Suggestions needed to get performing borrower to pay late fees?

Question

We purchased a first position NPL on a single family home in Charlotte NC a few years ago and did a loan mod with the borrower. He was paying consistently until last Spring where he missed 2 months of payments then started paying monthly again, but his payments are now about 85 days late ongoing. Apparently he knows that if he stays under 90 days, we cannot file a NOD for foreclosure. Because each payment is considered late, FCI is imposing the late fee of 10% as stated in the original loan docs and this has accumulated to over $350 currently plus unpaid advance of >$1,200 for taxes. He gets regular statements showing this outstanding amount.

Since he is not technically in default for FC, does anyone have any suggestions for strategies to "encourage" him to get caught up on his late fees and the advance we made for taxes? Fyi, his current monthly payment does include impounds for T&I.

Bob

Tiger M. · Answer

@Bob MaleckiSounds like its time for a phone call or certified letter. You do not have to accept partial payments. Borrower should be informed that the arrears are due and any funds will be applied to the taxes and late fees so you suggest a payment plan that increases the monthly payment until settled. Thats a starting place. I assume you don't want to file fcls and prefer him to perform.

Dion DePaoli · Answer

Bob,Pyramiding late fees is prohibited. A late fee may only be applied according to the date by which the payment is delivered to the Servicer congruent with the note terms. So in Jan a payment is late and the fee is assessed. In February the borrower sends in a normal payment (not including the late fee) on time. February can not bear a late fee. Only January's late fee exists. This is true even though one may look to Feb's payment and attempt to devise that the application of funds to pay for Jan's late fee come from Feb's payment and now Feb's payment is less than full and thus a late fee should be charged. This would then result in two late fee charges now. You can not do that. Your Servicer should know better than to allow this. A payment is considered full if the amount delivered is the amount specified in the note or modification which may include escrow items. Late fees and advance recovery are not considered in this idea. Or, another way to say this all is, a Borrower can not be deemed late for failure to pay a late fee or advance amount. A Notice of Default on a Consumer loan can not be issued prior to 120 days late, not 90. When the loan went 60 days late your Servicer was supposed to have assigned the loan to a single point of contact and issue a letter discussing the alternatives to foreclosure. The Servicer is obligated to make "live" contact with the Borrower when this level of delinquency has occurred. These loss mitigation options can include, among other ideas, that the Borrower file for payment relief by submitting a proper application and supporting documentation. When it comes to payment Suspense and denial with return of payment, you need to read your note and ensure you and the Servicer understand the hierarchy of payment application. A partial payment can be put in suspense but must be applied to the account when it reaches full payment amount. The alternative to this procedure would be returning the payment to the Borrower requesting that only a full payment be made. I am not going to dive too far into this as it sounds like you are pyramiding late fees and causing the partial payment which again - you can not do. Taxes that go unpaid can be a breach of contract however proper notice and plenty of warning must take place before embarking down that road. You can not simply roll out a foreclosure notice because taxes went unpaid. Notice and time to cure must be granted. Further, you need to make sure you have the stated provision in your note.A borrower with a rolling late is frustrating. It causes the monthly servicing fee to increase reducing investor yield. It devalues the loan. The real line of defense is contact with the borrower not really shock and awe. Does this provide a haven for borrowers to live in where they are perpetually rolling late? Yes. That is why "live" contact is your first line of defense through your Servicer. "Mr. Jones, I am Dion with XYZ Servicing, we see here your loan account with us is delinquent and I am hereto help you get caught up.""I see you are 2 payments behind totaling $XXX.XX I would like to work with you catching that amount back up. Paying late every month negatively affects your credit. You also teeter on the brink of foreclosure.""Blah, blah,....can you agree to include an additional $XXX.XX in your monthly payments so we can start to pay down the delinquent payments?"Yes, No...etc....you get the idea. Probably want to avoid using the "blah, blah" part as they won't understand that.Good Luck.

Jay Hinrichs · Answer

@Bob Malecki in every Deed of trust or mortgage I have originated over the years and or read.. non payment of tax's is an event of default and foreclosure can commence.. now not sure with the new fed guidelines on how late the tax's have to be to start foreclosure.as for late fee's I wrestled with this for 30 years in this business.. I just accrued them all and when the payoff demand came in.. I collected them all then.. other wise no release.. not worth my time or energy or thought process to chase little dollars on a monthly basis. But as @Tiger M. states you can refuse the payments since they are only partials and foreclose as well.. again though in my mind to foreclose over late fee's is jumping over dollars to collect pennies. and at the end of the day if I never got a late fee what the heck.. they could use it more than me.. its not going to change what I do were I eat were I travel the quality of the wine I buy etc etc.. I am just joking of course but you get the drift... repositioned buyers frankly act many tiems more like renters.. and the redefault over time is pretty high 50% or better from what I expeirnced. in my stuff here in Oregon but that could be even higher in lower value assets out east.

Dion DePaoli · Answer

@Bob MaleckiThat is not enough of the data to make any determination. It is not clear what is happening in each entry. It is also not clear if there is a uniform application of policy. Why in the beginning of the schedule such as due for May paid in July is there a fee which is assigned then removed or paid? Was the fee waived? Was the fee paid? Did the fee reduce interest and principal application?If the fee is eroding the payment, which we can't see due to lack of columns (not asking for any further disclosure), then that fee can be contested by the borrower as that would be pyramiding. Further, there is a variance among states in the how a rolling payment is assessed in a late fees. Some states will look at March 2015 payment and say late fee is OK. The payment was received after the grace period made within the period. However, for all the other months in the schedule the payments were received within the grace period and therefore can not be assessed a late fee. Even though, those payments are being applied to past due months. Example: Payment due 5/15 is missed. Late fee assessed on 5/16. Payment made on 6/4. No late fee can be assessed for June since the payment received was within the grace period of 15 days for June. The payment is considered a June payment. June's payment is then applied to May making the loan due for June. Further understand, that late fees in some states are thrown out upon acceleration. In other states late fees no longer accrue. In some states, late fees are treated as interest and in other states late fees are not. Point is, there is more to the picture and it is not all the same from state to state and how things are applied and work.(Shocking, I know)

Bob Malecki · Answer

Hi @Dion DePaoli see below screen shot the schedule of payments received vs due. I would assume that since his note states anything after 15 days is late, this is not pyramiding. Do you concur?

Bob Malecki · Answer

Thanks for the detailed insights Dion, much appreciated. We have reached out to the borrower but I think he knows the game and is just keeping under the wire for any adverse actions. I'll contact my servicer to see what they say about the constant late fees and pyramiding. Bob

Bob E. · Answer

Send a demand letter and accept nothing less then full payment to get current. Then he either pages or your foreclose.

Jay Raught · Answer

Can you cut some of the arrears off he he makes on-time payments? Maybe that will keep him from playing the 85 day game. That would constitute a new work out though I would think...