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Can we offer a consumer-purpose revolving line of credit that requires no payments due (neither interest nor principal) until maturity under Illinois law? The borrowers would be natural persons, and the term of the loan would be for one year. – IBA Compliance Connection

IBA Compliance Connection

Your go to source for compliance!

Can we offer a consumer-purpose revolving line of credit that requires no payments due (neither interest nor principal) until maturity under Illinois law? The borrowers would be natural persons, and the term of the loan would be for one year.

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Yes, you may offer a revolving line of credit with a term of one year and principal and interest due at the end of the term, although we recommend considering the regulatory guidance on small dollar loans discussed below. We are not aware of any law or regulation that would prevent it, and the Illinois Financial Services Development Act expressly authorizes financial institutions to enter into revolving credit arrangements with their customers.

However we recommend considering the FDIC’s Affordable Small-Dollar Loan Guidelines, even though the FDIC is not your primary federal regulator. One potential concern is that because no payments are due until the end of the loan term, interest on the outstanding balance would continue to compound for up to a year. The FDIC identified this as a concern for open-end loans, stating that “products should be structured to require minimum payments of interest and principal that provide for the reduction of the outstanding loan over a reasonable timeframe.” In addition, “the prolonged failure to reduce the outstanding balance on an open-end loan . . . [is a] sign that the product is not meeting the borrower’s credit needs.” Based on that guidance, you may want to consider structuring the loan product to require some minimum payment of interest or principal before the end of the term.

For resources related to our guidance, please see:

  • Illinois Financial Services Development Act, 205 ILCS 675/4 (“Notwithstanding the provisions of any other laws in connection with revolving credit plans, any financial institution may, subject to the other provisions of this Section 4 offer and extend credit under a revolving credit plan to a borrower . . . as the financial institution and borrower may agree upon from time to time.”)
  • FDIC FIL 50-2007, Affordable Small-Dollar Loan Guidelines (See discussion under “Features of Responsible, Affordable Small-Dollar Credit Programs.”)