We agree that you may contract for and charge fees for returned checks for loan payments, even though some customers may be charged fees both on a loan at your bank and on the customer’s deposit account held at your bank. Overall, there are very few limitations on interest rates and fees charged by banks under Illinois law. However, with the increasing focus on unfair, deceptive, and abusive acts and practices (UDAAP), you may want to take some steps to mitigate UDAAP risks, as we discuss below.
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(concluding that restrictions on interest rates and charges found elsewhere in the Interest Act were implicitly repealed by the later-enacted Section 4(1)(l) of the Interest Act). 815 ILCS 205/4(1)(l)United States Bank Nat’l Ass’n v. Clark, 216 Ill.2d 334, 349 (2005); see also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 and on deposit accounts, subject only to the limitations discussed above. With that said, the federal banking regulators are increasingly scrutinizing fee charges for UDAAP violations. See OCC Advisory Letter 2002-03, Guidance on Unfair or Deceptive Acts or Practices (March 22, 2002). That advisory letter includes several steps for mitigating UDAAP risks which you may want to consider, such as ensuring that your disclosures are clear on when and how NSF fees will be charged. When adding the NSF fee provisions to your loan contracts, you may want to document your institution’s justifications for charging the fee, particularly in charging a second NSF fee when a check written on an account at your institution bounces. Also, the OCC letter recommends monitoring your complaints for concerns or signs of confusion over the fees.