To the world at large, this seems a small and obscure subject. In part, though, because across a substantial portfolio the numbers really add up, late charges are indeed important and a number of recent requests for clarification of this subject throughout the servicing industry underscores the point. (For some reason, late charges have lately come into many a servicer’s spotlight.)
We note first that explaining all the nuances of late charges would make this a mini-treatise and the goal here is to effortlessly enlighten, not overwhelm with minutiae. So for those needing further detail, attention is invited to some earlier articles on the subject: “Late Charges Can Amount to Big Bucks”, 5 Servicing Management 37 (February, 1994); “Confirmed at Last — Yes Virginia, There are Late Charges, And In New York Too”, New York Law Journal, January 26, 1994, at 5, Col. 2.; “Court Rules on Late Charges — in New York, If a Borrower Doesn’t Pay Assessed Late Charges, You Can Foreclose — But Do You Want To?” 10 Servicing Management 32 (September, 1998).
To be sure, issues, concepts and details about late charges will vary from state to state and will be a function of case law and/or statute in each of the jurisdictions
Presented here will be some vital issues explaining late charges in New York, by virtue of which, aspects to be pursued in other states will be underscored.
So, to some Q and A as an efficient way to cover the subject.
Q. Are late charges collectible in New York?
A. Absolutely, although for residential properties the borrower needs to be afforded at least a 15 day grace period. (There was an errant case in the 1980s which suggested late charges could not be assessed, but it was wrong and has since been discredited.)
Q. Is there a limit on the amount of late charges?
A. Yes. Statute (RPL §254-b) caps late charges for residential buildings (up to and including six families) at 2% of each late installment. There is no ceiling for non-residential property and federally chartered lenders are not bound by the cap.
Q. Can late charges be assessed beyond the moment of acceleration?
A. No, and this tends to be the most common servicer miscue. Late charges are deemed to be compensation to a lender (or servicer) for pursuing tardy remittances. Upon acceleration, there are no longer any periodic installments to collect (the entire balance has been declared due) and hence, no payments to which late charges can apply.
Q. When does acceleration occur (for purposes of cutting off further late charges)?
A. Acceleration is effective when a valid acceleration letter is sent (by the servicer or by servicer’s counsel) — this letter not to be confused with the breach or 30-day cure letter. If an acceleration letter is not sent, acceleration occurs when the complaint is filed with the court, so long as it contains a declaration of acceleration — which is standard.
The inquiry which is likely inherent in many questions servicers ask about late charges may be how to treat late charges when there is a reinstatement. If a mortgage is satisfied — that is paid off in full — late charges ended upon acceleration and there is nothing more to say. But if the mortgage is reinstated, then in essence there has been a de-acceleration. Then, past due installments are being accepted.
Although no case law on the subject can be offered, mindful of the purpose of late charges, it appears that they should apply in the instance of a reinstatement (whether via a forbearance agreement or just one large payment). Because this is in any event a logical approach, late charges after acceleration and upon reinstatement have been collected in literally thousands of cases in New York without incident. That nothing untoward has ever been encountered in the past on this point doesn’t necessarily make the rule, but suggestion can be made that it is both rational and correct.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.