We are considering opening a loan production office in a different state. Do we need to follow the laws of that state for any loans generated from that location, or can we continue to follow Illinois law since all origination activity will take place in Illinois? Does the answer change if we decide to open a branch rather than a loan production office? Are there any resources available to help us understand our responsibilities as we look to move to other states?

While we cannot address all possible scenarios in fifty different states, we believe that an Illinois court would find that Illinois law applies to your loans if you include a provision specifying that Illinois law will govern the contract (i.e., a choice of law provision) and there is some relationship between Illinois and the parties or the transaction. However, if the borrower and loan collateral will be located in another state, we recommend reviewing the other state’s laws, particularly any consumer protection laws that are intended as an expression of public policy and thus an exception to these general choice of law rules.

Illinois courts generally will enforce a choice of law provision provided in an agreement, unless (1) the chosen state has no substantial relationship to the parties or the transaction, or (2) application of the chosen law would be contrary to a fundamental public policy of a state with a materially greater interest in the issue in dispute. However, if a choice of law provision is found to “contravene” public policy, as expressed in a state law, a court may find that there is an exception to this general rule. Consequently, in many cases, you may be able to establish the applicable state law in your loan agreements — but the choice of law language in a loan agreement is not ironclad and could be overcome by a borrower’s public policy argument, particularly in the case of a consumer protection law of the state of the borrower and loan collateral.

Note that in the absence of a choice of law provision in a loan agreement, whether another state’s law applies to a loan is a complicated question that will depend on the circumstances of each loan, the loan agreements, the location of the borrower, the location of any property securing the loan, and several other factors.

Furthermore, we cannot predict how an out-of-state court would react to a choice of law provision in your loan agreements. It is possible that a court in another state would consider other factors when selecting the governing law and choose a state other than Illinois over the governing law provision in the agreement.

For these reasons, you may need to consult with counsel familiar with both Illinois law and the law of the state where the borrower or collateral is located when deciding what law would apply to a loan.

For resources related to our guidance, please see:

Emigrant Mortg. v. Chicago Financial, 386 Ill.App.3d 21, 26 (1st Dist. 2007) (“[T]he agreement provides that ‘[t]his Agreement shall be governed by, and construed in accordance with the laws of the State of New York, excluding such laws’ provisions relating to choice of law.’ The language of the contract is clear . . . . So long as the provision does not contravene Illinois public policy and there is some relationship between the chosen forum and the parties to the transaction, an express choice of law provision will be given full effect.”)

International Surplus Lines Ins. Co. v. Pioneer Life Ins. Co., 209 Ill.App.3d 144, 153 (1st Dist. 1990) (“[T]he parties’ choice of law governs unless (1) the chosen State has no substantial relationship to the parties or the transaction or (2) application of the chosen law would be contrary to a fundamental public policy of a State with a materially greater interest in the issue in dispute.”)

Preferred Capital Lending v. Chakwin, 2015 U.S. Dist. LEXIS 137383, *5 (N.D. Ill. 2015) (“The loan documents at issue contain a choice of law provision stating that the agreement ‘shall be construed in accordance with and governed by the internal laws of the State of Illinois.’ . . . Under Illinois law, choice-of-law clauses are generally enforceable: ‘the law applicable to a contract is the law intended by the parties.’”)

Kafka v. Bellevue Corp., 999 F.2d 1117,1121–22 (7th Cir. 1993) (“Because this case was tried by a district court sitting in Illinois, we must apply Illinois choice of law principles. Illinois courts apply the law that the parties understood would govern the case. We have no indication that the parties agreed upon what law would govern. Our next step, then, is to consider which state has the most significant relationship to the contract. . . . To determine which state has the most significant relationship to the contract, we examine the location of the subject matter, the domicile of the parties, and the place of the last act to give rise to a valid contract. . . . Here, the investment property was located in California; all the defendants were California citizens; the investments were made in California, and the guarantees were made in California if they were made at all. Only Kafka was in Illinois. In these circumstances, California has a more significant relationship to the contract, and therefore its law governs.”)