We can provide guidance on Illinois law, but we cannot provide any guidance on Indiana law and recommend that you contact a state banking association based in Indiana, if possible.

We believe that banks in Illinois can charge any interest rate after the borrower defaults (provided that the customer agreed to the default rate in the loan agreement), but statutory interest rates apply after a bank obtains a judgment against the debtor. As an example, a recent Illinois case in the first district upheld a default rate increase of five-percent in a commercial real estate loan. Inland Bank and Trust v. Knight, 927 N.E.2d 777, 782 (1st Dist. 2010).

While the Illinois Interest Act restricts post-default penalties to five-percent (815 ILCS 205/4.1a(f)), we do not believe that this restriction on penalties applies to default interest rates. First, Section 4.1a(f) applies to late payment penalties, not to default interest rates. Inland Bank and Trust v. Knight, 927 N.E.2d at 782. Further, Section 5e of the Banking Act states that “[n]otwithstanding the provisions of any other law in connection with extensions of credit” banks may charge any fees, “subject only to the provisions of [subsection 4(1)] of the Interest Act,” provided that the bank sets fees based on its “prudent business judgment and safe and sound operating standards.” 205 ILCS 5/5e. And subsection 4(1) of the Interest Act states that a bank is authorized “to receive or contract to receive and collect interest and charges at any rate or rates agreed upon by the bank or branch and the borrower.” 815 ILCS 205/4(1). (If the loan is secured by a mortgage on real estate, the Illinois Supreme court has confirmed that the Section 4.1a’s restrictions on loans secured by real estate were implicitly repealed by the later-enacted Section 4(1)(l) of the Interest Act. 815 ILCS 205/4(1)(l)United States Bank Nat’l Ass’n v. Clark, 216 Ill.2d 334, 349 (2005); see also IDFPR Interpretive Letter 98-01.)

With that said, federal and state law set the interest rates that banks may charge after obtaining a judgment against a debtor, and regulatory limitations on interest rates may apply. The Illinois Code of Civil Procedure sets the postjudgment interest rate at nine-percent. 735 ILCS 5/2-1303. Also, the federal Code of Civil Procedure limits interest that can be charged post-judgment, and bankruptcy courts may require that your post-default rate be “reasonable” (a restriction that applies to all creditors in bankruptcy). Finally, Regulation Z prohibits an increased interest rate after default for HOEPA (i.e., higher-cost) loans (12 CFR 1026.32(d)(4)), and both the federal and state versions of the Service Member Civil Relief Act/Servicemembers Civil Relief Act limit interest rates during a service member’s active duty (815 ILCS 205/4.0550 USC App. 527(a)).