Topic: Retail Lending
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Our bank offers a rewards checking account that provides certain benefits for using the product, including a reduced fee on consumer loans. When we originate a consumer loan, are we required to review the customer’s checking accounts to see if they are eligible for this benefit, or can we include language in our TISA disclosure that puts that burden on the customer to inform us that they are eligible for the benefit when applying for the loan?
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We recommend that your bank institute a process to check whether consumer loan applicants are eligible for this benefit, rather than placing the burden on the customer to alert your bank about the benefit at the time of loan application. We believe that a failure to provide a stated benefit of the rewards checking account…
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Is there a maximum loan doc prep fee that we can charge on a consumer loan that is not secured by real estate (such as an auto loan or unsecured loan)?
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No, we are not aware of a maximum or limitation on document preparation fees for consumer loans that are unsecured or secured by collateral that is not real estate. The Illinois Banking Act generally permits banks to establish fees without limitation, provided that they are agreed to by the borrower. Additionally, the Illinois Interest Act…
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A customer has applied for a car loan, and he wants his grandson, who is a minor, to cosign the loan. Both are named on the car title. Our loan agreement provides that both debtors are jointly and severally liable for the loan amount. Will the minor’s signature be binding? Is the loan agreement void because one of the debtors is a minor? What if all payments are made by the grandfather only?
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No, the minor’s signature will not be binding on the loan agreement or the security agreement until the minor reaches the age of eighteen and ratifies the agreements. However, the loan agreement will not be void, as the grandfather’s signature is binding, and you have told us that he is liable for the entire loan…
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We offer zero interest loans to customers to repay their overdrafts. If we extend the payment schedule from 6 to 18 months, will the extended repayment period subject us to scrutiny, possibly related to recent guidance on payday loans or the upcoming CFPB payday loan rules?
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No, we do not believe the longer loan terms will subject you to heightened scrutiny, particularly because you are providing the loans without charging interest. The FDIC Guidelines on Small-Dollar loans identify several characteristics of responsible and affordable small-dollar credit programs, including affordability and a payment structure that encourages principal reduction. Since these loans will…
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We recently noticed a handful of loan documents that name our holding company, instead of the bank, as the lender. The documents state that payment is due to the holding company, but the payments are actually due to the bank, and the bank provided the initial disclosures. Do we need to ask our customers to sign new loan documents with the bank’s name?
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We believe it would be advisable to have these customers sign new loan documents. There are at least two areas of concern in the situation you have described: (1) the bank’s right to enforce the loans, and (2) compliance with Regulation Z’s disclosure rules. The first issue is whether the bank has the right to…
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Can we offer a consumer-purpose revolving line of credit that requires no payments due (neither interest nor principal) until maturity under Illinois law? The borrowers would be natural persons, and the term of the loan would be for one year.
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Yes, you may offer a revolving line of credit with a term of one year and principal and interest due at the end of the term, although we recommend considering the regulatory guidance on small dollar loans discussed below. We are not aware of any law or regulation that would prevent it, and the Illinois…
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Under Illinois law, can we make an unsecured consumer loan that has a demand feature as well as a monthly payment schedule (for a 24 month term)?
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We are not aware of any Illinois laws that would prohibit a bank from offering an unsecured consumer loan with a demand feature, even if the loan terms also contemplate monthly payments for a 24 month term. While the Consumer Installment Loan Act requires that loans be “repayable in substantially equal and consecutive weekly, biweekly,…
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Can we charge increased interest rates on loans after they mature under Illinois law? Is the answer different for consumer loans?
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There are very few limitations on interest rates and fees charged by banks under Illinois law, whether for commercial or consumer loans. However, any post-maturity rates (also known as default rates) must be agreed to by your customers in your loan agreements, and they may be subject to court scrutiny if they are not considered…
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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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Are NSF fees allowed under the Illinois Interest Act for loans of less than $25,000?
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We do not believe that the limitations on installment loan fees in Section 4a of the Interest Act apply to your institution. In fact, there are very few limitations on interest rates and fees charged by banks under Illinois law. Section 5e of the Banking Act states that a bank may “elect to contract for…