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American College of Mortgage Attorneys — Partner with the Best®

Formed in 1974, the American College of Mortgage Attorneys (ACMA) is comprised of over 500 lawyers in North America who are experts in mortgage law.

United States

Illinois

The predominant security instrument is the mortgage. However, deeds of trust and trust deeds also are used from time to time. Both are treated as mortgages and must be judicially foreclosed under the Illinois Mortgage Foreclosure Law (“IMFL”), 735 ILCS 5/15-101 et seq., since there are no non-judicial foreclosures in Illinois. Note also that “Illinois land trusts” occasionally are utilized in Illinois commercial real estate transactions. See generally 765 ILCS 405. In Illinois, a land trust is a legal arrangement in which a trustee (usually a bank or savings institution or trust affiliate of a title company) holds legal and equitable title to real property, thus making transfer of title to the property much easier. But, unlike traditional trusts, all managerial, decisional, and operational powers over the trust assets remain under the control of the holder of the beneficial interest of the land trust, pursuant to the land trust agreement unless such additional rights are identified in the trust agreement by reference to the Illinois Trust Code. 765 ILCS 405/1; 760 ILCS 3/605(d). Unlike other trusts, the land trustee's sole purpose is to accept and hold title to the real property, i.e., the trustee is merely a nominee to hold title. The trustee can take action only when directed to do so by the beneficiaries. Since a beneficial interest in an Illinois land trust is personal property, the conveyance (or transfer) of it for security purposes is usually effected by means of an assignment of beneficial interest (“ABI”). The use of land trusts in Illinois is not nearly as common as it once was, especially in commercial transactions (although they still are sometimes used in connection with tenancy-in-common transactions). Many people believe that a land trust protects them in some way, as beneficiaries, from disclosure or liability with respect to creditors, judgments, taxes, etc. Generally this is incorrect. See e.g., 765 ILCS 405/2. Judgments against the beneficiaries of a land trust, however, do not create a lien against the real estate, which can facilitate the transfer of real estate. An Illinois land trustee will not hold title to real property located outside of Illinois. Title companies have no problem insuring title to property held in a land trust in Illinois. An individual or individuals, or a limited liability company or any other form of business entity, may be the beneficiary of a land trust. See also the UNIFORM COMMERCIAL CODE (UCC) section below.

SECURITY INSTRUMENT USED

The mortgage must contain a notary acknowledgment but need not be witnessed and the mortgagor's name must be typed under the signature. Furthermore, the document must state (a) that “This instrument was prepared by ________,” (and insert the name, firm and address of the attorney preparer), (b) the real estate tax permanent index number of the encumbered property and (c) in some counties, the common address of the encumbered property. The county recorder is required to impose additional recording charges if the document does not conform to a statutory format, which includes 8&frac12; x 11” white paper of not less than 20-pound weight with at least &frac12;” margins on all 4 sides; printed in black ink, typewritten or computer generated in at least 10-point type; with the first page containing a 3 x 5” blank space in the upper right-hand corner; and without any attachments stapled or otherwise affixed to any page. Illinois has passed several laws that attempt to mitigate the negative effects of predatory lending. These laws generally apply to residential mortgage transactions (see following Section regarding Lender Qualification and/or Licensure for explanation of certain of these laws). However, under one such law, 765 ILCS 77/70 (applicable to Cook, Kane, Peoria and Will County property only), the predatory lending database program, requires that each mortgage must have either a Certificate of Exemption or a Certificate of Compliance attached to it or the mortgage will not be recordable. The title insurance company or the closing agent is responsible for attaching the appropriate certificate to the mortgage sought to be recorded. Exempt mortgages include: residential property with more than 4 units, investment property, commercial property and vacant land. If the mortgage is of residential property, the party accepting the mortgage loan application must submit information regarding the applicant to a central database with the Department of Financial Regulation. Based upon certain criteria set forth in the statute, the Department will advise whether the applicant requires financial counseling. If the latter is the case, the mortgage will be recordable only if the applicant attends approved counseling, the Department receives a report that such counseling has been successfully completed, and the Department issues a Certificate of Compliance. A Certificate of Compliance will also be issued by the Department if the applicant's information was received and the Department has determined that counseling is not required.

