FYI: Ill App Says Default Interest Rate Did Not Violate State Usury Statute

An Illinois appellate court recently held that an interest after default provision in a note providing the terms of a loan secured by an apartment complex did not violate the Illinois Interest Act's limits on late payment penalties and was also not an unenforceable penalty.  A copy of the opinion is attached.

Defendant borrower refinanced a mortgage loan with plaintiff, which was secured by an apartment complex.  Defendant defaulted on the loan and subsequently filed affirmative defenses and counterclaims when plaintiff sought to foreclose, alleging, among other things, that the interest after default provision of the note providing the terms of the loan violated Section 4.1a(f) of Illinois' Interest Act and constituted an unenforceable penalty.  The circuit court granted plaintiff's motion to strike and dismiss defendant's affirmative defenses and counterclaim and this appeal followed. 

In affirming the circuit court's holding, the appellate court first addressed whether § 4.1a(f) of the Interest Act was applicable to the default interest provision at issue in this case.  In making this determination, the court characterized "default interest" as "a vehicle of liquidated damages as opposed to penalties," noting that "default interest serves to balance the risk of lending to a defaulted borrower."  The court found this distinction significant, given that § 4.1a(f) of the Interest Act, in the court's view, only dealt with penalties. The court further found that the default interest provision was not a "delinquency charge" on an "installment in default," as defined in § 4.1a(f), given that the default was on the entire loan, not just an installment of the loan.  Accordingly the court found that the circuit court did not err in holding that § 4.12(f) was inapplicable to the default provision in this case.

The court further agreed with the circuit court's holding that the default interest provision, which provided for an increased interest rate of 7.250 percent over the Index upon default, was not an unlawful penalty, again noting that the default provision was essentially a liquidated damages clause, which the court found to be reasonable and therefore enforceable and not an unlawful penalty. 

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

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RWutscher@kw-llp.com

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