Some of our loan customers make their payments from checking accounts held at other banks. Our bank originates ACH transfers to pull loan payments from the borrowers’ outside checking accounts. Can we charge a fee if these payments are returned for insufficient funds (NSF)? If so, does our bank need to disclose this fee?

Yes, your bank may charge an NSF fee, and yes, it must be disclosed and agreed to by your customers.

We are unaware of any limitation on charging reasonable NSF fees for returned ACH transfers under Illinois law. The Illinois Uniform Commercial Code (UCC) generally limits returned check fees to $25, but this limitation applies only to returned checks — not returned ACH transfers. Additionally, the Illinois Banking Act permits banks to “contract for and receive” fees “subject only to the provisions of [subsection 4(1)] of the Interest Act” and any laws applicable to “credit secured by residential real estate.” This provision applies to banks “notwithstanding the provisions of any other law.” Subsection 4(1) of the Interest Act expressly permits banks “to charge, contract for, and receive any rate or amount of interest or compensation with respect to . . . (l) Loans secured by a mortgage on real estate.”

However, these provisions do require that a bank “contract for” the NSF fees to be charged. If your loan agreements do not already provide for these NSF fees, your customers must agree to them. First, you should check your controlling loan agreements for provisions that might apply to the unilateral imposition of these new fees, as well as for any terms regarding the disclosure of new fees. It may be that there are no provisions in these controlling agreements that would constitute an agreement by your borrowers to accept these new fees. However, even if the provisions in your loan agreements permit you to unilaterally impose new fees at any time (by amending a fee schedule, for example), we would recommend taking a conservative approach by notifying your customers when unilaterally adding these new fees. Many financial institutions issue a “notice of change in terms” to their customers when imposing significant new fees on any type of account relationship. It also is worth noting that the CFPB is increasingly scrutinizing practices that it considers to be “unfair, deceptive or abusive,” with a particular emphasis on the charging of fees in any number of contexts.

In addition to the disclosure requirements in your account agreements, Regulation Z requires advance disclosure of new fees for open-end loans, even if your loan agreements reserve the right to add or modify loan fees at any time.

Also, your bank should consult the NACHA rules for specific instructions on how to submit a return fee entry (currently found in the NACHA Operating Guidelines, Section VI, Chapter 54, Return Fee Entries).

For resources related to our guidance, please see:

Illinois UCC, 810 ILCS 5/3-806 (“Any person who issues a check or other draft that is not honored upon presentment because the drawer does not have an account with the drawee, or because the drawer does not have sufficient funds in his account, or because the drawer does not have sufficient credit with the drawee, shall be liable in the amount of $25, or for all costs and expenses, including reasonable attorney’s fees, incurred by any person in connection with the collection of the amount for which the check or other draft was written, whichever is greater . . . .”)

Illinois Interest Act, 815 ILCS 205/4.1a(e) (“Charges for and cost of the following items paid or incurred by any lender in connection with any loan shall not be deemed to be charges for or in connection with any loan of money referred to in Section 6 of this Act, or charges by the lender as a consideration for the loan referred to in this Section: . . . (e) if the agreement governing the loan so provides, a charge not to exceed the rate permitted under Section 3-806 of the Uniform Commercial Code-Commercial Paper for any check, draft or order for the payment of money submitted in accordance with said agreement which is unpaid or not honored by a bank or other depository institution.”)

Illinois Banking Act, 205 ILCS 5/5e (“Notwithstanding the provisions of any other law in connection with extensions of credit, a State bank may elect to contract for and receive interest, fees, and other charges for extensions of credit subject only to the provisions of subsection (1) of Section 4 of the Interest Act, except for extensions of credit secured by residential real estate, which shall be subject to the laws applicable thereto.”)

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.)

Regulation Z, Open-End Credit, 12 CFR 1026.9(c)(1) (“For home-equity plans subject to the requirements of §1026.40, whenever any term required to be disclosed under §1026.6(a) is changed or the required minimum periodic payment is increased, the creditor shall mail or deliver written notice of the change to each consumer who may be affected. . . .”)

Regulation Z, Open-End Credit, 12 CFR 1026.9(c)(2)(i)(B) (“A notice of change in terms is required, but it may be mailed or delivered as late as the effective date of the change if the consumer agrees to the particular change. . . . The following are not considered agreements between the consumer and the creditor for purposes of this paragraph (c)(2)(i)(B): The consumer’s general acceptance of the creditor’s contract reservation of the right to change terms; . . .”)

Regulation Z, Official Interpretations, Paragraph 9(c)(1)(i), Comment 3 (“Advance notice of 15 days is not necessary — that is, a notice of change in terms is required, but it may be mailed or delivered as late as the effective date of the change — in two circumstances: . . . (ii) If the consumer agrees to the particular change. . . . the following are not ‘agreements’ between the consumer and the creditor for purposes of §1026.9(c)(1)(i): The consumer's general acceptance of the creditor's contract reservation of the right to change terms; . . .”)