With respect to Illinois law, please offer any insights into granting borrowers’ requests to skip monthly payments on adjustable rate mortgages (ARMs) with thirty-year terms or monthly interest payments on home equity lines of credit (HELOCs). For the ARMs, the skipped payments would be added to the end of the scheduled loan payments, and for the HELOCs, the skipped interest-only payments would be spread over a few months to avoid the borrower being hit with one large interest payment.

Illinois law does not expressly address mutually agreed-upon skipped payments — whether offered by the bank as a “skip-a-payment” program or when requested by the borrower. However, such arrangements are permissible in Illinois.

It is important that your “skip-a-payment” agreement does not have the effect of canceling the original loan and substituting it for a new loan resulting in a refinancing and triggering disclosure requirements under federal regulations. Consequently, when you enter into a skip-a-payment agreement, you should avoid any language suggesting that the loan — or even the payment — has been “canceled.”

For the ARMs, you will be adding the skipped payments to the end of the loan’s payment schedule, resulting in an extension of the loan term. For those loans, you will need to deliver a written flood insurance notice to the borrower if the loan is secured by a building or mobile home in a special flood hazard area. Under the FDIC’s flood insurance rules, a loan extension is an event triggering notice. You also may need to obtain a new flood determination if your previous determination is more than seven years old or the applicable flood maps have been revised since the original flood determination for that building was obtained.

For more information on this subject, including federal notice requirements under Regulation Z, we recommend reading the IBA’s 2006 article “Skip-a-Payment” Programs: Pitfalls and Concerns, which is available on GoToIBA.com.

For resources related to our guidance, please see:

Illinois Banking Act, 205 ILCS 5/5e (“Notwithstanding 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.”)

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. . . .”)

Regulation Z, 12 CFR 1026.20(a) (“A refinancing occurs when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer. . . .”)

FDIC Flood Insurance Regulations, 12 CFR 339.9(a) (“Notice requirement. When an FDIC-supervised institution makes, increases, extends, or renews a loan secured by a building or a mobile home located or to be located in a special flood hazard area, the FDIC-supervised institution shall mail or deliver a written notice to the borrower and to the servicer in all cases whether or not flood insurance is available under the Act for the collateral securing the loan.”)

National Flood Insurance Act, 42 USC 4104b(e) (“Any person increasing, extending, renewing, or purchasing a loan secured by improved real estate or a mobile home may rely on a previous determination of whether the building or mobile home is located in an area having special flood hazards (and shall not be liable for any error in such previous determination), if the previous determination was made not more than 7 years before the date of the transaction and the basis for the previous determination has been set forth on a form under this section, unless (1) map revisions or updates pursuant . . . after such previous determination have resulted in the building or mobile home being located in an area having special flood hazards; . . . .”)

Regulation Z, Official Interpretations, Paragraph 17(c)(1), Comment 2(iii) (“The legal obligation normally is presumed to be contained in the note or contract that evidences the agreement between the consumer and the creditor. But this presumption is rebutted if another agreement between the consumer and creditor legally modifies that note or contract. If the consumer and creditor informally agree to a modification of the legal obligation, the modification should not be reflected in the disclosures unless it rises to the level of a change in the terms of the legal obligation. For example: . . . (iii) If the contract provides for regular monthly payments but the creditor informally permits the consumer to defer payments from time to time, for instance, to take account of holiday seasons or seasonal employment, the disclosures should reflect the regular monthly payments.”)

Regulation Z, 12 CFR 1026.9(c)(1)(ii) (“Notice not required. For home-equity plans subject to the requirements of § 1026.40, a creditor is not required to provide notice under this section when the change involves a reduction of any component of a finance or other charge or when the change results from an agreement involving a court proceeding.”)
Regulation Z, Official Interpretations, Paragraph 9(c)(1)(ii), Comment 2 (“Skip features. If a credit program allows consumers to skip or reduce one or more payments during the year, or involves temporary reductions in finance charges, no notice of the change in terms is required either prior to the reduction or upon resumption of the higher rates or payments if these features are explained on the initial disclosure statement (including an explanation of the terms upon resumption). For example, a merchant may allow consumers to skip the December payment to encourage holiday shopping, or a teachers' credit union may not require payments during summer vacation. Otherwise, the creditor must give notice prior to resuming the original schedule or rate, even though no notice is required prior to the reduction. The change-in-terms notice may be combined with the notice offering the reduction. For example, the periodic statement reflecting the reduction or skip feature may also be used to notify the consumer of the resumption of the original schedule or rate, either by stating explicitly when the higher payment or charges resume, or by indicating the duration of the skip option. Language such as ‘You may skip your October payment,’ or ‘We will waive your finance charges for January,’ may serve as the change-in-terms notice.”)