Mortgage contracts generally allow a servicer—the company that handles the loan account—to charge late fees, inspection fees, foreclosure costs, and other default-related fees to your account under certain circumstances, like when you are late on a payment or are in foreclosure. If the servicer charges fee and costs in excessive or incorrect amounts, this will unfairly increase the total balance you owe on your loan. If this happens to you in foreclosure, you can challenge those fees and costs.
Read on to learn about how servicers assess late fees and other costs when you default on your mortgage, and how to challenge improper fees in a foreclosure.
If your mortgage payment is late, your servicer may charge you a late fee. But 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.
Here are some ways that can happen:
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, there shouldn't be 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 specifically authorized by the loan contract. The late charge amount is usually found in the promissory note. Even then, state law may limit the amount that can be charged. If the state limit is lower than what the contract allows, it will generally override the loan contract.
Example. 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 allowed by state law. In this situation, the late fee would be limited to 4% pursuant to state law. It is up to the borrower to make sure the servicer only charged 4% to the account, not 5%.
Limits on late fees. Late fees are often limited by:
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 covered by TILA.
Example. A borrower sends in a late mortgage payment after the grace period has expired, but does not include the late fee. Let's say the late fee assessed is $50. The borrower doesn't realize that she owes the extra $50, so the next month she sends the regular payment amount on time. However, the loan servicer applies $50 of this payment to the prior late fee, which makes the second month come up short and another late fee is then due. Under the terms of the mortgage and the law, the funds should have been applied first to principal and interest, and then to outstanding fees.
The servicer assesses post-acceleration late charges. In most cases, the servicer is prohibited from assessing late charges after the loan has been accelerated. (When a loan is "accelerated," you have to immediately pay the entire balance of the loan, not just the past due amounts. This sets the stage for the foreclosure procedure to begin.)
If you default on your mortgage payments (that is, you fail to make the mortgage payments), your loan servicer may assess particular charges to your account. Default-related fees typically include:
Some states limit the amount of fees that can be charged pursuant to a default. For instance, charges may be limited to reasonable expenses, including costs and 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, are not necessary.
The loan servicer may also assess costs for preserving the value of the property. For example, property preservation costs may include fees advanced to:
Most courts have held that such fees must be reasonable in order to be collectable from the borrower.
Generally, foreclosure costs must be reasonable and actually incurred before they are recoverable against the borrower. Acceptable foreclosure costs include, among others:
Most mortgages require the borrower to pay the lender's foreclosure attorney's fees as well. To be collectable, attorney's fees must be reasonable and actually incurred. Additionally, some states limit attorneys' fees in foreclosures.
Corporate advances are expenses paid by the servicer to be recovered from the borrower. Corporate advances may include bankruptcy fees or force placed insurance costs, for example. If undefined corporate advances appear on your account, you should contact your loan servicer for an explanation to ensure they are appropriate for inclusion in the total amount owed.
Borrowers may raise any number of defenses regarding improper late fees or other incorrect default-related fees. While some may constitute a full defense to the foreclosure, others will reduce the amount owed on the debt, thereby potentially decreasing any deficiency owed to the lender. (Learn more about deficiencies after a foreclosure.)
A few of the defenses that could potentially be raised are:
If you want to challenge the fees being charged in a foreclosure action, you should 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?