Default Rate Options at GoDocs. Please select one:
☐ Option 1 - Entire Unpaid Principal Balance -> (i.e. “interest under this Note shall accrue at the Default Rate on the unpaid principal balance”)
☐ Option 2 – Defaulted Amount -> (i.e. “interest under this Note shall accrue at the Default Rate on the principal amount then-currently in default”)
☐ Option 3 - No Reference to Application -> (i.e. “interest under this Note shall accrue at the Default Rate”)
☐ Option 4 – Combination of Option 2 for California loans, Option 1 for all other states
For ease of reference, if you would more information on the case the GoDocs article is linked here -> https://link.edgepilot.com/s/3ba40a27/XP5vbXVp4kebP1dnkIy1_w?u=https://godocs.com/what-is-your-risk-tolerance-level-honchariw-v-fjm-private-mortgage-fund/
When lending in California, charging the default interest rate on the entire outstanding principal balance of the Note carries the most risk as current court cases have ruled against this lending practice. This would amount to “accepting” the risk – that is, do nothing and continue business as usual- i.e., charging default interest on the outstanding principal balance of the loan. This approach would almost certainly open the lender up to litigation costs if it were to attempt to enforce this provision in its promissory note.
Option 2 is less risky as the lender is only charging the default interest rate on the amount then-currently outstanding. This more conservative approach would support the argument that the liquidated damages assessed does bear a “reasonable relationship” to the actual damages that the parties anticipate would flow from breach. Here is a sample of Option 2:
Option 3 is a Lender setting if the Lender wanted to remain intentionally vague as to the application of Default Interest. Here is a sample of Option 3:
It is important to note that liability would only occur for the Lender if it attempted to enforce the default interest rate provision after an Event of Default. If the Lender did nothing and just continued to charge the stated interest rate it is at no risk. Regardless of if the Event of Default is a monetary Event of Default or a non-monetary Event of Default these options would still apply. For non-monetary events of default, the amount then-currently in default is the current payment which is due while the loan is in default due to a default for a loan covenant or for failure to timely file a financial statement.