Changing Late Payment Fees
By Amy Kudlacek
I have recently received a lot of questions regarding changing a late payment fee on a loan. I'm not sure if these banks are looking at ways to increase their fee income or it maybe it is just a coincidence. Either way, before you start increasing your late payment fees, there are some things to consider.
First you need to determine whether the change will be made to closed-end loans or open-end loans. Truth in Lending (Regulation Z) makes no mention regarding changing terms on existing closed-end loans. Thus, once you enter a closed-end loan agreement with a borrower, no changes can be made after the loan is closed, right? Not necessarily. You can always do a "loan modification agreement" or a "change in terms agreement" if you need to make changes to a loan. You will notice; however, that both of these documents include the word "agreement". This is because you cannot execute one of these documents unless the customer "agrees" to the change. I can't imagine that a customer is going to agree to let you increase their late payment fee. Additionally, to change these loans, you would have to prepare a loan modification agreement for each closed-end loan you want to change.
Since a customer giving permission seems unlikely and given the time it would take to implement the change if they did, it seems your only option is to implement the late payment fee on all NEW loans going forward.
With regard to open-end loans; however, Regulation Z does allow late payment fee changes. Section 226.9(c)(2) states that no notice...is required when the change involves late payment charges.... You can increase the fee and not even notify the customer. However, this may not be a good customer service practice.
Why are these two sections of Regulation Z so different regarding this topic? Who knows...that is why I love compliance! (Compliance professionals are kind of strange that way.)