No, we do not believe there is any law or regulation that would prevent you from charging a 22% default rate on a commercial loan, provided your customer agreed to the rate in your loan agreement. Additionally, Illinois does not impose a maximum default rate charged on consumer loans, but courts have held that default rates should be “reasonable.” However, in addition to loans made to active-duty service members, certain prohibitions also apply to high-cost mortgage loans and post-judgment interest.

The are very few limitations on the interest rates banks may charge under Illinois law, whether for commercial or consumer loans, provided the borrowers agree to the rates 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.

Default rates may be subject to court scrutiny if they are not considered “reasonable.” In 2010, an appellate court found that a default 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.’”

We note that some limitations on default interest rates may apply under federal law, such as the Servicemembers Civil Relief Act’s protections noted in your question, which also apply under the Illinois Service Member Civil Relief Act. Both the federal and state laws limit interest rates to 6% for active military personnel on obligations entered into “prior to a service member’s period of military service.” That means you may be prevented from imposing a full default interest rate increase if it results in a rate above 6% for a customer entitled to these protections.

Additionally, Regulation Z prohibits an increased interest rate after default for HOEPA (high-cost) mortgage loans. Further, if your institution obtains a court judgment against a borrower, both the Illinois and federal rules of civil procedure limit interest that can be charged post-judgment. If a borrower files for bankruptcy, the court may scrutinize interest rates you charge after the bankruptcy filing to determine whether your interest rate is “reasonable.”

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.”)

• 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. . . . Loans secured by a mortgage on real estate . . .”)

• 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.’”)

• 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.”)

• Illinois 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.”)

• 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 (“Judgments recovered in any court shall draw interest at the rate of 9% per annum from the date of the judgment until satisfied . . .”)

• Federal Code of Civil Procedure, 28 USC 1961 (“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 . . . .”)

• U.S. Bankruptcy Code, 11 USC 506(b) (“To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.”)