We recommend extreme caution before imposing a “charge-off fee” on a delinquent account, irrespective of whether such a fee is disclosed in your loan agreement. Such a fee, unrelated to any costs incurred for servicing the loan, would be ripe for attack under the principles of the federal and state UDAAP laws.  It is not a collection cost (which, if provided in the loan agreement, may be added to the amount owed after it has been incurred), nor is it attorneys fees and court costs related to collection (which also frequently are covered in the loan agreement). In our view, merely adding a flat fee to a negative balance because it is delinquent and written off by the bank very well could invite allegations of UDAAP violations and even class action lawsuits, even if fully disclosed to your customers.

In addition, note that the Credit Practices Rule (Regulation AA) prohibits you from collecting delinquency charges on any extension of credit when the delinquency is attributable only to pre-existing late fees or delinquency charges. 12 CFR 227.15. We believe that the rationale underlying this prohibition of “pyramiding late fees” would apply with equal force to “charge-off fees” assessed on the sole basis that an account is delinquent.  Although Regulation AA recently was repealed, the federal banking agencies’ Interagency Guidance Regarding Unfair and Deceptive Practices clearly states that any violation of Regulation AA’s rules will be treated as a UDAAP violation.