RECORDING REQUIREMENTS

IMFL permits the waiver of statutory rights of redemption (except for defined residential and agricultural real estate), which waiver is customarily included in all commercial transactions. 735 ILCS 5/15-1601. IMFL permits the reinstatement by the borrower of a mortgage that has been accelerated after a default if statutory procedures are followed. Reinstatement may be exercised multiple times by the mortgagor, unless the court makes an express written finding that the mortgagor exercised its reinstatement rights pursuant to 735 ILCS 5/15-1602, in which case the right of reinstatement is only available to the mortgagor under the same mortgage once every 5 years. However, such reinstatement rights may not be waived prior to the commencement of a foreclosure action. 735 ILCS 5/15-1601. Homestead rights are usually waived in all mortgages.

STATUTES TO BE WAIVED

There are no statutory restrictions on prepayment premiums or escrows in commercial transactions. However, if the interest rate exceeds 8% per annum on a loan secured by residential property, then it is unlawful to impose a prepayment penalty or other charge for prepayment. For a non-exempt residential loan bearing interest of 8% per annum or less, the borrower has the right to prepay and the lender may require a prepayment premium that is limited in amount. 815 ILCS 205/4.1a. See also the PREPAYMENT PREMIUMS section below). Furthermore, in “single family residential” mortgage loans, the mortgage real estate tax escrow may not exceed 150% of the previous years assessed taxes, except in the first year of the mortgage term. Also, in “single family owner occupied” mortgage loans (a) when the loan amount is reduced to 65% of the original principal amount by timely payments and the loan is free of default, the lender must notify the borrower that any mortgage escrow may be terminated (except for mortgages insured, guaranteed, supplemental or assisted by Illinois or the federal government that otherwise require an escrow arrangement) and (b) in lieu of an escrow, borrower may pledge an interest bearing time deposit in an amount sufficient to pay anticipated taxes. The Illinois Supreme Court, in U.S. Bank Nat'l Ass'n v. Clark, 216 Ill. 2d 334 (2005), overturned an Appellate Court ruling and held that the Illinois Interest Act was preempted by Federal legislation. See also McCarthy v. Option One Mortgage Corp., 362 F.3d 1008, 1011 (7th Cir. 2004) (federal Parity Act preempts Illinois Interest Act); Dannewitz v. EquiCredit Corp. of America, 362 Ill. App. 3d 82, 87 (1st Dist. 2005) (National Bank Act preempts Illinois Interest Act and Illinois Consumer Fraud Act). All usury limitations on the interest rate on loans secured by mortgages against real estate or in installment contracts for real estate have been abolished in Illinois; but residential mortgage loans with interest in excess of 8% may be prepaid without prepayment penalty. 815 ILCS 205/4(2)(a). See also the USURY and PREPAYMENT PREMIUMS sections below. An Illinois mortgage must state the amount owing. A mortgage that fails to state the amount of indebtedness secured is insufficient, under the recording laws, to impart constructive notice and is subject to being subordinated to a subsequent mortgage recorded by a subsequent purchaser without adequate notice; a statement in a mortgage that it secures a specific amount and “any future advances,” (i.e., is completely open-ended as to future indebtedness) is not sufficiently definite under Illinois law. See Northridge Bank v. Lakeshore Com. Fin. Corp., 48 Ill. App. 3d 82 (1 Dist. 1977); Flexter v. Woomer, 46 Ill. App. 2d 456 (5 Dist. 1964). On February 8, 2013, 765 ILCS 5/11 was amended by adding subsection (b), which specifically states that the provisions of 765 ILCS 5/11(a) regarding the form of an Illinois mortgage “are, and always have been permissive and not mandatory,” and that the failure of a new or prior mortgage to state one of the items mentioned in subsection (a) (including the interest rate or the maturity date) shall not affect the validity or priority of the mortgage or cause the recordation of the mortgage to be ineffective for notice purposes. Although some mortgage lenders in Illinois may decide, in an abundance of caution, to nonetheless include all of the permissive elements stated in the mortgage form provided in 765 ILCS 5/11(a) to take full advantage of the statutory “safe harbor,” and to specifically reference the promissory note in the mortgage, failure to include the maturity date and the interest rate of the loan in the mortgage should have no effect on the priority and validity of the mortgage.

