IBA Compliance Connection

Your go to source for compliance!

We recently discovered that we overcharged interest at various times during the term of an adjustable rate mortgage (ARM) loan originated over 25 years ago. Our system shows an interest rate floor for the ARM, but the note does not establish a minimum rate. As a result, we have charged interest at a higher rate (the floor shown in our system) rather than the rate agreed to by the customer in the note. How far back must we look when calculating the amount of overcharged interest to reimburse the customer? Is it in our best interest to reimburse the customer for overcharges that occurred outside of the three-year record retention period and our current exam cycle?

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We recommend consulting with your bank counsel for advice in calculating restitution for your customer and crafting the best response for your bank.

We have found some case law (discussed below) suggesting that your potential liability may be limited to the past ten years of overcharged interest, but this situation also requires consideration of regulatory and reputational risks for your bank in so limiting the customer’s reimbursement. In any event, we do not recommend limiting your reimbursement by looking back only three years, based on your internal record retention policy or practices — particularly since your bank seems to have access to records dating back further than three years.

Charging interest at a rate that is higher than that allowed under the terms of the note appears to be a breach of contract. The statute of limitations in Illinois for breach of a written contract is ten years. The Seventh Circuit Court of Appeals has held that “contracts requiring continuous performance are capable of being partially breached on numerous occasions . . . [and] each partial breach is actionable and is subject to its own accrual date and own limitation period.”

We believe your bank had a continuing duty to charge interest according to the terms of the note, and that each overcharge constituted a partial breach of the note. Although the statute of limitations has run on overcharges occurring more than ten years ago, we believe your bank would likely be found liable to the customer for overcharges occurring within the last ten years. Consequently, we recommend reimbursing the customer for overcharges occurring within at least the last ten years. Whether to reimburse the customer for overcharges occurring before that period is a business decision for your bank.

For resources related to our guidance, please see:

  • Illinois Code of Civil Procedure, 735 ILCS 5/13-206 (“Except as provided in Section 2-725 of the ‘Uniform Commercial Code’, actions on bonds, promissory notes, bills of exchange, written leases, written contracts, or other evidences of indebtedness in writing and actions brought under the Illinois Wage Payment and Collection Act shall be commenced within 10 years next after the cause of action accrued
  • Hi-Lite Products Co. v. American Home Products Corp., 11 F.3d 1402, 1408 (7th Cir. 1993) (“Contracts requiring continuous performance are capable of being partially breached on numerous occasions. . . . Each partial breach is actionable and is subject to its own accrual date and own limitation period. . . Accordingly, because each breach of a continuous duty has its own accrual date, a plaintiff may sue on any breach which occurred within the limitation's period, even if earlier breaches occurred outside the limitation period.”)
  • Luminall Paints, Inc. v. La Salle Nat’l Bank, 220 Ill. App. 3d 796, 802 (“Luminall relies on the well-established rule that ‘where an obligation is payable by installments, the statute of limitations runs against each installment from the time it becomes due, that is, from the time when an action might be brought to recover it.’”)