Late fee based on a percentage of the loan balance is void

[Peter Walther]

Honchariw v. FJM Priv. Mortg. Fund, LLC, 2022 WL 4544812 (Cal. Ct. App. Sept. 29, 2022)

I thought I'd post a link to this recent CA decision.  While it was decided by a CA court I wouldn't be surprised if the rational wasn't adopted by other courts.

HONCHARIW v. FJM PRIVATE | No. A163756. | 20220929022 | Leagle.com

[Peter Walther]

Quote from @Jeff S.:

Here a private lender tried to charge a 9.9% late fee against a missed monthly payment plus a 9.9% charge against THE ENTIRE LOAN BALANCE.

Considering that this was a particularly large $5.6M loan, with a nearly $40k monthly payment, the late fee went from a reasonable $4000 to seemingly over half a million dollars – for one missed payment!!!

How do you spell loan-to-own?

I actually thought this was resolved a few years ago with the CashCall decision. The court didn't find that a 98% interest rate was illegal in CA, but that it was invalid because it was unconscionable. As a result, our lending lawyer admonished his clients to be careful of unconscionable terms in their loan documents. Clearly, late penalties applied against the entire loan balance, not just what was owed that month, would be considered unconscionable.

I didn’t realize until I just reread the summary that the CashCall decision was for consumer-purpose loans. Most HMLs only make business-purpose loans, thus one reason for the decision you referenced, @Peter Walther. The lender argued, “… whatever the parties agreed to is lawful.” The court, not using the word “unconscionability,” found the borrowers, “… cannot be legally bound by an agreement to pay a late-payment fee that violates public policy.”

Unconscionability. Public policy. What’s the difference? It’s Idiotic lenders like this that give hard money lenders a bad name and get what they deserve. I certainly hope this decision is adopted by other courts.

I frequently found decisions based on the tension between what is "fair" and what the contract terms say when a court is asked to relieve a party of its obligations under a freely entered into agreement interesting.  I just searched for cases that the term "shock the conscience of the court" appears in.  I was shocked (pun intended) to find 2833 of them.