IBA Compliance Connection

Your go to source for compliance!

Is there a maximum late fee or default rate that we can charge non-consumer loan customers? Also, are we required to send non-consumer loan customers notice when there is a change in the interest rate due to a default?

—

by

admin

There are very few limitations on loan late fees and default interest rates under Illinois law, whether for consumer or commercial loans, provided that your customers have agreed to such fees and rates in your loan agreements. However, default rates may be subject to court scrutiny if they are not considered “reasonable.” Further, we are unaware of any laws or regulations that require a lender to send notice of the imposition of a default rate and recommend reviewing the terms of your loan agreements to determine if such notice is required.

For revolving credit plans, the Illinois Financial Services Development Act authorizes late fees without any specific limit. For closed-end loans, the Illinois Banking Act permits banks to charge fees, interest and other charges, provided that the bank sets these charges based on its “prudent business judgment and safe and sound operating standards.” Additionally, the Interest Act authorizes a bank to collect interest and charges at any rate agreed on by the bank and the borrower.

We also are not aware of any specific grace period requirements. Although Section 4.1a of the Illinois Interest Act requires a ten-day grace period and limits late fees to 5% of each loan installment payment past due, we believe these restrictions are inapplicable to banks, based on provisions elsewhere in the Interest Act, the Illinois Banking Act, an Illinois Supreme Court decision, and an IDFPR interpretive letter.

Some limitations on default rates may apply under federal law, such as the protections of the Servicemembers Civil Relief Act (SCRA). Similar restrictions also apply under the Illinois Service Member Civil Relief Act. Both the federal SCRA and the state law limit interest rates to 6% for active military personnel on obligations entered into “prior to a service member’s period of military service.”

The protections of the SCRA are not limited to a servicemember’s primary residence and apply to business purpose loans, as the Federal Reserve Bank of Philadelphia confirmed in a 2013 webinar Q&A. Additionally, several courts throughout the country have held that the SCRA limitation applies to loans to businesses where the owner or principal of the company enters active military service. Accordingly, a late fee or default rate should be analyzed under the SCRA at the time it is imposed to determine whether the aggregate interest rate exceeds 6% and poses a risk under the SCRA.

Also, if your institution obtains a court judgment against a borrower, both 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. . . .”)
  • 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.”)
  • In re Kimbrell Realty/Jeth Court, LLC, 483 B.R. 679, 689 (Bankr. C.D. Ill. 2012) (“Under Illinois law, default interest provisions are generally valid and enforceable so long as the higher rate is reasonable in light of the anticipated or actual loss caused by the breach and the difficulty of proving the loss. Inland Bank & Trust v. Knight, 399 Ill.App.3d 378, 340 Ill.Dec. 38, 927 N.E.2d 777 (Ill.App. 1 Dist.2010).”)
  • Illinois Financial Services Development Act, 205 ILCS 675/4 (“Notwithstanding the provisions of any other laws in connection with revolving credit plans, any financial institution may, subject to the other provisions of this Section 4 offer and extend credit under a revolving credit plan to a borrower and in connection therewith may charge and collect interest and other charges, may take real and personal property as security therefor and may provide in the agreement governing the revolving credit plan for such other terms and conditions as the financial institution and borrower may agree upon from time to time.”)
  • Illinois Financial Services Development Act, 205 ILCS 675/6 (“In addition to or in lieu of interest at a periodic rate or rates as provided in Section 5, and without limitation of the foregoing Section 4, a financial institution may, if the agreement governing the revolving credit plan so provides, charge and collect as interest, in such manner or form as the plan may provide, an annual or other periodic fee for the privileges made available to the borrower under the plan, a transaction charge or charges, late fees or delinquency charges, returned payment charges, over limit charges and fees for services rendered.”)
  • Interest Act, 815 ILCS 205/4.1a(f) (Ten-day grace period requirement and 5% limitation on late fees.)
  • IDFPR Interpretive Letter 98-01 (Section 4(1)(l) of the Interest Act implicitly repealed previous restrictions on interest and fee charges on real estate loans made by banks.)
  • 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.”)
  •  Illinois Service Member Civil Relief Act, amending the Interest Act, 815 ILCS 205/4.05(a) (“‘Obligation’ means any retail installment sales contract, other contract for the purchase of goods or services, or bond, bill, note, or other instrument of writing for the payment of money arising out of a contract or other transaction for the purchase of goods or services.”).
  • FRB Philadelphia, SCRA Webinar Questions & Answers (First Quarter 2013) (“12. Do foreclosure rules apply only to the service member’s primary residence, or do they apply to all loans secured by a mortgage on a residence? Does it matter if the loan is for business purposes? The SCRA’s foreclosure protections in section 533 apply to any obligation on real or personal property owned by a service member that is secured by a mortgage, trust deed, or other security in the nature of a mortgage. The obligation must have been originated before the service member’s military service, and the service member must still be obligated on it. The statute applies to loans for business purposes and loans secured by the service member’s residence, even if it is not the service member’s primary residence.”)
  • Cathey v. First Republic Bank, CIVIL ACTION NO. 00-2001-M, 2001 U.S. Dist. LEXIS 13150, at *14 (W.D. La. July 6, 2001) (“Therefore, while it is the serviceman who is provided interest rate protection under the SSCRA and not his co-makers, the result is the same. Interest on that obligation may not be charged in an amount in excess of the statutory rate of 6% per annum. Defendants' suggestion that, because a corporation is a separate legal entity, it can run itself while the serviceman is away is specifically rejected, especially where, as here, the corporation is a family corporation which depends on its owners' presence for profitability.”)
  • Linscott v. Vector Aero., No. CV05-682-HU, 2006 U.S. Dist. LEXIS 30023, at *10-11 (D. Or. May 12, 2006) (“Defendants have argued that the protections offered to servicemembers by the Act are not applicable to JLA, the judgment debtor. However, I am persuaded by the reasoning of the court in Cathey v. First Republic Bank et al., . . . which held that the protections extended to the servicemember by the Act extend to the servicemember's family corporation, especially when, as in Cathey and as in this case, the corporation's obligations were personally guaranteed by the servicemember and the corporation ‘depend[ed] on its owners' presence for profitability.’”)
  • Fifth Third Bank v. Schoessler's Supply Room, LLC, 2010-Ohio-4074, ¶ 23, 190 Ohio App. 3d 1, 9, 940 N.E.2d 608 (“In this case, Ducastel executed two unconditional guarantees, which personally obligated himself on the payment of Note 42 and Note 26. In addition, Ducastel stated in his affidavit that he was both an owner and managing member of SSR, and until his mobilization ‘ran the business almost entirely [him]self.’ Keeping in mind that we must liberally construe the provisions of the SCRA, we find, under these limited circumstances, that because Ducastel, a servicemember, personally guaranteed both loans, and because it appears that his presence was necessary to run and maintain the business, the protections of the SCRA may extend to SSR.”)
  • 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.”)