December 9, 1997
Gary R. Chandler, General Counsel
RTN Federal Credit Union
600 Main Street
Waltham, Massachusetts 02154
Dear Mr. Waltham:
You have asked whether Section 706.4(a) of NCUA Rules and Regulations,
which prohibits the practice of the "pyramiding of late fees"
in consumer loans, is applicable to real estate mortgage loans.
No, it is not.
You state that, according to most standard mortgage loan documents,
a lender is allowed to charge a late fee if a borrower fails to
make a timely loan payment. When a late fee is assessed, a lender
will apply the monthly loan payment first to the late fee, then
to escrow, interest, and principal. To illustrate, you gave an
example in which a borrower, whose monthly loan payment is $200,
has incurred a $10 late fee. The lender applies the first $10
of the $200 loan payment to the late fee, leaving $190 to be applied
to the mortgage. This causes the borrower to be $10 short on
the monthly loan payment. The following month the borrower makes
a timely monthly loan payment, but the lender assesses another
late fee because the lender still considers the borrower's loan
payment for the prior month to be delinquent. Thus, the lender
applies the following month's loan payment first to the second
late fee, creating a pyramiding of late fees.
Section 706.4(a) prohibits an FCU from pyramiding late fees in
consumer loans. A consumer is defined as "[a] natural person
who seeks or acquires goods, services, or money for personal,
family or household use." 12 C.F.R. �6.1(b). NCUA's
definition of consumer does not specifically exclude the purchase
of real property as does the Credit Practice Rule drafted by the
Federal Reserve Board, 12 C.F.R. �7.12(a). However, our
position is that, by definition, the terms "goods, services,
or money," do not include real property and, thus, Section
706.4(a) does not apply to real estate mortgage loans.
Sincerely,
Sheila A. Albin
Associate General Counsel
GC/NSW:bhs
SSIC 3500 / 97-0943