When is it permissible to backdate loan documentation? Are you aware of any potential repercussions when backdating loan documentation of a renewal that occurs after the original loan has matured? Alternatively, are there any repercussions for not backdating loan documentation, resulting in a gap between the maturity date and the renewal date? Are there contract considerations for either?

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.” When renewing a matured loan, you may select an effective date that all parties agree to.

Whether to backdate the effective date for the renewal to avoid a gap between the renewal and the maturity date is a business decision for your bank. We do not believe it is necessary to avoid a gap between a loan’s maturity date and the renewal date, provided that all parties agree to the terms of the renewal. As recognized by the federal Seventh Circuit Court of Appeals, a loan does not automatically “expire” when it matures, and it is possible to renew a loan after its maturity date.

We note that in the context of consumer loans, Regulation Z distinguishes between renewals, extensions and modifications, which typically are not considered new transactions, from a “refinancing,” which is considered a new transaction subject to new disclosures. Whether a subsequent transaction should be treated as a “modification” or a “refinancing” depends on the specific facts, including consideration of the original and any subsequent loan documents. The general rule is that a refinancing occurs only when an existing obligation is “satisfied and replaced” by a new transaction, based on the parties’ contract and applicable law.

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., 980 N.E.2d 708, 724 (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.”)

Janowiak v. Tiesi, 932 N.E.2d 569, 577 (1st Dist. 2010) (“Although there is a dearth of recent precedent, perhaps because the rule is so rudimentary, Illinois courts have long recognized that ‘undoubtedly a contract may have a retrospective operation.’ . . . . ‘It is elementary that ordinarily a contract speaks from the day of its date, regardless of when it was executed and delivered.’”)

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.”)

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.”)

Regulation Z, 12 CFR 1026.20(a) (A “refinancing” occurs when “an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer.”)