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On a rescindable loan under Regulation Z, can the bank charge interest on the loan from the date of the note, even though as a creditor we cannot disburse loan proceeds to the customer? – IBA Compliance Connection

IBA Compliance Connection

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On a rescindable loan under Regulation Z, can the bank charge interest on the loan from the date of the note, even though as a creditor we cannot disburse loan proceeds to the customer?

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Yes, the bank can charge interest on the loan from the date of the note. Regulation Z allows interest to accrue at the loan closing and does not require you to wait until the expiration of the rescission period (provided that your loan agreement allows for this). Official Staff Commentary, 12 CFR 1026.15(c), 12 CFR 1026.23(c), Comment 3.

As to Illinois law, there are very few limitations on interest charges. Section 5e of the Illinois Banking Act states that “[n]otwithstanding 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.” 205 ILCS 5/5e. And subsection 4(1) of the Interest Act states that a bank is authorized “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). For loans secured by real estate, the Illinois Supreme court has confirmed that Section 4(1)(l) of the Interest Act implicitly repealed previous restrictions on interest and fee charges on real estate loans. United States Bank Nat’l Ass’n v. Clark, 216 Ill.2d 334, 349 (2005) (see also IDFPR Interpretive Letter 98-01).