IBA Compliance Connection

Your go to source for compliance!

We are setting up a new loan origination system that will be used for commercial and agricultural real estate and non-real estate loans and for consumer non-real estate loans. The system asks us to choose one of three options for interstate lending — we can choose to use the lender’s state law, the borrower’s state law, or an option to “select at any time.” What is the most appropriate choice, given that our bank only has Illinois branches but commonly makes loans in other many other states?

—

by

admin

We believe that the option to “select at any time” may be the most appropriate choice, given that the governing law for a loan transaction will depend on the specific details of each loan.

Illinois courts generally will enforce a choice of law provision provided in an agreement, provided there is “some relationship” between the chosen state and the parties to the transaction. Consequently, in many cases, you will be able to establish the applicable state law in your loan agreements.

However, we cannot predict how an out-of-state court would react to a choice of law provision in your loan agreements, and you may need to consult with counsel familiar with both Illinois law and the law of the state where the borrower or collateral is located when deciding what law should apply to a loan. We recommend choosing the option providing your bank with the most flexibility, which appears to be the “select at any time” option.

For resources related to our guidance, please see:

  • Emigrant Mortg. v. Chicago Financial, 386 Ill.App.3d 21 (1st Dist. 2007) (“So long as the provision does not contravene Illinois public policy and there is some relationship between the chosen forum and the parties to the transaction, an express choice of law provision will be given full effect.”)