The CMA previously updated its members on the negative impact of the California Court of Appeals decision in the Honchariw case. In that decision, the Court of Appeals held that a lender could not charge default interest on the entire unpaid principal balance following a monthly payment default. Following the Court of Appeal’s decision, the lender, FJM, requested a review by the California Supreme Court. To bolster FJM’s efforts, CMA’s General Counsel, Robert Finlay, and his team at Wright, Finlay & Zak, LLP filed an Amicus Letter in support of the Petition for Review. WFZ was also able to get the Mortgage Bankers Association, California Mortgage Bankers Association, National Private Lenders Association, and American Association of Private Lenders to join our efforts. Unfortunately, despite everyone’s best efforts, the CA Supreme Court refused to hear the matter. This means that the Honchariw ruling is final!
What’s next? Provided that the default interest charged bears a “reasonable relationship” to the anticipated loss that the lender would suffer as a result of the default, a lender should be able to do the following:
- Charge default interest on the missed payment(s); and
- Charge default interest on the entire unpaid principal balance upon maturity of the loan.
Subject to the proper notices and the “reasonable relationship” test, a lender may also be able to do the following:
- Charge default interest on the entire unpaid principal balance following acceleration due to a non-monetary default; and
- Charge default interest on the entire unpaid principal balance following acceleration due to a monetary default.
BUT, both options carry risks that should be discussed with your counsel before charging default interest.
Under the Honchariw decision, a lender should NOT charge default interest on the entire unpaid principal balance following a payment-only default.
What about your existing loan docs? To enhance a lender’s ability to charge default interest or, otherwise protect itself in the event of default, lenders may also want to consider updating your existing loan documents.
If you have any questions as to the Honchariw decision or how it impacts a particular loan, please feel free to reach out to Robert Finlay at firstname.lastname@example.org or Michelle Rodriguez at email@example.com.
T. Robert Finlay, Esq. (Licensed in CA only)
Partner | Wright, Finlay & Zak, LLP