UNUSUAL TREATMENT OF STANDARD PROVISIONS

Under IMFL, 735 ILCS 5/15-1302 provides that as to any monies advanced or applied more than 18 months after a mortgage is recorded, the mortgage is a lien as to subsequent purchasers and judgment creditors only from the time such monies are advanced or applied. However, the following advances are a lien from the time the mortgage is recorded: (a)&nbsp;obligatory advances pursuant to a written commitment made contemporaneously with and referred to in the mortgage or as required in the mortgage, (b)&nbsp;monies advanced or applied under a reverse mortgage, (c)&nbsp;monies advanced or applied in accordance with the terms of a revolving credit arrangement secured by a mortgage as authorized by law, (d)&nbsp;all interest accrued or added to the principal amount secured by the mortgage in accordance with the terms of the mortgage and (e)&nbsp;all monies advanced by the mortgagee in accordance with the terms of the mortgage to preserve or restore the property, to preserve the lien or priority of the mortgage or to enforce the mortgage.

SECURING FUTURE ADVANCES

SECURING ADDITIONAL ADVANCES TO PROTECT THE COLLATERAL, INCLUDING PAYMENT OF TAXES AND INSURANCE

The trustee under a trust deed or deed of trust may be an individual or other entity, including a limited liability company. An individual trustee need not be an Illinois resident, but a non-individual trustee must be qualified to act as a trustee in the State of Illinois.

CORPORATE OR INDIVIDUAL

Under IMFL, a foreclosure is commenced by filing a statutory short-form complaint. Only the mortgagor and other persons who owe payment of the mortgage indebtedness and against whom personal liability is asserted are necessary parties defendant. However, others, such as mechanics' lien claimants, subordinate lenders and subordinate tenants, may be joined as parties defendant in order to terminate their interests in the mortgaged real estate. In a foreclosure, the defendants have 30 days to answer the complaint after service of summons. Many foreclosures are resolved by motion for summary judgment, but, if material fact issues exist requiring trial, the trial proceeds as in other actions but without a jury since the foreclosure proceeding is “in equity.” With the approval of the court, a party claiming an interest in the proceeds of sale of the mortgaged real estate may defer proving the priority of such interest until the hearing to confirm sale. 735 ILCS 5/15-1506(h). Upon entry of a judgment of foreclosure, the mortgaged real estate is typically sold via public sale, although IMFL provides a method for private sale. The foreclosure sale can be held immediately upon expiration of the redemption period, if any, and after (1)&nbsp;mailed notice of the sale to all defendants, which notice shall be mailed at least 10 days prior to the sale (see also ILCS S. Ct. Rule 113 for notice requirements) and (2) publication of a notice for 3 consecutive weeks, with the last publication being not less than 7 days prior to the sale, by (A) advertisement in a newspaper of general circulation in the county in which the mortgaged real estate is located, in the section of such newspaper where legal notices are commonly placed, and (B) separate advertisement in the section of such a newspaper where the sale of real estate is commonly advertised; provided, however, if in a county with more than 3,000,000 population (currently, the only such Illinois county is Cook County in which Chicago is located), the notice in (B) must be published in a newspaper different from the newspaper that publishes the notice in (A) and shall be published in the township in which the real estate is located. In any event, the sale must then be confirmed by the court. Upon confirmation, a deed is issued to the purchaser.

