Under existing law, late fees must be agreed to by the resident in the lease contract and must be reasonable. Because “reasonableness” can be vague, there is interest in a mandatory cap on late fees. Defining a reasonable late fee for every transaction in the State is difficult because of the wide variety of transactions, delinquent balances, and level of lateness. It is also difficult because the late fee is not just interest on the past due balance, but compensation for the administrative costs of a delinquent account.
Elements of Reasonable Late Fees
- Late fees are not just interest but primarily to compensate for the administrative expense of dealing with the delinquency.
- The administrative expense is the same regardless of the balance of the late payment and has a floor of approximately $50.
- In addition to the administrative expense, there is also an interest component, which increases depending on both the size of the past due rent balance and the underlying mortgage.
- A cap of 15% captures the interest component in most transactions.
- The interest component of the late fee increases overtime as the lateness continues.
- The state already mandates a tolerance of 10 days of lateness (with the require 10-day demand for payment) and an additional 30-45 days of lateness (through the eviction process).
- A daily late fee is necessary to discourage continued lateness after the assessment of the initial fee.
- Unreasonably low late fees will reduce housing made available to rent, as those without sufficient cash reserves will be unable to loan a housing unit.
- Unreasonably low late fees will lead to tighter leasing standards thereby making it harder for people with poor credit to rent.
- Unreasonably low late fees will lead to higher rents for people that do pay their rent on time, as the cost of delinquency is spread from the delinquent to the entire portfolio.
- Unreasonably low late fees will lead to fewer workout arrangements.