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Do you know why we got a warning from our loan software stating that we cannot charge a dishonored item fee on consumer loans? – IBA Compliance Connection

IBA Compliance Connection

Your go to source for compliance!

Do you know why we got a warning from our loan software stating that we cannot charge a dishonored item fee on consumer loans?

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We do not believe that there are any restrictions on charging fees for a loan secured by a mortgage on real estate, provided that the customer contracted to pay such fees in your loan agreement. Section 4(1) of the Illinois Interest Act states that “it is lawful to charge, contract for, and receive any rate or amount of interest or compensation with respect to . . . (l) Loans secured by a mortgage on real estate.” 815 ILCS 205/4(1)(l).

It is possible that your software showed a warning about “limitations on authorized fees and charges” due to limitations elsewhere in the Interest Act. Section 4.1a of the Interest Act limits charges in excess of the interest rate to 3% of the principal loan amount if the loan rate exceeds 8% and if the loan is secured by residential real estate. 815 ILCS 205/4.1a. However, the Illinois Supreme Court has held that Section 4.1a’s restrictions on loans secured by real estate were implicitly repealed by the later-enacted Section 4(1)(l) of the Interest Act. 815 ILCS 205/4(1)(l)United States Bank Nat’l Ass’n v. Clark, 216 Ill.2d 334, 349 (2005); see also IDFPR Interpretive Letter 98-01.

Because your software must warrant its documents for your use, it appears to be taking a very cautious position by warning you about the NSF fees. We note that your software directs you to consult with legal counsel; we cannot give you any legal advice, and so we also recommend that you consult with legal counsel on this issue.