BRIEF DESCRIPTION OF PROCEDURE

An uncontested foreclosure may take approximately 6 to 9 months from commencement through confirmation of the sale. If a foreclosure is contested, it could take more than a year, depending on the type of contest and the county in which the action is pending. If defenses are asserted raising fact issues requiring trial, conclusion of the foreclosure could take as long as other judicial actions.

TYPICAL LENGTH OF PROCEDURE

There are no special bidding requirements under IMFL. The mortgagee usually bids what it believes to be the value of the mortgaged real estate. The court may not confirm a sale if it believes that the purchase price was so low as to be unconscionable. If a deficiency judgment is sought, some courts will require the mortgagee to submit an appraisal showing that the purchase price is consistent with the value of the mortgaged real estate.

FORECLOSURE BID REQUIREMENTS

In most nonresidential mortgages, redemption is waived. If it is not, however, the redemption period ends on the later of 6 months from the date the mortgagor was served with summons or 3 months from the date of entry of the judgment of foreclosure. In residential foreclosures, the redemption period ends on the later of 7 months from the date the mortgagor was served with summons or 3 months from the date of entry of the judgment of foreclosure. In all foreclosures, the redemption period expires prior to the foreclosure sale. There is no redemption period after sale.

REDEMPTION PERIOD AND PRICE

In nonresidential and nonagricultural foreclosures, the mortgagor may waive the right of redemption by an express waiver stated in the mortgage or by any other waiver in writing that has been acknowledged by the mortgagor and recorded. After commencement of a foreclosure, the mortgagor, including a mortgagor of residential real estate, may waive rights of reinstatement and redemption, or either of them, by expressly consenting in writing to entry of a judgment without such right of reinstatement or redemption provided the mortgagee consents and agrees to waive any and all rights to a deficiency judgment.

WAIVER OF REDEMPTION; REDUCTION OF REDEMPTION PERIOD

A deficiency judgment may be entered against the mortgagor or other persons who owe payment of the mortgage indebtedness. The deficiency judgment is usually entered upon confirmation of the sale. The amount of the deficiency is determined by subtracting the purchase price from the mortgage indebtedness as set forth in the judgment of foreclosure. Enforcement of the deficiency judgment is in accordance with normal judgment enforcement procedures. IMFL also allows an expedited consent foreclosure in which the mortgagee must offer to waive any deficiency.

DEFICIENCIES

Under IMFL, in order to terminate a subordinate lease, the mortgagee must name and serve the tenant in the judicial foreclosure action. The mere act of foreclosure does not automatically terminate any leases. If the lender seeks to terminate a tenancy as a part of the foreclosure, a tenant current in its rental obligations will be permitted to remain in possession “(i) for 120 days following the notice of the hearing or the supplemental petition that has been properly served upon the tenant, or (ii) through the duration of his or her lease, whichever is shorter.” 735 ILCS 5/15-1701(h)(5). Subsection (h)&nbsp;does not apply to any tenant with a bona fide lease of a dwelling unit in residential real estate in foreclosure; for that see 735 ILCS 5/9-207.5.

