Topic: Usury Laws
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Are there any laws or regulations that would prevent us from raising the default rate on our commercial loans from 18% to 22%? Also, is there a maximum default rate we can charge on consumer loans? We are not aware of any prohibitions other than the Military Lending Act’s annual percentage rate (APR) cap of 36% for active-duty service members and their dependents.
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No, we do not believe there is any law or regulation that would prevent you from charging a 22% default rate on a commercial loan, provided your customer agreed to the rate in your loan agreement. Additionally, Illinois does not impose a maximum default rate charged on consumer loans, but courts have held that default…
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Can our bank charge prepayment penalties on all types of commercial loans? If allowed, can we include a demand clause as well? Are there any interest rate limits? Is any collateral prohibited?
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Commercial Loan Prepayment Penalties and Demand Clauses Yes, we believe you may charge prepayment penalties on all types of commercial loans. Regulation Z and the Illinois High Risk Home Loan Act impose restrictions on prepayment penalties for certain consumer loans, but these restrictions do not apply to commercial transactions. Similarly, we believe that you may…
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We understand that loans made by banks generally are exempt from the Predatory Loan Prevention Act (PLPA). However, we are also aware that the PLPA may apply to loans made by a covered lender and purchased by a bank, such as an indirect automobile loan originated by a dealer and sold to a bank. For this reason, should we be requiring dealers to provide us with a signed disclosure of the PLPA’s 36% rate cap for each auto loan that we purchase?
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Yes, we recommend requiring automobile dealers to provide the 36% PLPA rate cap disclosure for each covered loan made to a consumer borrower that your bank purchases. You are correct that banks are generally exempt from the PLPA, and that loans made by a covered lender and purchased by a bank, such as an indirect…
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Do the new Predatory Loan Prevention Act (PLPA) rules apply to banks and credit unions? We heard that they contain a carve out for both banks and credit unions, but we cannot find it.
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No, the PLPA rules do not apply to banks and credit unions. The PLPA expressly exempts federally- and state-chartered banks, savings banks, savings and loan associations, and credit unions (although it could apply, for example, to financial institution’s nonbank subsidiary). The new PLPA rules incorporating the APR calculation method required by the PLPA do not…
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We want to apply our default interest rate of 6% above the current rate for a consumer mortgage borrower in default. Is there a maximum rate allowed for consumer mortgage loans in Illinois?
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No, we do not believe that Illinois law imposes a maximum interest rate for consumer mortgage loans. There are very few limitations on interest rates charged by banks under Illinois law, whether for consumer or commercial loans, provided they are agreed to by your customers in your loan agreements. The Illinois Banking Act permits banks…
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We are aware that the Military Lending Act (MLA) caps the annual percentage rate (APR) on consumer loans at 36% for active duty servicemembers and their dependents. Does Illinois have any usury limits that cap rates for consumers who are not active duty servicemembers or their dependents? We occasionally make short-term consumer loans that have an APR in excess of 36% due to the small dollar amount of the loan.
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Generally, there are very few limitations on interest rates charged by banks under Illinois law for consumer loans made to borrowers who are not active duty servicemembers or their dependents. Of course, any interest rates and fees must be agreed to by your customers in your loan agreements, and some other limitations will apply only…
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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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May we charge a fee or higher interest rate on a matured loan that is in between its maturity date and renewal date? We have many customers with matured loans who take quite some time to complete the steps needed to renew their loans.
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Yes, we believe you may charge a fee for renewing a matured loan if the customer agrees to it as part of a renewal or modification agreement. Likewise, we believe you may impose an increased interest rate (or default rate) on a matured loan if it is agreed to by your customers in your loan…
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I have a question about increasing the post maturity rate on a home equity line of credit (HELOC). I have seen the term “default rate” referenced in relation to increasing a HELOC’s rate when the loan is “terminated” or “accelerated.” When a HELOC is terminated or accelerated, does that mean it has matured? We would like to impose a post-maturity interest rate increase, but we will not impose a default rate during the loan term. Is that permissible?
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Yes, we believe that your bank may impose an increased post-maturity rate for HELOCs that have matured, provided that your customers have agreed to the increase in their loan agreements. The terms “default rate,” “terminated,” “accelerated,” and the imposition of interest rate increases all should be defined by your bank’s HELOC loan agreement. Typically, the…
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Are there any restrictions in Illinois regarding default interest rates for any type of loan products? We would like to use loan terms that provide for a post-maturity interest rate increase.
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There are very few limitations on interest rates and fees charged by banks under Illinois law, whether for consumer or commercial loans. 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 “reasonable.” Some limitations on default rates may…