Fourth Circuit Holds that Creditors Violate Maryland Closed End Credit Provisions By Pyramiding Late Fees

On July 8, 2016, the Fourth Circuit decided, in Williams v. Lendmark Fin. Servs., No. 15-1976, 2016 U.S. App. LEXIS 12597 (4th Cir. July 8, 2016), that a creditor violated Maryland’s Credit Grantor Closed End Credit Provisions (CLEC) by imposing late charges on timely payments when it applied those payments to satisfy earlier late fees and thereby rendered the amount insufficient to pay the interest and principal due.

The Plaintiff filed suit against Lendmark Financial Services, Inc. alleging that Lendmark violated CLEC and the promissory note: (1) by applying monthly payments first to late charges, then to interest, and finally to the principal; (2) by imposing late charges on timely payments based on its practice to apply payments to late fees first; and (3) by prematurely assessing late charges by posting them after the close of business on the fifth day of the five-day grace period, rather than on the following sixth day. The District Court for the District of Maryland dismissed all three claims, entering judgment in favor of Lendmark. Plaintiff subsequently appealed.

The Fourth Circuit affirmed the District Court’s dismissal of Plaintiff’s first and third claims, but reversed and remanded the second claim.

Regarding Plaintiff’s first claim, the Court found that the promissory note provides explicitly that each payment will be applied first to late charges, then to accrued interest, and then to the principal. Thus, Lendmark’s practice of applying payments first to late charges was legal, both under CLEC and under the terms of the note. For the third claim, the Court found that the promissory note provides for Lendmark to charge a late fee if Plaintiff does not pay within five days after its scheduled date. Because Plaintiff could not make payments after the close of business on the fifth day of the five-day grace period, Lendmark properly charged Plaintiff for being late. Thus, the Court affirmed the dismissal of both the first and third claims.

As for Plaintiff’s second claim, the Court found Lendmark’s practice of charging late fees solely because payments were applied first to earlier late fees constituted a violation of both the CLEC and the promissory note. The Court reasoned that the charging of late fees based on an application of an otherwise conforming payment to prior late fees amounted to the collection of multiple late fees for a single installment, which is improper. Furthermore, the note did not require monthly payments of an amount in excess of the predetermined amount listed in the note. Thus, charging a late fee on an otherwise conforming payment effectively imposes multiple late charges for the same amount, in violation of CLEC and the promissory note.

The Court accordingly reversed the dismissal of the second claim and remanded it for further proceedings.