No, there are no limitations on late fees for “higher-priced mortgage loans,” which have interest rates exceeding 1.5%, 2.5% or 3.5% over the average prime offer rate (depending on the lien position and loan amount). Regulation Z imposes escrow, appraisal and other requirements on higher-priced mortgage loans, but it does not limit late charges for these loans.
Notably, “higher-priced mortgage loans” should not be confused with “high-cost mortgages,” which have interest rates exceeding 6% or 8% over the average prime offer rate, or points and fees exceeding applicable thresholds, or prepayment penalties. Those loans are subject to limitations on late fees.
As for Illinois law, the Illinois Banking Act generally permits banks to establish late fees without limitation, provided that they are agreed to by the borrower. Additionally, the Illinois Interest Act authorizes a bank to collect interest and charges at any rate agreed on by the bank and the borrower. You should be aware, however, that other limitations on late fees may apply in certain situations, such as the Servicemembers Civil Relief Act’s protections for servicemembers and their dependents.
If you are assessing a late fee using a percentage rather than a flat dollar amount, we strongly recommend calculating the fee only as a percentage of the actual amount that is past due. Calculating the late fee as a percentage of the full payment that was due when the borrower has made a partial payment could raise questions implicating UDAAP issues.
For resources related to our guidance, please see:
- Regulation Z, 12 CFR 1026.35 (requirements for higher-priced mortgage loans)
- Regulation Z, 12 CFR 1026.32 (requirements for high-cost mortgage loans)
- Illinois Banking Act, 205 ILCS 5/5e (“Notwithstanding 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.”)
- Interest Act, 815 ILCS 205/4(1) (Authorizes a 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.”)
- Interest Act, 815 ILCS 205/4(1)(l) (A bank may receive and collect interest and charges at any rate on loans secured by a mortgage on real estate.)
- United States Bank Nat’l Ass’n v. Clark, 216 Ill.2d 334, 349 (2005) (Amendments to the Interest Act implicitly repealed previous restrictions on interest and fee charges on real estate loans.)
- IDFPR Interpretive Letter 98-01 (Section 4(1)(l) of the Interest Act implicitly repealed previous restrictions on interest and fee charges on real estate loans made by banks.)
- Servicemembers Civil Relief Act, 50 USC App. 527(a) (Limitation on interest rates and finance charges during a service member’s active duty.)