In these difficult economic times, many property owners find themselves being in the unfortunate position of being late in making their monthly mortgage payments. Many real estate notes and mortgages provide not only for the imposition of a "late charge" but also provide for an increased interest rate after default. Recently, the Illinois Appellate Court answered the question of whether an increased interest rate after default constitutes a violation of the Illinois Consumer Fraud and Deceptive Practices Act (the "Act").
In this case, the Note secured by a mortgage on the borrower’s property provided, in pertinent part:
LATE CHARGE. ... [i]f a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment.
INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, Lender at its option, may, if permitted under applicable law, increase the variable interest rate on this Note to 7.250 percentage points over the Index. The interest rate will not exceed the maximum rate permitted by applicable law.
Section 4.1a(f) of the Act provides:
[I]f the agreement governing the loan so provides, for each installment in default for a period of not less than 10 days, a charge in an amount not in excess of 5% of such loan installment. Only one delinquency charge may be collected on any such loan installment regardless of the period during which it remains in default.
The borrower argued the Interest after Default provision of the Note violated the Act. Therefore, the lender should be prohibited from collecting the 7.250 percentage points over the Index.
The trial court and the Illinois Appellate Court both disagreed and decided there was no violation of the Act. The courts reasoned that a default interest rate serves to balance the risk of lending to a defaulted borrower whereas a late charge is more akin to a one-time penalty for missing or delaying a scheduled payment.
A careful reading of section 4.1a(f) of the Act reveals that the limit of 5% is for "delinquency charges" on an "installment in default," and that such a charge may be charged only once for "any such loan installment." Therefore, section 4.1a(f) is clearly applicable only to provisions governing loan installments. A single loan installment being in default is a far cry from an entire loan being in default. The late charge provision in the Note governed delinquency charges on installments in default whereas the default interest provision affected the stated interest rate of the Note itself.
The courts also rejected the borrower’s argument that the Interest after Default provision constituted an unlawful penalty. The courts ruled that parties to a Note may stipulate to a higher interest rate after maturity and since the higher interest serves as a measure of liquidated damages, the additional rate will not be considered an unenforceable penalty unless it is so high that it would be considered an unenforceable penalty on grounds of public policy.
We represent borrowers and lenders. Please do not hesitate to contact us if you have any questions about this article or loan transactions under Illinois law.
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