Topic: 365/360 Interest Calculations
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When may the 365/360 accrual method be used? Does it matter whether a loan is made for a consumer or business purpose? If a business purpose loan is secured by a business owner’s primary residence, can we use the 365/360 accrual method?
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The permitted use in Illinois of the 365/360 accrual method for calculating interest rates depends on whether a loan is made for a business or consumer purpose. It generally is permitted for business loans, but we strongly advise against using it for consumer loans. Its use in consumer loans is not the prevailing industry practice…
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Are we permitted to charge interest on a 365/360 basis for loans (whether commercial or consumer)?
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Yes for commercial loans and no for consumer loans. Illinois permits using the 365/360 accrual method for commercial loans in Illinois, provided the loan documents clearly disclose and explain the method of calculation and it is agreed to by the borrower. However, we strongly advise against using the 365/360 basis for calculating annual interest rates…
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Is the use of the 365/360 accrual method permissible in commercial loans? We have been made aware of an Illinois lawsuit challenging the use of this method (Kitson v. Bank of Edwardsville), but we always thought that if we disclosed our interest computation method, we had a safe harbor.
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Yes, using the 365/360 accrual method is permissible for commercial loans in Illinois, provided that the loan documents clearly disclose and explain the method of calculation. The court case you mention, Kitson v. Bank of Edwardsville, arose out of commercial promissory notes that stated an “annual” interest rate and then disclosed that this rate would…
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Does Illinois specifically prohibit us from charging interest on a 365/360 basis on consumer, non-real-estate loans?
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We strongly advise against using the 365/360 basis for calculating the annual interest rate on consumer loans. It is not the prevailing industry practice, probably for a variety of reasons, including the fact that doing so could incur substantial litigation risks. It is true that Section 4(1) of the Interest Act contains general language that…
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After acquiring a financial institution through an FDIC receivership, can we change all of the old bank’s loans from a 360/365 interest calculation to a 365/365 basis without notifying the customers or having them sign new loan agreements, since the change would be to their benefit?
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We believe that the bank would need to obtain the borrower’s consent before switching their loan from the 360/365 method to the 365/365 method of calculating interest. Even though this change would clearly benefit the borrower, any change to the loan agreement should be agreed to by the borrower (and obtaining their consent for any…
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Is it true that Illinois requires loan interest to be calculated on a 365/365 basis?
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There have been no Illinois laws enacted on this subject since Public Act 96-1421 (August 3, 2010). The Illinois Interest Act still states that banks may use the 365/360 method to calculate interest on commercial loans. 815 ILCS 205/4(5). (Note that it is not the prevailing industry practice to use the 365/360 method for consumer…