We want to apply our default interest rate of 6% above the current rate for a consumer mortgage borrower in default. Is there a maximum rate allowed for consumer mortgage loans in Illinois?

No, we do not believe that Illinois law imposes a maximum interest rate for consumer mortgage loans.

There are very few limitations on interest rates charged by banks under Illinois law, whether for consumer or commercial loans, provided they are agreed to by your customers in your loan agreements. The Illinois Banking Act permits banks to charge any “interest, fees, and other charges . . . subject only to the provisions of [subsection 4(1)] of the Interest Act” and any laws applicable to “credit secured by residential real estate.” This provision applies to banks “notwithstanding the provisions of any other law.” Subsection 4(1) of the Interest Act permits banks to collect interest at any rate agreed upon by a bank and its borrower and specifies that it is lawful to charge, contract for, and receive any rate or amount of interest for loans secured by a mortgage on real estate.

Default rates may be subject to court scrutiny if they are not considered “reasonable.” In 2010, an appellate court found that a default rate increase “will be enforced if the damages are ‘reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.’”

Note that limitations could potentially apply under state and federal law limiting interest rates to six percent for active military personnel on obligations entered into before their period of military service. Additionally, 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.

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. . . .”)

Interest Act, 815 ILCS 205/4(1)(l) (“It is lawful to charge, contract for, and receive any rate or amount of interest or compensation with respect to the following transactions. . . . Loans secured by a mortgage on real estate. . . .”)

Inland Bank and Trust v. Knight, 399 Ill.App.3d 378, 383 (1st Dist. 2010) (A default interest rate increase “will be enforced if the damages are ‘reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. . . .’”)

Illinois Interest Act, 815 ILCS 205/4.05(b) (“Notwithstanding any contrary provision of State law, but subject to the federal Servicemembers Civil Relief Act, no creditor in connection with an obligation entered into on or after the effective date of this amendatory Act of the 94th General Assembly, but prior to a service member’s period of military service, shall charge or collect from a service member who has entered military service, or the spouse of that service member, interest or finance charges exceeding 6% per annum during the period of military service.”)

Illinois Service Member Civil Relief Act, 330 ILCS 63/40 (“Interest or finance charges collected or charged to a service member who has entered military service, or the spouse of that service member, in connection with an obligation entered into on or after the date of August 22, 2005, but prior to the date that the service member entered military service, shall be subject to Section 4.05 of the Interest Act.”)

Servicemembers Civil Relief Act, 50 USC 3937 (“An obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent (A) during the period of military service and one year thereafter, in the case of an obligation or liability consisting of a mortgage, trust deed, or other security in the nature of a mortgage; or (B) during the period of military service, in the case of any other obligation or liability.”)

Illinois Code of Civil Procedure, 735 ILCS 5/2-1303 (“Judgments recovered in any court shall draw interest at the rate of 9% per annum from the date of the judgment until satisfied . . . .”)

Federal Code of Civil Procedure, 28 USC 1961 (“Interest shall be allowed on any money judgment in a civil case recovered in a district court. . . . Such interest shall be calculated from the date of the entry of the judgment, at a rate equal to the weekly average 1-year constant maturity Treasury yield . . . .”)