Are we allowed to charge a fee for releasing our lien after a borrower pays off their home equity line of credit (HELOC)? When we added a lien release fee to our documents, our loan document provider produced a “critical warning” stating that under Illinois law, the lender must pay all expenses to release a security interest in real estate when the security interest no longer secures any credit under a line of credit.

Yes, we believe that Illinois law permits banks to charge HELOC lien release fees, provided your customers have agreed to pay such fees in the HELOC agreement and they have been properly disclosed under Regulation Z.

Section 4.1 of Illinois’s Interest Act prohibits lenders from charging for “expenses, including recording fees and otherwise” when releasing a mortgage lien for a revolving credit arrangement. However, we believe that this prohibition is inapplicable to banks; the Illinois Banking Act expressly permits banks to charge any “interest, fees, and other charges . . . subject only to the provisions of [subsection 4(1)] of the Interest Act” and any laws applicable to “credit secured by residential real estate.” This Illinois Banking Act language applies to bank lenders “notwithstanding the provisions of any other law.”

Subsection 4(1) of the Interest Act, referenced in the Illinois Banking Act, permits banks to collect “interest and charges at any rate or rates agreed upon by the bank or branch and the borrower” and further states that “it is lawful to charge, contract for, and receive any rate or amount of interest or compensation . . . with respect to . . . (l) Loans secured by a mortgage on real estate.” Also, the Illinois Financial Services Development Act confirms that Illinois financial institutions may assess charges with respect to open-end credit “as the financial institution and borrower may agree upon from time to time.”

Note that a lien release fee must be properly disclosed under Regulation Z. For home-equity plans, Regulation Z requires creditors to disclose at account opening “the circumstances under which a finance charge will be imposed and an explanation of how it will be determined,” as well as “[t]he amount of any charge other than a finance charge that may be imposed as part of the plan, or an explanation of how the charge will be determined.” If properly itemized and disclosed, you may be able to exclude the lien release fee from the finance charge calculation for the loan.

For resources related to our guidance, please see:

Interest Act, 815 ILCS 205/4.1 (“Whenever a lender is granted a security interest in real property or in a beneficial interest in a land trust, the lender . . . shall agree to pay all expenses, including recording fees and otherwise, to release any such security interest of record whenever it no longer secures any credit under a revolving credit arrangement.”)

Illinois Banking Act, 205 ILCS 5/5e(a) (“Notwithstanding the provisions of any other law in connection with extensions of credit, a State bank may elect to contract for and receive interest, fees, and other charges for extensions of credit subject only to the provisions of subsection (1) of Section 4 of the Interest Act, except for extensions of credit secured by residential real estate, which shall be subject to the laws applicable thereto.”)

Illinois Banking Act, 205 ILCS 5/5e(b) (“The establishment of account service charges and the amounts of the charges not otherwise limited or prescribed by law is a business decision to be made by a bank according to prudent business judgment and safe and sound operating standards. In establishing account service charges, the bank may consider, but is not limited to considering, the costs incurred by the bank, plus a profit margin, for providing the service, the deterrence of misuse of the bank’s services, the establishment of the competitive position of the bank in accordance with the bank’s marketing strategy, and the maintenance of the safety and soundness of the bank.”)

Interest Act, 815 ILCS 205/4(1) (“It is lawful for a state bank or a branch of an out-of-state bank, as those terms are defined in Section 2 of the Illinois Banking Act, 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) (“It is lawful to charge, contract for, and receive any rate or amount of interest or compensation, except as otherwise provided in the Predatory Loan Prevention Act, with respect to the following transactions: . . . (l) Loans secured by a mortgage on real estate, including a manufactured home . . . .”)

United States Bank Nat’l Ass’n v. Clark, 216 Ill.2d 334, 349 (2005) (“[W]e agree with the Seventh Circuit Court of Appeals . . . that the 1981 amendments to section 4 [of the Interest Act] implicitly repealed section 4.1a’s limitation on noninterest charges lenders may impose on residential mortgage loans.”)

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.”)

Regulation Z, 12 CFR 1026.6(a)(1) (“The requirements of this paragraph (a) apply only to home-equity plans subject to the requirements of § 1026.40. A creditor shall disclose the items in this section, to the extent applicable: . . . The circumstances under which a finance charge will be imposed and an explanation of how it will be determined, as follows: . . . (iv) An explanation of how the amount of any finance charge will be determined, including a description of how any finance charge other than the periodic rate will be determined.”)

Regulation Z, 12 CFR 1026.6(a)(2) (“The requirements of this paragraph (a) apply only to home-equity plans subject to the requirements of § 1026.40. A creditor shall disclose the items in this section, to the extent applicable: . . . The amount of any charge other than a finance charge that may be imposed as part of the plan, or an explanation of how the charge will be determined.”)

Regulation Z, 12 CFR 1026.4(e) (“If itemized and disclosed, the following charges may be excluded from the finance charge: (1) Taxes and fees prescribed by law that actually are or will be paid to public officials for determining the existence of or for perfecting, releasing, or satisfying a security interest.”)