Yes for commercial loans and no for consumer loans. Illinois permits using the 365/360 accrual method for commercial loans in Illinois, provided the loan documents clearly disclose and explain the method of calculation and it is agreed to by the borrower. However, we strongly advise against using the 365/360 basis for calculating annual interest rates on consumer loans. It is not the prevailing industry practice, and using it for consumers risks lawsuits claiming that it is an unfair and deceptive practice.

The Illinois Interest Act was amended in 2010 to expressly authorize the 365/360 accrual method for loans made to corporations and other business loans: “[A] rate or amount of interest may be lawfully computed when applying the ratio of the annual interest rate over a year based on 360 days.” Note that this language does not apply to consumer loans.

While the banking industry has been using the 365/360 accrual method for centuries (literally), in 1976 the California Supreme Court found that its use in consumer loans was a deceptive and misleading practice, after which the banking industry generally stopped this practice for consumer loans. Given that it no longer is a customary practice of the industry, and considering the California Supreme Court case and the 2010 amendment to the Illinois Interest Act, using this method today in consumer loans almost certainly would invite a class action lawsuit, which would have a reasonably strong chance of prevailing.

For additional discussion of this issue, including sample language for disclosing and explaining the 365/360 method in a commercial note, please read our 365/360 Interest Rate Legislation article on our compliance website: http://gotoiba.com/articles/365-360-interest-rate-legislation.

For resources related to our guidance, please see:

• Illinois Interest Act, 815 ILCS 205/4(5) (“For purposes of items (a) and (c) of subsection (1) of this Section, a rate or amount of interest may be lawfully computed when applying the ratio of the annual interest rate over a year based on 360 days. The provisions of this amendatory Act of the 96th General Assembly are declarative of existing law.”)

• Credit Agreements Act, 815 ILCS 160/2 (“A debtor may not maintain an action on or in any way related to a credit agreement unless the credit agreement is in writing, expresses an agreement or commitment to lend money or extend credit or delay or forbear repayment of money, sets forth the relevant terms and conditions, and is signed by the creditor and the debtor.”)

• Chern v. Bank of America, 15 Cal.3d 866 (S. Ct. Cal. 1976) (“We conclude that the practice of quoting as a ‘per annum’ rate interest computed on the basis of a 360-day year is likely to mislead and deceive a bank’s potential borrowers, and that if, as alleged, defendant has adopted such practice it constitutes false and misleading advertising under Business and Professions Code section 17500.”)