Opinion ID: 378909
Heading Depth: 2
Heading Rank: 3

Heading: Late payment charges

Text: 12 The disclosure statement which the Vegas received from First Federal reflected the basic finance charge on the loan. In addition, it indicated that if a monthly payment was not received within fifteen days of its due date, a late payment charge equal to 4% of the monthly payment would be assessed. The Vegas contend that this late payment charge represented an additional finance charge which should have been included in the computation of the basic finance charge. 13 The Truth in Lending Act requires that the finance charge on the loan and any delinquency, default, or late payment charges be disclosed separately. The distinction between the two types of charges is defined at 12 C.F.R. § 226.4(c). 14 (c) Late payment, delinquency, default, and reinstatement charges. A late payment, delinquency, default, reinstatement, or other such charge is not a finance charge if imposed for actual unanticipated late payment, delinquency, default, or other such occurrence. 15 Through its official staff interpretations, the Federal Reserve Board has to some extent clarified this definition. 16 Because the distinction between late payment and finance charge depends upon the unique interplay of facts in each individual case, staff cannot provide an exhaustive list of factual criteria. Two generalized statements, however, can be made. A charge assessed for late payment is distinguishable from a finance charge in that it is imposed for an actual and unanticipated event and the ultimate evidence of the nature of a charge imposed is an objective viewing of the course of conduct between your client and each of his customers. 17 Insofar as the particular requirements of Interpretation § 226.401 are concerned, staff is of the opinion that the interpretation does not require termination of your client's service to his intermittently delinquent customers as a sine qua non to meeting the test set forth in § 226.4(c). On the other hand, continued imposition of late charges on a delinquent account, without taking positive action to collect the account, including eventual termination of additional credit privileges, would result in viewing such late charges as finance charges. 18 Official Staff Interpretation No. FC-0060. 19 The distinction between a late payment charge and a finance charge has generally been applied in determining whether a transaction was subject to the requirements of the Truth in Lending Act. In Kroll v. Cities Service Oil Company, 352 F.Supp. 357 (N.D.Ill.1972), Cities Service Oil Company billed its credit card holders on a monthly basis. If the bill was not paid within sixty days, a monthly charge of 1 1/2% of the unpaid balance was assessed until the account was paid in full. The customer, however, was allowed the continued use of his credit card. As a defense to an action brought under the Truth in Lending Act, Cities Service contended that its monthly charge was a late payment charge rather than a finance charge and that therefore it was not a creditor within the meaning of the Act. The district court, relying on the fact that delinquent customers were still allowed to use their credit card, held that the monthly charge represented a finance charge. Accordingly, the court concluded that Cities Service was subject to the requirements of the Truth in Lending Act and that the proper disclosures were necessary. Other courts have confronted this same question in the same context of determining the applicability of the Act and have, under different factual circumstances, reached different conclusions. See Bright v. Ball Memorial Hospital Association, Inc., 463 F.Supp. 152 (S.D.Ind.1979); Rootberg v. American Express Company, 352 F.Supp. 949 (S.D.N.Y.1972); Garland v. Mobil Oil Corporation, 340 F.Supp. 1095 (N.D.Ill.1972). 20 But, in this case, the distinction between a finance charge and a late payment charge arises in a slightly different context. It is not the necessity of disclosure but the manner of disclosure that is in dispute. We find it difficult to characterize the charge in this case as anything but a late payment charge. The residential loan involved a single extension of credit payable in uniform monthly installments over a long period of time. If a monthly installment was not paid within fifteen days of its due date, a single charge of 4% of the installment was assessed. In the context of a residential loan, a delinquent payment clearly is unanticipated within the meaning of 12 C.F.R. § 226.4(c). Accordingly, we conclude that the charge in this case was not a finance charge. 21 Any other conclusion would undercut the very foundation of the Truth in Lending Act. The purpose of the Act is to insure meaningful disclosure of credit terms. If the finance charge contained in a disclosure statement reflected both the actual finance charge and a potential charge such as the one in this case, a consumer would not be informed of the amount that he was required to pay. That amount would vary according to the extent to which he made his payments in a timely manner. The basis of the distinction between a finance charge and a late payment charge is that one represents an actual unavoidable charge while the other one simply represents a potential charge. The separate disclosure of both types of charges provides a consumer with an accurate picture of his obligations. Any attempt to combine these charges in a single figure would distort that picture. The disclosure statement received by the Vegas reflected both the actual finance charge and the potential charge in the event of late payments. Under the circumstances of this case, we believe that the separate disclosure of these charges was consistent with the purposes of the Truth in Lending Act.