There are very few limitations on interest rates and fees charged by banks under Illinois law, whether for commercial or consumer loans. However, any post-maturity rates (also known as default rates) must be agreed to by your customers in your loan agreements, and they may be subject to court scrutiny if they are not considered “reasonable.” Some limitations may apply under federal law, as discussed below.

Section 5e of the Illinois Banking Act states that “[n]otwithstanding the provisions of any other law in connection with extensions of credit,” banks may charge “interest, fees, and other charges . . . subject only to the provisions of subsection (1) of Section 4 of the Interest Act” and the laws applicable to real estate loans, 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). For loans secured by real estate, the Illinois Supreme court has confirmed that Section 4(1)(l) of the Interest Act implicitly repealed previous restrictions on interest and fee charges on real estate loans. United States Bank Nat’l Ass’n v. Clark, 216 Ill.2d 334, 349 (2005) (see also IDFPR Interpretive Letter 98-01).

While the Clark case did not directly address default interest rates, an Illinois appellate court recently upheld a default interest rate under Section 4 of the Interest Act. The court held that a default rate increase of 5% (from 2.25% to 7.25% over the loan’s index rate) was permissible, though the court did state that any default interest rate increases must be “reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.” Inland Bank and Trust v. Knight, 399 Ill.App.3d 378 (1st Dist. 2010). The court cited other cases that upheld default rate increases as reasonable, including an increase of 6% that raised the interest rate to 24% on default. Casaccio v. Habel, 14 Ill. App.3d 822 (1st Dist. 1973).

Elsewhere in the Interest Act, there are provisions that limit post-maturity interest rates, but they do not apply to Illinois banks. For example, Section 4.1a states that default rates are limited to five-percent of the installment amount and that they cannot be charged until ten days after default. 815 ILCS 205/4.1a(f). However, we do not believe that the restrictions on interest rates and charges in the Interest Act apply to banks based on Section 5e of the Illinois Banking Act, discussed above.

Of course, any limitations on interest rates in federal law would apply to your institution’s post-maturity rates. For example, Regulation Z prohibits an increased interest rate after default for HOEPA (that is, high-cost) loans. 12 CFR 1026.32(d)(4). Also, 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. 735 ILCS 5/2-130328 USC 1961. If a borrower files for bankruptcy, the court may scrutinize interest rates you charge after the bankruptcy was filed to determine whether your interest rate is “reasonable.” 11 USC 506(b).