54 JULY / AUGUST 2019 COMPLIANCE CONNECTION Brett J. Ashton Partner Krieg DeVault LLP bashton@kdlegal.com Krieg DeVault LLP is a Diamond Associate Member of the Indiana Bankers Association. Permissible Late Charges Changes affecting consumer loans Question: We recently read that there may be changes in the permissible late charges for consumer loans under Indiana law. Is further detail available? Answer: Yes. House Enrolled Act 1136 was signed into law by the governor and became effective on July 1. This new law eliminates the provision of law commonly known as the “Current Installment Rule” and increases the permissible late fee to $25 for a consumer credit sale or consumer loan with payments due every 15 days or more. The Current Installment Rule has been the subject of prior Compliance Connection articles and the source of many compliance challenges for banks. Under prior law, before the July 1 enactment of HEA 1136, the Rule prohibited the collection of a late fee during the time period in which a subsequent installment was due and required that payments first be applied to the current payment due in the period in which the payment was received, and then to delinquent installments. Once a scheduled payment was paid in full, all additional payments were first applied to previous unpaid installments and then applied to any uncollected late charges. If a customer made a partial payment, it was applied to the current installment due and not toward previous late charges. What classifies as a current installment? A current installment is the most recent payment due prior to the date a payment is made. A monthly payment due on Jan. 1 would be the current installment for a payment made between Jan. 1 and Feb. 1. The Current Installment Rule provides that no delinquency charge may be collected on an installment payment that is paid in full within 10 days after its scheduled installment due date, even though an earlier installment payment or a delinquency charge on an earlier installment may not have been paid in full. As an example, under prior law if a borrower missed a January payment and was assessed a late charge for January, and then sent a full payment in February (before the February grace period was over) intending it to be January’s payment, the Rule required the bank to apply the payment to February’s installment without collecting January’s late charge. Furthermore, the bank could not assess a late charge for any payment received in February because a full installment payment had already been received. The January late charge remained uncollected until a future payment was made over and above the current installment. With the enactment of HEA 1136, banks can now apply a payment received in the next installment period to the past due amount of the prior month. For example, in the same scenario described above, if a borrower misses a January payment and is assessed a late charge for January, and then sends a full payment in February (before the February grace period is over), that payment can now be applied to January’s installment, leaving the customer still to
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