IBA Compliance Connection

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I have a question about increasing the post maturity rate on a home equity line of credit (HELOC). I have seen the term “default rate” referenced in relation to increasing a HELOC’s rate when the loan is “terminated” or “accelerated.” When a HELOC is terminated or accelerated, does that mean it has matured? We would like to impose a post-maturity interest rate increase, but we will not impose a default rate during the loan term. Is that permissible?

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Yes, we believe that your bank may impose an increased post-maturity rate for HELOCs that have matured, provided that your customers have agreed to the increase in their loan agreements.

The terms “default rate,” “terminated,” “accelerated,” and the imposition of interest rate increases all should be defined by your bank’s HELOC loan agreement. Typically, the term “default rate” refers to a rate that will be imposed upon certain events of default described in the loan agreement. Termination may occur upon maturity or under other circumstances described in the loan agreement. Acceleration may occur when a payment default occurs before the HELOC has matured.

The terms of your HELOC agreement should dictate when the HELOC has matured and can be drafted to impose an increased interest rate only upon maturity. There are very few limitations on interest rates and fees charged by banks under Illinois law, whether for consumer or commercial loans, provided they are agreed to by your customers in your loan agreements. Default rates also may be subject to court scrutiny if they are not considered “reasonable.” In 2010, an appellate court found that a default rate increase “will be enforced if the damages are ‘reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.’”

We note that some limitations on post-maturity interest rates may apply under federal law, such as the Servicemembers Civil Relief Act’s protections, which also apply under the Illinois Service Member Civil Relief Act. Both the federal and state laws limit interest rates to 6% for active military personnel on obligations entered into “prior to a service member’s period of military service.” That means you may be prevented from imposing the full post-maturity rate increase if it results in a rate above 6% for a customer entitled to these protections.

Regulation Z also prohibits an increased interest rate after default for HOEPA (high-cost) mortgage loans. Also, if your institution obtains a court judgment against a borrower, both the Illinois and federal rules of civil procedure limit interest that can be charged post-judgment. In addition, if a borrower files for bankruptcy, the court may scrutinize interest rates you charge after the bankruptcy filing to determine whether your interest rate is “reasonable.”

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 . . . 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. . . . Loans secured by a mortgage on real estate. . . .”)
  • Inland Bank and Trust v. Knight, 399 Ill.App.3d 378, 383 (1st Dist. 2010) (A default interest rate increase “will be enforced if the damages are ‘reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.’”)
  • Inland Bank and Trust v. Knight, 399 Ill.App.3d 378, 383 (1st Dist. 2010) (“Parties to a note ‘may stipulate to pay a higher interest rate after maturity and the additional amount will not be considered a penalty but will be considered liquidated damages.’”)
  • Inland Bank and Trust v. Knight, 399 Ill.App.3d 378, 384 (1st Dist. 2010) (“Illinois has upheld liquidated damages clauses over a fairly wide range of values. From the previously cited cases, the supreme court in Baker upheld an increase from 6% to 7%. In Bane, the court upheld a provision in a promissory note which required the debtor to pay interest at the rate of 30% per annum after maturity. The supreme court in Walker v. Abt, 83 Ill. 226 (1876), upheld a provision in a note increasing the interest rate from 10% per annum to 20% per annum upon maturity of the note. While the relatively ancient cases of Bane and Walker predate usury laws, they nevertheless provide support for our holding that provisions for higher interest in the Note are valid and enforceable.”)
  • Servicemembers Civil Relief Act, 50 USC App. 527(a) (“An obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember’s spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent (A) during the period of military service and one year thereafter, in the case of an obligation or liability consisting of a mortgage, trust deed, or other security in the nature of a mortgage; or (B) during the period of military service, in the case of any other obligation or liability.”)
  • Illinois Service Member Civil Relief Act, amending the Interest Act, 815 ILCS 205/4.05(b) (“Notwithstanding any contrary provision of State law, but subject to the federal Servicemembers Civil Relief Act, no creditor in connection with an obligation entered into on or after the effective date of this amendatory Act of the 94th General Assembly, but prior to a service member's period of military service, shall charge or collect from a service member who has entered military service, or the spouse of that service member, interest or finance charges exceeding 6% per annum during the period of military service.”)
  • Regulation Z, 12 CFR 1026.32(d)(4) (“A high-cost mortgage shall not include the following terms: . . . (4) An increase in the interest rate after default.”)
  • Illinois Code of Civil Procedure, 735 ILCS 5/2-1303 (“Judgments recovered in any court shall draw interest at the rate of 9% per annum from the date of the judgment until satisfied . . . .”)
  • Federal Code of Civil Procedure, 28 USC 1961 (“Interest shall be allowed on any money judgment in a civil case recovered in a district court. . . . Such interest shall be calculated from the date of the entry of the judgment, at a rate equal to the weekly average 1-year constant maturity Treasury yield . . . .”)
  • U.S. Bankruptcy Code, 11 USC 506(b) (“To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.”)