In Costa Rica the legal mechanism to compensate the lender when the debtor does not pay a loan installment on time, is by means of “interés moratorio” or interest on arrears.
When the debtor is in default, besides charging the interest on arrears, the lender can request payment of balance in full and proceed to file foreclosure action. Interest on arrears will apply until the lender is paid in full as well as the current interests (they are charged separately).
A legal opinion from the Attorney General indicates that interest on arrears responds to punitive and compensatory purposes for the culpable delay in the attention of the debt, so it must respond to proportionality criteria, for which the law establishes parameters within which the rate may fluctuate.
That parameter is contained in article 498 of the Code of Commerce, which establishes:
Article 498. – Late interest shall be equal to current interest, unless otherwise agreed.
When current and late interests are agreed upon, the latter cannot be higher than thirty percent (30%) of the rate agreed for current interest.
This is a mandatory rule that cannot be waived by the parties. The National Registry, for example, will reject the registration of the mortgage if the late interest exceeds the 30% rule. So if parties agree to a 12% current interest, the maximum interest on arrears should be 15.60 (12+3.6).
Interest on arrears is calculated differently to the current interest: they are calculated on the amount that the payer had to do on a given date. They are calculated on the quota that he had to pay. They are not calculated on the balance that the debt had at that date. Many people get confused with this point because they consider that when there is a delay, what happens is that the interest on arrears replaces the current interest until the debt is updated. This is not the case, both interests are calculated independently: current interests on the amount of the loan; and interest on arrears on the amount of the installment in arrears.
Now, how about charging other penalties aside the delay interests? Commercial banks normally includes a “penalty” in case of late payment, however, normally it is a fixed fee to be charged only one time and it is referred as an “administrative charge.”
Americans are not familiar with the concept of interest on arrears and work more on fixed penalty fees. Gap Investment mortgages typically include a provision that indicates that there is a fixed penalty of after 3 days delay and $25 for every day of delay in the payment. They are referred to as “an administrative charge” following the banking practice, and even though, so far, the Registry has not objected this wording, it will be until this matter is discussed at judicial level that we will know how solid it is.
Most of the debtors will not question its legality and will pay them dutifully; however, investors should be warned that they might not be collected if the matter is discussed at Court (for example, in a foreclosure).