What is the name for this creditors' practice?
March 5, 2014 2:41 PM Subscribe
Is there a commonly used term for the practice of a creditor (particularly a landlord) applying a payment to several separate outstanding balances in such a way as to create artificial shortfalls in the balances and thus allow the charging of additional late fees?
Example:
Let's say my rent is $100 with a $10 late fee.
I pay January's rent late. I pay February's rent on time, but I have not paid the $10 late fee I incurred for February.
Instead of applying my $100 check to February's rent, the landlord applies $10 to the January late fee and $90 to February's rent. Now he can claim that February's rent was not paid in full in time, and so charge me a new $10 late fee, for a total outstanding balance of $20 ($10 for the "shortfall" in February's rent payment and the $10 late fee for February).
I know that some states prohibit or regulate this practice, and I have a vague memory that at least one of the financial reform bills which were introduced in Congress after the credit crunch also had some provision about payments being applied in the way most advantageous to the debtor (I don't recall whether this was for creditors in general, landlords specifically, or some other specific class of creditor).
I'd like to know what this practice is called so I can research its legality in my jurisdiction. (If you have specific sources that talk about its legality the context of a Chicago lease subject to the RLTO, that would be useful too.)
Example:
Let's say my rent is $100 with a $10 late fee.
I pay January's rent late. I pay February's rent on time, but I have not paid the $10 late fee I incurred for February.
Instead of applying my $100 check to February's rent, the landlord applies $10 to the January late fee and $90 to February's rent. Now he can claim that February's rent was not paid in full in time, and so charge me a new $10 late fee, for a total outstanding balance of $20 ($10 for the "shortfall" in February's rent payment and the $10 late fee for February).
I know that some states prohibit or regulate this practice, and I have a vague memory that at least one of the financial reform bills which were introduced in Congress after the credit crunch also had some provision about payments being applied in the way most advantageous to the debtor (I don't recall whether this was for creditors in general, landlords specifically, or some other specific class of creditor).
I'd like to know what this practice is called so I can research its legality in my jurisdiction. (If you have specific sources that talk about its legality the context of a Chicago lease subject to the RLTO, that would be useful too.)
This is not really transaction ordering and I'd be a little bit surprised if it were actually illegal anywhere.
You're looking at "January Rent" and "February Rent" and "January Late Fee" as distinct things that you can pay. They might even be tracked that way in the accounting software.
But, to the landlord, those are three distinct events which influence one thing: your account balance. Every month, on a certain date, if your account balance is negative, you get hit with a late fee.
It is possible to regulate this, of course, and force landlords to allow people to pay rents and fees separately . . . at which point the landlord is just going to put language in your lease that says that all late fees are due within 30 days and failure to pay those generates a late fee as well. All you've really done here is increase force an increase in the surface area of things that can generate fees. (Many leases already contain language that basically says if you're behind more than X days, you start incurring daily penalties).
On a quick perusal of RLTO, nothing jumps out at me as regulating this sort of (incredibly common to basically all debtor/creditor situations) practice, but a licensed attorney in your jurisdiction can give you a more definite answer and advice on how to handle the fees.
posted by toomuchpete at 3:04 PM on March 5, 2014
You're looking at "January Rent" and "February Rent" and "January Late Fee" as distinct things that you can pay. They might even be tracked that way in the accounting software.
But, to the landlord, those are three distinct events which influence one thing: your account balance. Every month, on a certain date, if your account balance is negative, you get hit with a late fee.
It is possible to regulate this, of course, and force landlords to allow people to pay rents and fees separately . . . at which point the landlord is just going to put language in your lease that says that all late fees are due within 30 days and failure to pay those generates a late fee as well. All you've really done here is increase force an increase in the surface area of things that can generate fees. (Many leases already contain language that basically says if you're behind more than X days, you start incurring daily penalties).
On a quick perusal of RLTO, nothing jumps out at me as regulating this sort of (incredibly common to basically all debtor/creditor situations) practice, but a licensed attorney in your jurisdiction can give you a more definite answer and advice on how to handle the fees.
posted by toomuchpete at 3:04 PM on March 5, 2014
Response by poster: I'd be a little bit surprised if it were actually illegal anywhere
Here is an example in the North Carolina General Statutes:
posted by enn at 3:10 PM on March 5, 2014 [1 favorite]
Here is an example in the North Carolina General Statutes:
(b) A late fee under subsection (a) of this section may be imposed only one time for each late rental payment. A late fee for a specific late rental payment may not be deducted from a subsequent rental payment so as to cause the subsequent rental payment to be in default.Chicago has such a reputation for tenant-friendly laws that I wouldn't have expected it to be less tenant-friendly in this case than a fairly laissez-faire red state like North Carolina, but I guess maybe it is.
posted by enn at 3:10 PM on March 5, 2014 [1 favorite]
Best answer: This is not covered in the Chicago RLTO (it's chapter 5-12 here--this page uses frames, so I'm not sure the link is going to work), so I think this may be a situation where the lease governs. The RLTO caps late fees, but it does not impose rules about how future payments are to be applied when a renter accrues--then fails to pay--a late fee. I know that the lease I use specifies how future payments work when there is an unpaid late fee.
This is also not covered in the Landlord Tenant Act in the state statute ((765 ILCS 705, et seq) nor the bit the part of the civil code that covers evictions (735 ILCS 5/9).
