Unpaid late charges for late, but paid payments are excluded. For example, let’s say… a year prior to the default which leads to foreclosure, the debtor was late in making several payments and never paid any accrued late charges. Those late charges are not illegal as part of a foreclosure judgment and/or as part of the total debt due at the foreclosure sale. The reason these types of late charges are excluded and legal, is that they fulfill the legal purpose of a late charge.

The legal purpose of any late charges is principally to give the lender some compensation for the tardy payment in lieu of the additional daily interest the lender would have been entitled to on a strict interest bearing loan. (It also gives the debtor an easily computed amount to add to his regular payment if he makes his payment late. That is not relevant here). Obviously, in the case of unpaid late charges for late, but paid payments, these objectives have been met and these late charges are a debtor’s obligation for all purposes, including foreclosure judgment and foreclosure sale bid.

This is not true for unpaid late charges for late, but unpaid payments at the time of foreclosure judgment and /or as part of the total debt due at the foreclosure sale. The reason is that the above purpose is not fulfilled. Specifically, the mortgagor is not entitled to some compensation for the lost interest that would be due on a strict interest bearing note because mortgagees collect this interest by changing through judgment and/or foreclosure sale interest on a strict interest-bearing basis from the date of default leading to foreclosure judgment or sale. If, in addition, the mortgagee charges late charges, he is double dipping: he gets not only the additional interest that late charges are intended to replace, but, he also gets the late charge too! This situation is a consumer debtor’s attorney’s dream! The wrong is obvious for a class action and the deep-pocket mortgagees will be ordered to pay his fees!

For mortgagees, it must be obvious that this risk is not worth the meaninglessness of these late charges, Specifically, these illegal late charges are insignificant in the total debt-plus-cost amount. Therefore, why add them, especially, when the substantial penalties therefore are considered.

Even in the rare instance when a deficiency is permitted and pursued, it only exposes the mortgagee to substantial penalties for small gain (i.e. these illegal late charges). If you have any questions concerning Illegal Late Charges, please feel free to call us at your convenience.