Daily simple interest loans can raise significant issues for creditors and counsel in foreclosure and bankruptcy proceedings if not given appropriate consideration, so they require special attention when the loan account is in default. If daily simple interest loans are not identified correctly when referred for foreclosure, creditors and their counsel could face a myriad of issues including milestone delays, other violations of client retention agreements, and potential Fair Debt Collection Practices Act violations.
Daily simple interest loans differ from traditional mortgage loans in the way interest accrues on the unpaid principal balance. A traditional loan divides the interest rate over 12 months while a daily simple interest loan divides the interest rate over the total number of days in the year. Once divided, the interest rate is then multiplied by the unpaid principal balance. This provides the daily interest charge that accrues to the borrower’s mortgage loan. The daily simple interest method therefore counts the number of days from the last payment made to the date the current payment is received, or from the date of default, to determine the amount of loan principal and interest to amortize. This accrual method makes identifying simple interest loans crucial to best practice, which includes attention to payment history, default date, and current unpaid balance figures.
Creditors should identify, and attorneys must properly plead, the interest accrual date when filing a foreclosure complaint on a daily simple interest loan. The interest accrual date and unpaid balance must be correct. Borrowers in default on these loans typically make late payments and/or payments that fall short of the actual amount owed, given that the interest-accrual method can increase the amount due under these circumstances. In these instances, the monthly payment will not be enough to cover the daily interest accrued, which will impact the date from which interest is accruing. While the monthly payment due may be for a given month, the interest could accrue from a date much earlier. A simple pleading error opens creditors to violations under federal consumer protection law, potential sanctions, and increased attorney fees.
In bankruptcy, there can be serious consequences if a creditor misapplies funds. Savvy debtors’ attorneys are often looking for opportunities like these to seek contempt and sanctions that lead to attorney fee awards.
In a Chapter 13 bankruptcy, the servicer must confirm the proposed treatment for both the pre-petition arrearage and the post-petition monthly payments. When the borrower files the bankruptcy petition, daily simple interest will immediately stop accruing on any pre-petition arrearage. The past due interest will then be a fixed amount that will be cured by the Chapter 13 trustee during the bankruptcy. Therefore, pre-petition arrearage treatment should be fairly straightforward. However, post-petition treatment can prove more problematic.
As a result, it’s important to pay particular attention to whether the ongoing post-petition mortgage payments are to be made by the trustee or the debtor. Daily simple interest cannot accrue if the trustee is making the payments. Trustees typically disburse a monthly mortgage payment at the end of the month it is due. If daily simple interest were allowed to accrue every day that the payment is made after the contractual due date, the debtor would likely be paying an entire month’s worth of interest. Consequently, most of the trustee payment would be applied to the interest and there would be nothing left to apply to the principal balance. This result would run contrary to the intention of bankruptcy, which is to provide the debtor with a fresh start, and would penalize the debtor for the delay caused by the trustee.
On the other hand, daily simple interest may still accrue on post-petition mortgage payments being paid directly by the debtor. In this scenario, it is incumbent upon the debtor to make the post-petition payment on time. The servicer must keep good records under these circumstances and be able to show that the post-petition payments were indeed made late and not just applied late by the creditor. It is critical that the servicer not apply payments contractually if there is a pre-petition arrearage.
Best practice with respect to daily simple interest necessitates properly identifying these loans when referring accounts for foreclosure and bankruptcy. This includes paying close attention and examining a comprehensive payment history, payoff quote, and any other verified resources for identifying these loans, determining proper interest-accrual date and current unpaid balance, and insuring that the pleading is factually correct.