Challenging Late & Other Fees in Foreclosure

Mortgage contracts generally allow a loan servicer to charge late fees, inspection fees, foreclosure costs, and other default-related fees to your account under certain circumstances, like when you're late on a payment or are in foreclosure. If the servicer charges fees and costs in excessive or incorrect amounts, the total balance you owe on your loan will unfairly increase.

So, you can challenge improper fees and costs in response to a foreclosure.

Late Fees

If your mortgage payment is late, your servicer may charge you a late fee.

What Is a Standard Late Payment Fee?

Most prime, conventional loan contracts allow the loan servicer to assess a late fee equal to 5% of the payment due. However, state law may limit the fee to, say, only 4%. If the loan documents and state law allow for different late fees, the servicer can only charge the maximum state law allows.

Limits on Late Fees

Late fees are often limited by:

• the dollar amount that may be charged (typically a maximum of $10 or $15)
• the percentage of the payment that may be charged (generally 4% or 5%)
• the date on which the late charge can be assessed, and
• the payment amount on which the late charge is calculated. (For example, the late charge might be based on a percentage of the entire amount of the payment due, including principal, interest, taxes, and escrow amounts or it might be calculated based on a percentage of just the principal and interest due.)

What Are Some Examples of Improper Late Charges?

Servicers sometimes incorrectly assess late fees, either inappropriately or in the wrong amount, which can add hundreds of dollars on to the amount you owe on the mortgage loan.

The servicer assesses a late charge during the grace period. Most mortgage contracts include a "grace period" of around ten or fifteen days. If you make your payment late, but during the grace period, the servicer shouldn't charge you a late fee.

The servicer delays posting your payment to your account. If the loan servicer delays posting your payment to your account until after the grace period ends, it can also result in an improper late fee.

The servicer assesses an incorrect late charge amount. Late fees can only be assessed in the amount that the loan contract specifically authorizes. The late charge amount is usually found in the promissory note.

The servicer illegally "pyramids" late fees. In some cases, servicers charge borrowers late fees on full payments that were made on time because the borrower didn't include a payment for a previously unpaid late charge. "Pyramiding" occurs when the loan servicer takes the assessed late fees from the regular payment and leaves part of the scheduled payment overdue, which results in the assessment of another late charge. When the servicer does this, more and more late fees accumulate.

Federal regulations, state law, and mortgage contracts usually prohibit this practice. According to the Federal Trade Commission, pyramiding of late fees is unfair to consumers. Regulation Z, which implements the Truth in Lending Act (TILA), also prohibits the pyramiding of late fees for mortgages that TILA covers.

The servicer assesses post-acceleration late charges. In most cases, the servicer is prohibited from assessing late charges after the loan has been accelerated.

Default-Related Fees

If you default on your mortgage payments, your loan servicer can usually assess specific charges to your account. Default-related fees typically include:

• property inspection fees
• property preservation costs
• foreclosure costs and fees, and
• miscellaneous corporate advances.

Some states limit the amount of fees that can be charged pursuant to a default. For instance, charges might be limited to reasonable expenses, including costs and fees.

Property Inspection Fees

Most mortgage contracts allow the servicer to take necessary steps to protect the lender's rights in the property, including conducting property inspections to determine the physical condition or occupancy status of the mortgaged property. Inspections are generally ordered automatically once the loan goes into default. The charges for the inspections are then added to the total mortgage debt.

The amount charged for each inspection, which is generally drive-by in nature, is typically minimal ($10 or $15). However, inspections might be performed monthly or more often, so the charges can add up quickly.

Some courts have found that repeated inspections when the servicer is in contact with the homeowner, knows the property is occupied, and has no reason to be concerned about the condition of the property, aren't necessary.

Property Preservation Costs

The loan servicer may also assess costs for preserving the property's value. For example, property preservation costs might include fees the servicer advanced to:

• winterize the home
• replace locks
• repair windows
• restore utilities, and
• landscape the property.

Most courts have held that such fees must be reasonable to be collectable from the borrower.

Foreclosure Costs and Fees

Generally, foreclosure costs must be reasonable and actually incurred before they're recoverable against the borrower. Acceptable foreclosure costs include, among others:

• auction advertisements
• sheriff's costs
• filing fees
• service of process, and
• certified mailings.

Most mortgages require the borrower to pay the lender's foreclosure attorneys' fees as well. To be collectable, attorneys' fees must be reasonable and actually incurred. Additionally, some states limit attorneys' fees in foreclosures.

Miscellaneous Corporate Advances

Corporate advances are expenses the servicer paid, which it can recover from the borrower. Corporate advances might include bankruptcy fees or force-placed insurance costs, for example.

If undefined corporate advances appear on your account, contact your loan servicer for an explanation to ensure they're appropriate for inclusion in the total amount owed.

Challenging Fees in Foreclosure

Borrowers may raise any number of defenses regarding improper late fees or other incorrect default-related fees in defense to a foreclosure. While some of these issues might constitute a full defense to the foreclosure, others will reduce the amount owed on the debt, thereby potentially decreasing any deficiency the borrower owes to the lender following the foreclosure.

A few of the defenses that could potentially be raised are:

• breach of contract
• violation of state usury laws
• unfair and deceptive acts and practices
• unjust enrichment
• negligent servicing
• breach of fiduciary duty, and
• breach of good faith and fair dealing.

Hiring a Foreclosure Attorney

If you want to challenge the fees the servicer is charging in a foreclosure action, speak to a qualified attorney who can advise you what defenses are available for your particular situation. Loan servicing records can be difficult to interpret and reconcile, so be sure the attorney is familiar with how to read loan servicing communication logs and payment histories.

For more information on challenging a foreclosure in court, see our article Should You Fight Your Foreclosure in Court?