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Can our bank charge a fee to extend or modify the construction period of a consumer-purpose construction loan? – IBA Compliance Connection

IBA Compliance Connection

Your go to source for compliance!

Can our bank charge a fee to extend or modify the construction period of a consumer-purpose construction loan?

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Yes, we believe you may charge this fee if the customer agrees to it as part of the extension or modification agreement.

We are not aware of any law that would prohibit a bank from charging an extension or modification fee agreed to by the customer, particularly in connection with a mortgage loan. Section 5e of the Banking Act states that a bank may collect interest and other charges subject only section 4(1) of the Interest Act and any laws applicable to “credit secured by residential real estate.” Similarly, subsection 4(1) of the Illinois Interest Act allows banks to charge any interest or compensation that a customer agrees to pay and expressly allows a bank to contract for and charge any amount relating to a loan secured by a mortgage on real estate. The Illinois Supreme Court has expressly confirmed this conclusion as it relates to loans secured by real property.

For resources related to our guidance, please see:

  • 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) (“It is lawful for a state bank or a branch of an out-of-state bank, as those terms are defined in Section 2 of the Illinois Banking Act, to receive or to 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) (“It is lawful to charge, contract for, and receive any rate or amount of interest or compensation with respect to the following transactions: . . . (l) Loans secured by a mortgage on real estate.”)
  • United States Bank Nat’l Ass’n v. Clark, 216 Ill.2d 334, 349 (2005) (“[W]e agree with the Seventh Circuit Court of Appeals in Currie and Reiser that the 1981 amendments to section 4 implicitly repealed section 4.1a’s limitation on noninterest charges lenders may impose on residential mortgage loans.)
  • IDFPR Interpretive Letter 98-01 (“For the reasons set forth in this letter, we conclude that Section 4(1)(l) is the controlling section and therefore, any rate of interest may be charged for loans secured by a mortgage on real estate.)