v. Guarnieri, 308 B.R. 122 (D.Ct. 2004), Wells Fargo secured a judgment of strict foreclosure, but the amount found due did not include post-acceleration late charges.  Before the “law date”, the borrower filed a voluntary Chapter 13 petition followed by a proposed “cure and maintain” plan under 11 U.S.C. § 1322(b)(5), which did not include post-acceleration late charges.  

Appealing the rejection of its objection to the plan, Wells Fargo, relying on Rizzo, contended that when the bankruptcy court confirms a cure and maintenance plan it effectively reinstates the loan as if no acceleration had occurred and since the security instrument requires payment of late charges in the event of reinstatement, Wells Fargo was entitled to post-acceleration, pre-petition late charges as a part of the “amounts necessary to cure the default” within the meaning of § 1322e.  Guarnieri, at 126.

The district court observed that “[n]o Connecticut court has had occasion to consider Rizzo. Nor, apparently, has any court explicitly decided whether a lender may recover post-acceleration late charges under Connecticut law when the debtor seeks to reinstate a loan rather than redeem it.”   Guarnieri, at 126.  The court rejected Wells Fargo’s argument and found no need to decide that issue because by the terms of the security instrument reinstatement was available only until a judgment enforcing the security instrument was entered.  Instead, the district court found that the borrower’s default was cured under the Code, and nothing in the security instrument required the payment of late fees under such circumstances.  

Conclusion

While there are no Fourth Circuit or North Carolina appellate court opinions on the issue, in the non-bankruptcy context, provided the security instrument contains a statement to the effect that reinstatement is conditioned upon the payment of all sums which then would be due under the security Instrument and the note as if no acceleration had occurred, a convincing argument can be made that the collection of late fees attributable to payments coming due and unpaid after the acceleration of the obligation are collectible as a matter of contract, permissible under North Carolina law (provided the statutory conditions are followed), and there is no violation of the FDCPA.  This is conditioned on the requirement that the late fee charged must not exceed 4%, and the servicer must provide a notice of late payment charge for each late payment charge it intends to make.

Servicers with a North Carolina portfolio of loans should confirm that their late fee collection procedures are in compliance with state law:

• Late fees do not exceed 4% of the missed monthly payment;
• A notice is provided to the borrower within 45 days following the date the payment was due that a late payment charge has been imposed for a particular late payment which late payment must be paid unless the borrower can show that the installment was paid in full and on time; and
• The fee may be charged only when each payment is past due for 15 days or more; provided, however, if the loan is one on which interest on each installment is paid in advance, no late payment charge may be charged until the payment is 30 days past due.

¹“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.”  GSE Note, ¶ 6(A).