No, we do not believe that Illinois law imposes a maximum default interest rate that can be charged on loans. However, if your loan agreements have set a maximum default interest rate, your bank should not charge more than the contracted-for default interest rate.

There are very few limitations on interest rates charged by banks under Illinois law, provided they are agreed to by your customers in your loan agreements. The Illinois Banking Act permits banks to charge any “interest, fees, and other charges . . . subject only to the provisions of [subsection 4(1)] of the Interest Act” and any laws applicable to “credit secured by residential real estate.” This provision applies to banks “notwithstanding the provisions of any other law.” Subsection 4(1) of the Interest Act permits banks to collect interest at any rate agreed upon by a bank and its borrower and specifies that it is lawful to charge, contract for, and receive any rate or amount of interest for loans secured by a mortgage on real estate (with the exception of transactions covered by the Predatory Loan Prevention Act, which does not apply to banks).

Under Illinois law, default interest rates may be subject to court scrutiny if they are not considered “reasonable.” For example, an appellate court has concluded that contractual default interest rate increases are enforceable if they “are ‘reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.’”

Note that limitations could potentially apply under certain circumstances. For example, state and federal law limit interest rates to six percent for active military personnel on obligations entered into before their period of military service. Additionally, if your institution obtains a court judgment against a borrower, both Illinois and federal rules of civil procedure limit interest that can be charged post-judgment.

For resources related to our guidance, please see:

• Illinois Banking Act, 205 ILCS 5/5e(a) (“Notwithstanding the provisions of any other law in connection with extensions of credit, a State bank may elect to contract for and receive interest, fees, and other charges for extensions of credit subject only to the provisions of subsection (1) of Section 4 of the Interest Act, except for extensions of credit secured by residential real estate, which shall be subject to the laws applicable thereto.”)

• Illinois Banking Act, 205 ILCS 5/5e(b) (“The establishment of account service charges and the amounts of the charges not otherwise limited or prescribed by law is a business decision to be made by a bank according to prudent business judgment and safe and sound operating standards. In establishing account service charges, the bank may consider, but is not limited to considering, the costs incurred by the bank, plus a profit margin, for providing the service, the deterrence of misuse of the bank's services, the establishment of the competitive position of the bank in accordance with the bank's marketing strategy, and the maintenance of the safety and soundness of the bank.”)

• Interest Act, 815 ILCS 205/4(1) (“It is lawful for a state bank or a branch of an out-of-state bank . . . to receive or to contract to receive and collect interest and charges at any rate or rates agreed upon by the bank or branch and the borrower. . . .”)

• Interest Act, 815 ILCS 205/4(1)(l) (“It is lawful to charge, contract for, and receive any rate or amount of interest or compensation, except as otherwise provided in the Predatory Loan Prevention Act, with respect to the following transactions. . . . (l) Loans secured by a mortgage on real estate. . . .”)

• Predatory Loan Prevention Act, 815 ILCS 123/15-1-15(c) (“Banks, savings banks, savings and loan associations, credit unions, and insurance companies organized, chartered, or holding a certificate of authority to do business under the laws of this State or any other state or under the laws of the United States are exempt from the provisions of this Act.”)

• Inland Bank and Trust v. Knight, 399 Ill.App.3d 378, 383 (1st Dist. 2010) (A default interest rate increase “will be enforced if the damages are ‘reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. . . .’”)

• Interest Act, 815 ILCS 205/4.05(b) (“Notwithstanding any contrary provision of State law, but subject to the federal Servicemembers Civil Relief Act, no creditor in connection with an obligation entered into on or after the effective date of this amendatory Act of the 94th General Assembly, but prior to a service member's period of military service, shall charge or collect from a service member who has entered military service, or the spouse of that service member, interest or finance charges exceeding 6% per annum during the period of military service.”)

• Illinois Service Member Civil Relief Act, 330 ILCS 63/40 (“Interest or finance charges collected or charged to a service member who has entered military service, or the spouse of that service member, in connection with an obligation entered into on or after the date of August 22, 2005, but prior to the date that the service member entered military service, shall be subject to Section 4.05 of the Interest Act.”)

• Servicemembers Civil Relief Act, 50 USC 3937 (“An obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent— (A) during the period of military service and one year thereafter, in the case of an obligation or liability consisting of a mortgage, trust deed, or other security in the nature of a mortgage; or (B) during the period of military service, in the case of any other obligation or liability.”)

• Illinois Code of Civil Procedure, 735 ILCS 5/2-1303(a) (“Except as provided in subsection (b), judgments recovered in any court shall draw interest at the rate of 9% per annum from the date of the judgment until satisfied. . . .”)

• Illinois Code of Civil Procedure, 735 ILCS 5/2-1303(b)(2) (“Notwithstanding subsection (a), consumer debt judgments of $25,000 or less shall draw interest from the date of the judgment until satisfied at the rate of 5% per annum.”)

• Federal Code of Civil Procedure, 28 USC 1961(a) (“Interest shall be allowed on any money judgment in a civil case recovered in a district court. . . . Such interest shall be calculated from the date of the entry of the judgment, at a rate equal to the weekly average 1-year constant maturity Treasury yield. . . .”)