Junk fees, junk fees, junk fees.
It seems like every other week our newsfeeds include a new proposed rule, advisory opinion, or enforcement action from specific federal agencies. The challenge facing financial institutions may be identifying what exactly the definition of a “junk fee” is. Now, I know what you are thinking, the various federal agencies have published remarks identifying their definition. However, I’d be willing to go out on a limb to say that there still is ambiguity, or that some bankers disagree with aspects of the junk fee initiative.
So, what should bankers focus on? If you missed my deposit-related junk fee Q&A, I invite you to take a look here. From a lending perspective, I’ve offered topics with practical relevance whether or not you agree with the junk fee initiative.
Late Fees
Consider whether your financial institution assesses late fees for real estate and non-real estate secured loans/lines if the borrower fails to make a scheduled payment before the grace period ends. It may be common practice for the credit agreement/note to have late fee contract language in which the fee “will be a percentage of the unpaid amount of the payment, or a fixed amount (i.e., $25), whichever is greater.” If your financial institution uses similar language, validate that the system calculating the late fee amount calculates it consistently with how the agreement/note contract language reads for all products. Why complete this exercise? The Consumer Financial Protection Bureau (CFPB) has found examples of inconsistencies between how the system was set up and how the agreement/note contract language discloses the calculation of a late fee.
Minimum Loan Payments
You may recognize a common theme, but consider how your financial institution assesses the minimum loan payment amount for real estate and non-real estate secured open-end products. Have you ever validated that the system calculating the minimum payment amount calculates it consistently with how the agreement/note contract language reads for all open-end products? Do you have any products where the minimum payment language within the agreement/note reads as the “greater of a percentage of the outstanding balance at the end of the monthly billing cycle plus finance charges, or a fixed amount plus (i.e., $25) finance charges”? Consistent with the above example, the CFPB has found instances of inconsistencies between how the system was set up versus how the agreement/note contract language discloses the minimum payment amount.
Finance Charges
Let’s talk about when finance charges begin to accrue. I know we are focusing on the agreement/note language, but please keep in mind that there may be specific state law requirements to consider. Let’s use a home equity line of credit product as an example. The agreement’s contractual details may contain language such as, “a finance charge begins to accrue on the day an unpaid balance is due on your account.” Let’s also assume a Massachusetts financial institution wrote this line, that the borrower is advancing a draw at the time of consummation, and that the borrower has rescission rights. State law prohibits the finance charge beginning to accrue during the rescission period. However, have you ever validated that the system is truly beginning to accrue the finance charge after the rescission period ends?
If your institution has further questions on the junk fee initiative, Wolf’s Compliance team is here to assist!
