Lexology-

The Arizona Supreme Court filed an opinion on April 25, 2017, in which the Court invalidated a five percent late fee assessed against the unpaid principal balance when the loan matured, holding that it was an unenforceable penalty.

The promissory note at issue provided that the borrower would pay a five percent late fee on any late payment, including the final balloon payment. The borrower failed to pay the balloon payment on the maturity date. The lender then assigned the promissory note and the deed of trust to a third party (the “Noteholder”), which recorded a notice of trustee’s sale.

Prior to the trustee’s sale, the borrower requested a payoff statement. The Noteholder provided a payoff statement that included a late fee in the amount of $1.4 million, which represented five percent of the balloon payment that was due upon maturity. The borrower disputed the late fee and tendered payment of all amounts except for the late fee. When the Noteholder refused to release the deed of trust, the borrower sued for a declaratory judgment, asking the court to declare that the borrower was not obligated to pay the late fee.

[LEXOLOGY]

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