We believe this practice would be highly unusual and quite possibly could violate both loan agreements, as well as raise questions under both Illinois law and the federal UDAAP prohibitions.

The crux of the problem is that interest begins accruing on the second loan before the second loan’s proceeds have been disbursed. Charging this interest before disbursing the loan proceeds most likely would not be addressed in the terms of the second loan’s agreement, and if it were, such a provision most likely would be unenforceable.

More importantly, your institution would be collecting interest on both the first loan and the second loan during the three day ROR period essentially for the same funds loaned to your customer. Your examiners (and your customers) probably would view this result as problematic, to say the least.

For both reasons, we recommend waiting until the proceeds of the second loan are used to extinguish the original loan before charging interest on the second loan. Then you would be charging interest on the first loan through the end of the ROR period, and after it has been paid off, you would begin charging interest on the second loan. This would avoid the risks of double-charging interest on funds that for practical purposes are the same funds (certainly from the customer’s point of view).

For resources related to our guidance, please see:

• Interest Act, 815 ILCS 205/6 (“If any person or corporation knowingly contracts for or receives, directly or indirectly, by any device, subterfuge or other means, unlawful interest, discount or charges for or in connection with any loan of money, the obligor may, recover by means of an action or defense an amount equal to twice the total of all interest, discount and charges . . . plus such reasonable attorney’s fees and court costs . . . .”)