April 23, 2014

Calculating Interest on Commercial Loans: Recent Legislation Expressly Permits Illinois Lenders to Use the "365/360" Method

Lenders throughout Illinois can breathe a sigh of relief now that Governor Pat Quinn has signed Public Act 96-1421, which amends the Illinois Interest Act to expressly permit use of the "365/360" method of calculating interest on commercial loans.

Leading up to this development, a flurry of class action lawsuits against financial institutions have called into question the legality of the well-established interest computation method, which has been routinely used by commercial lenders "since time immemorial," according to one Cook County Circuit Court judge. Plaintiffs throughout the state have asserted that commercial promissory notes violate Illinois usury law when they specify that interest will be calculated according to a 360-day year and the actual number of days elapsed (i.e., 365). This claim is rooted in the Illinois Interest Act, which stipulates that interest must be calculated based on a year comprised of 12 calendar months (i.e., 365 days) whenever a promissory note specifies a "per annum" or "per year" interest rate—as virtually all commercial promissory notes do. Plaintiffs have also claimed that using the "365/360" method constitutes common law fraud and violates the Illinois Consumer Fraud Act. Making matters worse for lenders, defendants in mortgage foreclosure cases—lacking any other way to extricate themselves from failing business deals and save their properties—have raised the illegality of the interest calculation method as an affirmative defense.

The economic underpinning of the borrowers' claims is that use of the "365/360" method results in a higher effective interest rate than the rate stated on the note. For example, if a promissory note establishes the interest rate at 5% per annum, with interest calculated according to a 360-day year and the actual number of days elapsed, then the effective interest rate will be 5.069444%, or 5% x (365/360). That means a borrower will pay an extra $694.44 a year in interest on a $1 million note. While trial court judges in Cook County have sided with the lenders in recent decisions, one downstate class action case resulted in a substantial settlement in favor of the plaintiffs.

Understandably, this rash of litigation put fear in the hearts of commercial lenders throughout Illinois and galvanized the industry to lobby for legislation. The result was Public Act 96-1421, which became law in August 2010 and amended the Illinois Interest Act to provide that "a rate of interest may be lawfully computed when applying the ratio of the annual interest rate over a year based on 360 days." The act further states that the provisions of the amendment "are declarative of existing law." Interestingly, however, the sponsor of the bill in the Illinois state senate remarked for the record that the "legislation will not dictate the outcome of any pending [litigation]. That will be up to the individual courts to apply the law."

While it may be back to business as usual—at least with respect to calculating interest for commercial loans—lenders should take careful note that Public Act 96-1421 only applies to commercial loans and is silent with respect to consumer and residential mortgage loans. Lenders should also consider certain precautions to minimize the risk of future litigation. In addition to clearly setting forth in the loan documents that interest will be calculated on a "365/360" basis, lenders should require borrowers to acknowledge that use of this method will result in an effective interest rate that is higher than the stated interest rate.

© 2014 Much Shelist, P.C.

About the Author

Michael D. Burstein, Much Shelist Law Firm, Real Estate Attorney

Michael D. Burstein, a member of the firm's Real Estate practice group, represents clients in a broad range of commercial real estate and real estate finance transactions. Michael's commercial real estate practice includes acquisitions and dispositions; commercial, office and industrial leasing on behalf of landlords and tenants; condominium project development, including registrations under the Interstate Land Sales Full Disclosure Act; and financing and refinancing on behalf of property owners.


Boost: AJAX core statistics

Legal Disclaimer

You are responsible for reading, understanding and agreeing to the National Law Review's (NLR’s) and the National Law Forum LLC's  Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free to use, no-log in database of legal and business articles. The content and links on are intended for general information purposes only. Any legal analysis, legislative updates or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.  

Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is  intended to be  a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional.  NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us. 

Under certain state laws the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.

The National Law Review - National Law Forum LLC 4700 Gilbert Ave. Suite 47 #230 Western Springs, IL 60558  Telephone  (708) 357-3317 If you would ike to contact us via email please click here.