A business customer would like to open a jumbo certificate of deposit (CD) and take out a loan secured by the CD. The borrower has requested a lower interest rate on the loan, in exchange for accepting a lower interest rate on the CD. Is this arrangement permissible? We do not advertise such arrangements but would be willing to offer the same terms to other qualified borrowers.

We believe this arrangement is likely permissible, but we recommend addressing the fair lending concerns that could be raised by making a special arrangement for one borrower.

There are very few limitations on interest rates charged by banks under Illinois law, provided they are agreed to by your customers in your loan agreements. The Illinois Banking Act 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 provision applies to banks “notwithstanding the provisions of any other law.”

Subsection 4(1) of the Interest Act permits banks to collect interest at any rate agreed on by a bank and its borrower and specifies that it is lawful to charge, contract for, and receive any rate or amount of interest for loans secured by certificates of deposit. Consequently, we believe you may charge your business customer any interest rate, and pay any interest on the CD, that they agree to in the agreements for the loan and CD.

As to the fair lending concerns, we recommend reviewing your lending policy to determine whether it grants your loan officers the discretion to offer a loan with the terms you intend to offer this customer. The FFIEC’s Interagency Fair Lending Examination Procedures identify “broad discretion in loan pricing” and a lack of “clear and objective criteria” for loan officers to deviate from your rate sheets and fees schedules (if any) as an indicator of potential disparate treatment in pricing.

To address fair lending concerns, we recommend documenting your business reasons for lowering the interest rate for this customer (i.e., because they accepted a lower interest rate on their CD) and ensuring that your loan officers offer the same terms to other qualified customers to avoid any fair lending concerns related to your loan pricing. For example, if this customer is a man, there could be fair lending concerns if you don’t offer the same terms to qualified female customers.

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)(b) (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: . . . Advances of money, repayable on demand, to an amount not less than $5,000, which are made upon . . . certificates of deposit . . .”)

Equal Credit Opportunity Act, 15 USC 1691 (“It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction (1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract); (2) because all or part of the applicant’s income derives from any public assistance program; or (3) because the applicant has in good faith exercised any right under this chapter.”)

FFIEC, Interagency Fair Lending Examination Procedures, page 9 (“Indicators of potential disparate treatment in Pricing (interest rates, fees, or points) such as: . . . P2. Presence of broad discretion in loan pricing (including interest rate, fees and points), such as through overages, underages or yield spread premiums. Such discretion may be present even when institutions provide rate sheets and fees schedules, if loan officers or brokers are permitted to deviate from those rates and fees without clear and objective criteria.”)

Equal Credit Opportunity Act, 15 USC 1691(a) (“It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction — (1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract); (2) because all or part of the applicant’s income derives from any public assistance program; or (3) because the applicant has in good faith exercised any right under this chapter.”)