You might try contacting the Illinois Tenants Union or CARPLS hotline or LAF to see if any of them have a definitive answer.
posted by crush-onastick at 3:52 PM on March 5, 2014
This is also not covered in the Landlord Tenant Act in the state statute ((765 ILCS 705, et seq) nor the bit the part of the civil code that covers evictions (735 ILCS 5/9).
You might try contacting the Illinois Tenants Union or CARPLS hotline or LAF to see if any of them have a definitive answer.
posted by crush-onastick at 3:52 PM on March 5, 2014
I've heard of this practice among Credit Card companies. I worked for one in my late teens and found it was very common for the company to apply payments how they see fit - mostly by applying it to fees and the portion of balance covered by lower interest rates first - so if someone had a revolving credit balance of $1,000 at 11% and a balance transfer of $2,000 at 5%, the payment would be applied to the $2,000 first - leaving the $1,000 balance to generate higher interest for them to collect for the next billing cycle.
When people would call in for late fees or over limit fees, they generally had to pay 2 late fees (because by the time you get your statement, you're generally already in a new billing cycle) - if they were over-limit, it was 2 over-limit fees + next payment + interest just to bring the account back under the limit (getting back under your limit was, obviously, next to impossible for many people). It's very shady stuff and definitely needed to be addressed by tighter controls since the credit card company will happily keep your account over-limit or past due for as long as they legally can.
But I've never heard of this practice outside of creditors - and it's unlikely to be illegal in most areas. As someone else mentioned, the landlord may not be looking at things in such clearly defined categories - you view it as Jan. rent, Jan. late fee, Feb. rent, Feb. late fee, ect. and landlord may be viewing it simply as Jan. Balance, Feb. Balance. If your 'balance' for January includes the $10 late fee that went unpaid - per the landlord, you still have a balance of January left unpaid, and so your next payment will pay the outstanding balance first. This makes sense to me, otherwise, what would stop someone from simply racking up late fees and never paying them?
posted by stubbehtail at 4:39 PM on March 5, 2014
When people would call in for late fees or over limit fees, they generally had to pay 2 late fees (because by the time you get your statement, you're generally already in a new billing cycle) - if they were over-limit, it was 2 over-limit fees + next payment + interest just to bring the account back under the limit (getting back under your limit was, obviously, next to impossible for many people). It's very shady stuff and definitely needed to be addressed by tighter controls since the credit card company will happily keep your account over-limit or past due for as long as they legally can.
But I've never heard of this practice outside of creditors - and it's unlikely to be illegal in most areas. As someone else mentioned, the landlord may not be looking at things in such clearly defined categories - you view it as Jan. rent, Jan. late fee, Feb. rent, Feb. late fee, ect. and landlord may be viewing it simply as Jan. Balance, Feb. Balance. If your 'balance' for January includes the $10 late fee that went unpaid - per the landlord, you still have a balance of January left unpaid, and so your next payment will pay the outstanding balance first. This makes sense to me, otherwise, what would stop someone from simply racking up late fees and never paying them?
posted by stubbehtail at 4:39 PM on March 5, 2014
As a landlord, I would not have accepted the January's late rent, unless it is paid in full including the late fee. Every day that it is not paid in full, it is late, and late fee is added on.
If you still had not paid the full amount for January by the time February's rent is due, you would probably see a "pay or evict" notice on your door.
The reason is that where I am, *any* acceptance of rent payment, full or partial, means that I'm letting you stay for the month, thus forfeiting my rights to evict you for some more time.
So I'm not sure what you propose is even legally possible for rent.
posted by ethidda at 4:44 PM on March 5, 2014
If you still had not paid the full amount for January by the time February's rent is due, you would probably see a "pay or evict" notice on your door.
The reason is that where I am, *any* acceptance of rent payment, full or partial, means that I'm letting you stay for the month, thus forfeiting my rights to evict you for some more time.
So I'm not sure what you propose is even legally possible for rent.
posted by ethidda at 4:44 PM on March 5, 2014
Response by poster: For the benefit of anyone finding this in the future, apparently one term for this is stacked late fees, though it doesn't seem to be in especially wide use.
posted by enn at 4:44 PM on March 5, 2014
posted by enn at 4:44 PM on March 5, 2014
In Texas, this is covered in the standard lease agreement if I'm reading your example correctly.
Your laws may vary, IANA/YL, etc.
posted by cmoj at 5:21 PM on March 5, 2014
D. Application of Funds: Regardless of any notation on a check, Landlord may apply funds received from Tenant first to any non-rent obligations of Tenant, including, but not limited to, late charges, returned check charges, repairs, brokerage fees, periodic utilities, pet charges, and then to rent.You paid your January rent late without paying the late fee. So when February rolls around you owe $110 (the original $10 late fee plus February's $100 rent). When you give your landlord $100 the next month, the money is first applied to the $10 you already owed. Funds are applied to debt in the order that the debt was incurred.
Your laws may vary, IANA/YL, etc.
posted by cmoj at 5:21 PM on March 5, 2014
It may not exactly be this term, but it may be in the ballpark: pyramiding of late fees. The Dodd Frank stuff you may be thinking of would be under the legislation relating to "servicing" and "servicers."
posted by yeahyeahyeah at 5:35 PM on March 5, 2014
posted by yeahyeahyeah at 5:35 PM on March 5, 2014
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posted by mbrubeck at 2:50 PM on March 5, 2014