The effective date that you choose for the renewal of a note is a business decision for your bank.

Under Illinois law, it is permissible to backdate an agreement — in other words, to use an effective date for an agreement that predates (or postdates) its signing date — provided that the parties' intention to do this is “clear from the face of the contract.”

Even without backdating a renewal of a note, you still can extend a loan by issuing a new note without affecting your existing lien position on the note’s collateral. Illinois courts repeatedly have held that a note “given in renewal of another note and not in payment . . . does not extinguish the original debt or change the debt except that it postpones the time for payment.”  Again, when this is clearly the parties’ intention, the issuance of a new note should not affect the lender’s lien position. The federal Seventh Circuit Court of Appeals similarly has recognized, in the context of a balloon payment payday loan, that it is possible to renew a loan after its maturity date, since a loan does not automatically “expire” when it matures.

Regarding the higher post-maturity interest rate, it is not clear to us which result you are seeking. Do you want the extra 2% of post-maturity interest that has been paid since the maturity date to be applied to the loan principal, or do you want the extra 2% post-maturity rate to continue to apply to the loan going forward? It appears that your loan system will take care of the former if you backdate a renewal agreement or new note to the maturity date. If you want the latter outcome, we recommend working with your bank counsel to provide in the renewal agreement or new note that the rate applied during the post-maturity period will constitute the new rate on the note going forward, notwithstanding the backdated effective date.

For resources related to our guidance, please see:

• Grubb & Ellis Co. v. Bradley Real Estate Trust, 909 F.2d 1050, 1054 (7th Cir. 1990) (“Although there is little recent law on the subject, Illinois courts have, in the past, permitted the ‘relation back’ theory of contract effectiveness: that is, contractual terms may be effective for a period before the contract is executed, so long as such coverage is clear from the face of the contract . . . .”)

• Asset Recovery Contracting, LLC v. Walsh Constr. Co. of Ill., 366 Ill.Dec. 615, 631 (1st Dist. 2012) (“As is clear from Illinois precedent, the date on the contract is ordinarily the effective date, and where the contract is executed later, its contractual terms relate back and are effective from the date of the contract if such coverage is clear from the face of the contract, as it is here.”)

• State Bank of Lake Zurich v. Winnetka Bank, 614 N.E.2d 862, 867 (2d Dist. 1993) (“Indeed, the ordinary practice of lending institutions is that where a note is given in renewal of another note and not in payment, the renewal does not extinguish the original debt or change the debt except that it postpones the time for payment.”)

• Heritage Bank of U. Park v. Bruti, 489 N.E.2d 1182, 1184 (3d Dist. 1986) (“We have no quarrel with the statement that a renewal note may operate as payment of and a discharge of the original note. However, from the aforementioned affidavit and the letters attached to the motion for summary judgment we find no evidence that plaintiff and defendants intended that the new note should serve as payment of the outstanding note.”)

• Jackson v. American Loan Co., Inc., 202 F.3d 911, 913 (7th Cir. 2000) (“To say, as plaintiffs do, that a loan ‘expires by its terms’ on the original due date is fanciful. All of the loan’s terms, including the repayment obligation, persist.”)