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The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us) STATE OF MICHIGAN FRANK J. KELLEY, ATTORNEY GENERAL Opinion No. 5904 May 15, 1981 LAND CONTRACTS: Late payment charges Late payment charges contained in a land contract for actual, unanticipated late payment, delinquency, default or other such occurrence does not constitute interest subject to the statutory interest rate ceiling for land contracts. The Honorable Shirley Johnson State Representative State Capitol Lansing, Michigan You have requested my opinion whether a late payment charge required under the terms of a land contract constitutes interest subject to the statutory interest rate ceiling for land contracts. You advise that the late payment charge is 4 percent of the monthly payment of $475.00, which amounts to a late payment charge of $19.00. You have indicated that your question concerns a land contract between two individuals. (1) 1966 PA 326; MCLA 438.31 et seq; MSA 19.15(1) et seq, Sec. 1c(6), authorizes individuals to enter into land contracts which 'provide for a rate of interest not to exceed 11% per annum, which interest shall be inclusive of all the amounts defined as the 'finance charge' in the federal truth in lending act (Public Act 90-321), and the regulations promulgated thereunder.' Therefore, in order to determine whether a particular charge constitutes part of the interest rate, it is necessary to review the Truth in Lending Act, 82 Stat 146 (1968); 15 USC 1601 et seq, and the regulations promulgated thereunder. The Truth in Lending Act, supra, Sec. 1605 (2) provides for certain charges to be inclusive in the determination of the amount of a finance charge in a consumer credit transaction: 'Except as otherwise provided in this section, the amount of the finance charge in connection with any consumer credit transaction shall be determined as the sum of all charges, payable directly or indirectly by the person to whom the credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit, including any of the following types of charges which are applicable: '(1) Interest, time price differential, and any amount payable under a point, discount, or other system of additional charges. '(2) Service or carrying charge. '(3) Loan fee, finder's fee, or similar charge. '(4) Fee for an investigation or credit report. '(5) Premium or other charge for any guarantee or insurance protecting the creditor against the obligor's default or other credit loss.' (Emphasis added.) Thus, whether a particular charge is considered to be a finance charge under the Truth in Lending Act, supra, depends on whether it is determined to be an incident to the extension of credit. 12 CFR, Sec. 226.4(c), a regulation promulgated pursuant to the Truth in Lending Act, supra, resolves that issue for late payment charges as follows: 'A late payment, delinquency, default, reinstatement, or other such charge is not a finance charge if imposed for actual unanticipated late payment, delinquency, default or other such occurrence.' It follows that a late payment charge, if imposed for an 'actual unanticipated late payment,' would be exempt from the purview of the Truth in Lending Act, supra. See Vega v First Federal Savings & Loan Ass'n of Detroit, 433 F Supp 624 (ED Mich, 1977). In Continental Oil Co v Burns, 317 F Supp 194, 198, (n3) (D Del, 1970), the court gave further explanation to the term 'actual unanticipated late payment': 'Since the word 'unanticipated' means 'not foreseen or expected,' it would appear that an 'actual unanticipated late payment' charge would be the antithesis of a charge stemming from a course of conduct where credit is continued even though payments are repeatedly late and late payment charges are periodically imposed.' Also see Kroll v Cities Service Oil Co, 352 F Supp 357 (ND Ill, 1972), and Garland v Mobil Oil Corp, 340 F Supp 1095 (ND Ill, 1972). In view of the terms of the federal Truth in Lending Act, supra, and the rules thereunder incorporated by reference by the Legislature in 1966 PA 326, supra, I am constrained to conclude that a late payment charge, required under the terms of a land contract between two individuals, does not constitute interest subject to the statutory interest rate ceiling for land contracts if such charge is imposed for actual unanticipated late payment, delinquency, default or other such occurrence. It must be stressed that the amount of the late payment charge must be reasonable, reflecting the expense of the inconvenience incurred, so as not to constitute a penalty which would be unenforceable at law. Curran v Williams, 352 Mich 278; 89 NW2d 602 (1958). Frank J. Kelley Attorney General (1)
(2)
This section was amended by 94 Stat 170, 185, effective March 31, 1982.
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