Setting a Precedent

Disclaimer: I am not an attorney, none of the ideas here should be considered legal advice.

I had a call from a customer a few weeks back where they wanted payments not to pay fees, but rather to pay interest and principal first.  The borrower was paying only the principal and interest payment, and was consistently late.  The customer was thinking that at some point the fees would eventually get paid through some kind of supplemental payment or maybe sit there until payoff.  They said they had seen that banks will do it that way, having a payment affect the principal and interest first and then pay the late fee.

I brought up a few reasons why we should let Moneylender apply the payment to the fees first, then interest then principal.

Banks will almost always foreclose on a first mortgage after 90 days.  I have plenty of customers that service their loans with Moneylender Professional that will start foreclosure within days of hitting a 90-day delinquency.  Legally, that’s what lenders are allowed to do, and if the real estate market is declining, or a lender had any reason to suspect that the property might lose value over time, this is the only sound course of action.  Foreclosing in these circumstances actually protects the borrower from piling up delinquent debt as the collateral asset loses value.  If sold at peak value, the surplus beyond the loan’s payoff goes to the borrower.

However, many lenders like my friend on the phone will work with a borrower to avoid foreclosure and set up very lenient reinstatement terms on the loan well past the 90 day mark.  If you fall into this category, be sure to put the reinstatement terms into writing and have the borrower sign it.  If you will not be exercising your right to foreclose at 90 days into default, but still want to collect the late fees, be up front that you are collecting the late fees.  If the late fees make the borrower appear even more delinquent because they haven’t paid them, it only further punctuates the borrowers need to change their payment strategy or reassess their debt.

Avoid having to explain the large accrued fees balance at the time of payoff.  Especially if the borrower has been paying on time for a couple years after the late fees piled up.  I’m a big advocate of clearly communicating the status and expectations on the loan at all times.  The balance regularly shown to the borrower should closely represent the actual payoff balance.  No surprise balances in the thousands of dollars lingering on the loan to pop up when the borrower thinks they’re ready to pay and close the loan.

Sets a precedent that might be interpreted as waiving the late fees.  If you accept a payment without the late fee, and the amount due on the loan for next month doesn’t include the late fee, you have essentially waived the late fee.  Most late fee clauses state that the late fee is due and payable immediately after the grace period ends.  If you make the late fee not collectable, you are ignoring that part of your contract and possibly setting yourself up to have to waive late fees later.

Always let your borrower know about the timeliness and sufficiency of payments, especially at the outset of underpayment, will help the borrower set their priorities correctly so the loan doesn’t become a non-performing burden to the lender.  Stick to the terms of the contract to avoid confusion or expectation creep.

Your loan is itself an asset.  It loses its value if the borrower underpays and falls behind.  Like a home requires maintenance to keep its value, ensuring your borrowers are receiving consistent and clear communication can only help your loans remain at full value and keep your revenue from the loan consistent.  You don't want the debt to go bad and become uncollectable!

Moneylender’s mechanisms to apply payments are designed to apply the payments as fairly as possible, but also in a way that will be thoroughly enforceable and collectable.  Once your loan’s terms are configured in Moneylender, it will apply payments such that you can easily demonstrate what you collected and how you rightfully credited it toward the borrower’s accounts.  Moneylender customers have gone through audits, lawsuits and foreclosures to the satisfaction of judges, auditors, and lenders alike.