Today, usury law is mostly a dead letter due to: Federal pre-emption (federally regulated mortgage lenders are not subject to state law limits), and State usury law reform In Missouri, parties can agree to any interest rate for: (1) A loan to a corporation, partnership, or LLC; (2) A business loan of => $5,000; (3) Loans secured by real estate, unless the real estate is residential and the lender is not a federally regulated lender [Can you spot the usury trap here?] Default Interest/Late Fees: Westmark Westmark Note: If the unpaid balance hereof is not received by Holder on the Maturity Date, or on the Acceleration Date, such amount shall bear interest at the Note Rate plus two (2%) per annum (the Default Rate )... [ Default interest ] Westmark Note: If any installment under this Note shall not be received by Holder on the date due, Holder may at its option impose a late charge of six percent (6%) of the overdue amount. [ Late fee ] Late Fees/Default Interest: Problem 5 Note has both default interest and late fee clauses, and Borrower is in default (> 20 days have passed since last installment date, w/out payment) Lender imposes the default interest rate, and also assesses a late fee on missed payment Is this double counting by the Lender (collecting twice for the same harm)? Default Interest and Late Fees Default interest is forward -looking; it compensates the lender for the lost opportunity cost (i.e., interest) on lender s investment of the principal Once borrower defaults (and usually after acceleration), default rate allows the lender to adjust to a rate more appropriate (as borrower has proven itself riskier ) Parties can agree to whatever rates they wish, subject to usury limits (which typically do not apply to most real estate mortgage loans) 1
By contrast, the late charge or late fee is backward - looking; it compensates the lender for: (1) Administrative expenses and costs incurred in handling late payments (extra servicing expense), and (2) Lost interest on the late installment itself (if the borrower had timely paid the installment, lender would have been able to invest it and earn return on it) B/c monthly payments are often composed of mostly interest (esp. early in loan term), imposing late fee and default interest isn t double counting (default interest accrues on principal) Westmark Consistent with great weight of case authority, court upheld both late charge, default interest provisions But: state statutes do commonly place maximum limits on late charges [note 7, page 621] RSMo. 408.140(1) ( If the contract so provides, a charge for late payment on each installment or minimum payment in default for a period of not less than fifteen days in an amount not to exceed five percent of each installment due... ) Satisfaction of Mortgage When the mortgagor pays off the debt, the lien of the mortgage is extinguished (it is no longer enforceable) But, if the mortgage still appears on the record, it is a cloud on the mortgagor s title (searchers can t tell whether it has been paid off or if lien is still effective) Thus, on receiving full payment, mortgagee must execute a release or satisfaction of the mortgage In many states (including MO), mortgagee must also record it Missouri Statute [RSMo. 443.130] Once mortgage is paid off, mortgagee must record satisfaction within 45 days after request by mortgagor If mortgagee fails to do so, mortgagee is liable for a statutory penalty of $300 per day, up to a maximum of 10% of the amount of the mortgage, plus court costs and attorney fees If satisfaction is rejected by the recorder, mortgagee has 60 days (following receipt of notice of rejection) to record a sufficient satisfaction 2
Payoff Letters/Statements Today, most mortgage notes are prepaid (before their originally scheduled maturity), either when (1) the mortgagor sells the mortgaged land, or (2) the mortgagor refinances the mortgage debt Mortgagor confirms the amount needed to make full payment of mortgage debt by obtaining a payoff statement from the lender (specifying amount of payment needed to satisfy debt) Common law: mortgage lender had no legal duty to provide a payoff statement (a confirmation of the balance of debt) Compare UCC 9-210 (requires secured party to confirm balance of debt upon written request, with $500 penalty if secured party fails to timely respond) Restatement of Mortgages 1.6 recognizes a legal duty to deliver a payoff statement; such a duty is also imposed by statute in some states In practice, lenders routinely provide payoff letters (sometimes charging fee, unless prohibited by statute) Suppose that in conjunction with sale of a home, Bank (holding a mortgage on the home) gives a payoff amount that is too low by $1,000, by mistake Buyer pays stated payoff amount and sale closes After the closing, can Bank enforce the mortgage against the Buyer? After the closing, can Bank collect the $1,000 remaining from the Borrower? Bank can still collect the remaining balance of the unpaid debt from the Borrower (assuming that Borrower is personally liable for the debt) However, Bank probably can t enforce the mortgage lien vs. Buyer, due to equitable estoppel Buyer relied on accuracy of payoff amount to complete the purchase, believing he would receive a clear title, thus changing his position in detrimental reliance Problem: payoff letters often state that they are subject to correction ; in that case, can Buyer reasonably rely on the payoff letter? 3
Default and Acceleration The first step in the foreclosure process is default and acceleration of the maturity of the debt Note usually gives the mortgage lender, at its option, the right to accelerate the maturity of the debt upon default (as defined by the loan documents) [note 1, page 679] See Fannie Uniform Note, 6(C), page 1435 Upon acceleration, the entire balance of debt becomes immediately due and payable; if not paid, mortgagee can commence foreclosure proceeding Acceleration Acceleration is a practical precondition to foreclosure Mortgage lien can only be foreclosed once (foreclosure extinguishes mortgagor s title and also extinguishes the foreclosing mortgagee s lien) It would make no sense for the mortgagee to conduct a foreclose sale just to collect past due installments (if it did, the rest of the debt would remain unpaid, and the land would no longer be subject to a mortgage lien to secure that unpaid debt) Acceleration (in Context) Acceleration clauses can have different effects in different agreements/contexts E.g., an acceleration clause in a lease has the effect (if enforceable) of accelerating the due date of all future rent payments under the lease (i.e., all future payments rent become due at once) E.g., acceleration clause in a mortgage does not accelerate future installments; instead, it accelerates the maturity (due date) of the unpaid principal balance Problem Crouch s home is subject to mortgage held by Bank Under Crouch s loan documents, his mortgage payment is due on the first of the month; it s now October 4, and Crouch hasn t made his payment for October Under MO law, Bank can t impose late fee unless Crouch s payment is more than 15 days late [RSMo. 408.140(1)] Bank is tired of Crouch s mess. Can Bank declare a default and accelerate Crouch s loan today (Oct. 4)? 4
Grace Periods Loan documents can (but do not have to) allow a grace period before borrower goes into default and lender can accelerate E.g., Note provides that Borrower shall pay installments by the 1 st of each month, but shall not be in default if payment is received within 5 days following the due date Under such a provision, Borrower could not be in default due to nonpayment until after the 6th Late Fee Clauses Note: Late fee provision in documents does not create an implicit grace period for late payments If payment is due by 1 st of the month, and the note defines any late payment as a default, a late fee provision does not create a grace period for nonpayment [See Fannie Note, 6(A), (B), p. 1435] Late fee provision merely ensures that the note complies with any state law statutory limit on the imposition of late fees Common law: after default, Mortgagee need not give Mortgagor notice (warning) and/or a right to cure prior to accelerating the debt, unless required by either (a) a state statute or (b) the loan documents In commercial mortgage loan docs, notice/right to cure is not common for payment defaults, but is typically included for nonfinancial defaults Compare Fannie Uniform DOT [ 22, p. 1455] Under 22, Mortgagee must give Mortgagor notice and a 30-day cure period, as a precondition to Mortgagee s ability to accelerate the maturity of the debt 5