Currently, our systems cannot separate out commercial loans with primary residences taken as collateral from other commercial loans. Does the Illinois Grace Period Notice requirement apply to these loans? Do you recommend providing the Grace Period Notice to all of our delinquent commercial borrowers, even if we did not take a primary residence as collateral?

Please note that this answer discusses the Illinois grace period notice requirement, which expired on July 1, 2016, pursuant to a sunset provision. Please see 735 ILCS 5/15-1502.5.

Scope of Grace Period Notice Requirements for Commercial Loans

Yes, the Illinois Grace Period Notice requirements apply to commercial loans that have a primary residence as collateral.

To summarize the requirements, the Illinois Code of Civil Procedure imposes a thirty day statutory grace period after a borrower’s delinquency for nonpayment and requires that “if a mortgage secured by residential real estate becomes delinquent by more than thirty days the mortgagee shall send via U.S. mail a notice advising the mortgagor that he or she may wish to seek approved housing counseling.” 735 ILCS 5/15-1502.5(c).

These requirements apply to any loan secured by a borrower’s principal residence, including loans made for a commercial purpose, regardless of the reasons for taking the property as collateral. This is because these provisions apply to any “mortgage secured by residential real estate.” 735 ILCS 5/15-1502.5(b), (c). The term “residential real estate” is defined to include any residence occupied as the mortgagor’s principal residence, meaning “any real estate, except a single tract of agricultural real estate consisting of more than 40 acres, which is improved with a single family residence or residential condominium units or a multiple dwelling structure containing single family dwelling units for six or fewer families . . . which residence, or at least one of which condominium or dwelling units, is occupied as a principal residence” by the mortgagor. 735 ILCS 5/15-1219.

In the case of a mortgagor that is a corporation, the Grace Period Notice requirements apply if the real estate is occupied as a principal residence “by persons owning collectively at least 50 percent of the shares of voting stock of such corporation or by a spouse or descendants of such persons.” 735 ILCS 5/15-1219. If the mortgagor is a different type of business, such as a limited liability company (LLC), we believe that this provision also would apply.

Delivering the Grace Period Notice to all Commercial Customers

We do not recommend making unnecessary disclosures by sending the Grace Period Notice to all commercial borrowers, regardless of the type of collateral securing their loans. As explained above, the Grace Period Notice requirements apply only to commercial loans that are secured by a primary residence of one of the borrowers. We think it would be misleading to send the notice to commercial customers whose loans are not secured by a primary residence, particularly because the notice states that “you have a grace period of 30 days from the date of this notice to obtain approved counseling” and “during the grace period, the law prohibits us from taking any legal action against you.” 735 ILCS 5/15-1502.5(c). Many commercial customers will be ineligible for the thirty day grace period and housing counseling rights described in the notice, and those ineligible customers could argue that by providing the notice, your institution agreed by contract to provide those customers with the thirty day grace period and housing counseling.