Our residential mortgage agreements authorize us to charge dishonored item fees, but we haven’t been charging the fees so far. Are these types of fees permitted under Illinois law?

We do not believe that there are any limitations on NSF fees that apply to your institution. In fact, there are very few limitations on interest rates and fees charged by banks under Illinois law.

Section 5e of the Banking Act states that a bank may “elect to contract for and receive interest, fees, and other charges” subject only section 4(1) of the Interest Act and any laws applicable to “credit secured by residential real estate.” 205 ILCS 5/5e. The only proviso in Section 5e limiting a bank’s ability to charge NSF fees are that the customer must agree to the charges and that the bank must set its fees based on its “prudent business judgment and safe and sound operating standards.” 205 ILCS 5/5e.

Similarly, subsection 4(1) of the Illinois Interest Act allows banks to charge any “charge” that a customer agrees to pay: “It is lawful for a state bank or a branch of an out-of-state bank . . . to receive or contract to receive and collect interest and charges at any rate or rates agreed upon by the bank or branch and the borrower.” 815 ILCS 205/4(1). Paragraph 4(1)(l) explicitly allows a bank to contract for and charge any compensation relating to a loan secured by a mortgage on real estate. 815 ILCS 205/4(1)(l). And, the Illinois Supreme court has confirmed this conclusion specifically as to loans secured by real property (concluding that restrictions on interest rates and charges found elsewhere in the Interest Act were implicitly repealed by the later-enacted Section 4(1)(l) of the Interest Act). 815 ILCS 205/4(1)(l)United States Bank Nat’l Ass’n v. Clark, 216 Ill.2d 334, 349 (2005); see also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.

Notably, the Illinois Department of Financial and Professional Regulation (IDFPR) opined in 1995 that while Section 4.1a of the Interest Act authorizes banks to charge NSF fees, such “Bad Check Fees” are subject to the $25 limit in Section 3-806 of the Uniform Commercial Code. IDFPR Interpretive Letter 95-08. However, Section 5e was added to the Illinois Banking Act in 1999 and overrides Section 3-806 by expressly stating that Section 5e applies “[n]otwithstanding any other law.”

In sum, we believe that Section 5e authorizes banks to charge NSF fees on mortgage loans, subject only to the limitations discussed above.