Is there anything restricting us from inserting a “due on demand” provision in a consumer loan agreement? We are looking into offering short-term, unsecured consumer lines of credit for furloughed federal employees as a payroll gap loan. We want to invoke the demand clause within a certain number of days after the furlough has concluded.

We are not aware of any Illinois laws that would prohibit a bank from offering an unsecured consumer loan with a demand feature. Regulation Z prohibits the use of demand features in high-cost mortgage loans and home equity lines of credit, but we are not aware of any limitations on demand features in unsecured consumer loans.

However, we note that courts in Illinois have occasionally called into question whether a demand feature is enforceable, because certain loan terms (whether found in the note or incorporated by reference) may be considered inconsistent with a “payable on demand” term. For example, demand clauses have been found to conflict with acceleration clauses that accelerate a loan on an event of default. Additionally, a borrower has challenged a bank’s exercise of a demand feature in a consumer line of credit as “deceptive” because the loan was structured as a term loan; however, the court ultimately rejected the borrower’s claim and found that the demand feature, alone, was not deceptive.

One alternative to inclusion of a demand feature would be to offer loans with terms limited to a certain number of weeks, with a provision permitting the bank to extend the loan in its discretion.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.32(d)(8) (“A high-cost mortgage shall not include the following terms: . . . (8) Acceleration of debt. A demand feature that permits the creditor to accelerate the indebtedness by terminating the high-cost mortgage in advance of the original maturity date and to demand repayment of the entire outstanding balance, except in the following circumstances: . . .”)

Regulation Z, 12 CFR 1026.40(f)(2) (“Limitations on home equity plans. No creditor may, by contract or otherwise: . . . (2) Terminate a plan and demand repayment of the entire outstanding balance in advance of the original term (except for reverse mortgage transactions that are subject to paragraph (f)(4) of this section) unless: . . .”)

N.W.I. Int’l, Inc. v. Edgewood Bank, 291 Ill.App.3d 247, 256, 257 (1st Dist. 1997) (“Examination of the consolidated note reveals that the words, ‘on demand’ are prominent and typewritten in two places and included again in the note’s form language. However, the note also includes three instances of form language, in what is best described as ‘fine print,’ mentioning terms of default that would trigger the bank’s right to accelerate payment. In addition, other events of default are recited in the September 1980 security agreement which has been specifically incorporated by reference. . . . Accordingly, since the note appears to be ambiguous, the issue as to whether the parties intended that the instrument be a demand note must be submitted to the jury.”)

Nilsson v. NBD Bank of Illinois, 313 Ill.App.3d 751, 764–765 (1st Dist. 1999) (The borrower “offered evidence that the deceptive act committed by the bank and its loan officers was the insertion of a demand feature into the promissory note [and] further asserted that the ‘deception’ continued when defendants sought to enforce the demand feature of the note notwithstanding the true intent of the parties to execute a term loan rather than a demand loan. . . . After reviewing the evidence, we agree with the trial court that [the borrower’s] claim for damages as a result of the bank’s alleged violation of the Act failed because the evidence offered at trial did not show that the bank's actions amounted to an act of deception.”)