EFFECT OF FORECLOSURE UPON LEASES

Effective August 23, 2018, Public Act 100-1048 amended several statutes to protect the rights of third parties who acquire an interest in foreclosed property. The amendments include the following: <ul>
 <li>Adding foreclosure-specific provisions to Section 2-1401 of the Illinois Code of Civil Procedure (the “Code”). Section 2-1401 governs procedures for seeking relief from any final order or judgment after 30 days from the entry thereof. Public Act 100-1048 revised Section 2-1401(b) to require that any petition to reopen a foreclosure proceeding must include all parties to the original action, “as well as current record title holders to the property, current occupants, and any individual or entity that had a recorded interest in the property before the filing of the petition.” This amendment reduces the risk that any third party with an interest in the foreclosed property would be caught unawares of a petition that, if successful, could have a material and negative impact on the third party's property interest.</li>
 <li>Adding language to Section 2-1401(e) of the Code that, in the event a petition to reopen a foreclosure proceeding is filed, the purchaser or successor purchaser of the subject property may remain in possession of the property until either the outcome of such petition is determined, or the foreclosure defendant redeems the property if the purchaser has been in possession of the property for more than 6 months.</li>
 <li>Adding Section 13-107.1 to the Code to provide a 2-year statute of limitations for actions seeking recovery of property from a non-mortgagee who acquired the property either via judicial foreclosure, or subsequently from a mortgagee or purchaser at the judicial foreclosure sale (each, a “Foreclosure Purchaser”). This provision will hold true regardless of whether the applicable order or judgment of foreclosure is vacated or modified pursuant to Section 2-1401 of the Code.</li>
 <li>Adding Section 13-109.1 to the Code to provide that any Foreclosure Purchaser who continues in possession and pays property taxes on the foreclosed property for 2 successive years shall be deemed the legal owner of such property. As with Section 13-107.1, Section 109.1 will hold true regardless of whether the applicable foreclosure judgment is vacated or modified pursuant to Section 2-1401 of the Code.</li>
 <li>Finally, Public Act 100-1048 amended the Illinois Mortgage Rescue Fraud Act at 765 ILCS 940/50 by making it a crime for a distressed property consultant to enter into or enforce any agreement that “provides for the division of proceeds between the foreclosure defendant and the distressed property consultant derived from litigation to the foreclosure.”</li>
</ul>

RECENT CHANGES TO THE FORECLOSURE PROCESS

In LLC 1 05333303020 v. Gil, 2020 IL App (1st) 191225, the Illinois Appellate Court compared and distinguished the recording of a notice of foreclosure pursuant to 735 ILCS 5/15-1503 and the recording of a general lis pendens pursuant to 735 ILCS 5/2-1901. Specifically, the court held that while the more general lis pendens statute requires that the defendant be served with the complaint within six months in order for the lis pendens to constitute constructive notice upon subsequent interest holders, the six-month service requirement does not apply to foreclosure actions because the recording of a notice of foreclosure (a form of lis pendens) is governed by 735 ILCS 5/15-1503, which contains no such service requirement. 2020 IL App (1st) 191225, &para; 23. In LOMTO Fed. Credit Union v. 6500 W. LLC, 2018 IL App (1st) 173106, the Illinois Appellate Court held that, pursuant to 735 ILCS 5/15-1704(g), a receiver in a foreclosure action may, with leave of court, compel a tenant to a pre-existing lease to pay an increased rental rate, up to an amount necessary for the receiver to perform its duties (i.e., equal to the operating costs and expenses to manage the property). 2018 IL App (1st) 173106, &para; 25. In U.S. Bank Nat'l Ass'n v. Randhurst Crossing LLC, 2018 IL App (1st) 170348, the Illinois Appellate Court affirmed an order requiring the turnover to a receiver of certain rents collected prior to the appointment of receiver. Id. &para; 1. Generally, a mortgagee cannot assert a right to collect rents pursuant to an assignment of rents until the mortgagee takes either actual or constructive possession of the property. Id. &para;&para; 49-50. Constructive possession requires that the mortgagee take some affirmative action to gain possession and that, in the event mortgagee's action consists of filing a motion, the court affirmatively rule on the motion. Id. &para; 50. Thus, where the defendant sought bankruptcy protection while the mortgagee's motion for appointment of receiver was pending and the mortgagee subsequently sought and obtained an order in the bankruptcy court designating collected rents as “cash collateral” under the Bankruptcy Code and prohibiting the mortgagor from using such collateral, the mortgagee was deemed to have taken constructive possession of the rents, thus justifying the order requiring turnover of such rents to the receiver when the receiver was appointed after the bankruptcy stay was lifted. Id. &para;&para; 58-59.

RECENT CASELAW OF NOTE

MORTGAGOR PROTECTIONS: 735 ILCS 5/15-1508 prohibits the confirmation of any sale where the borrower applied for assistance under the Making Home Affordable Program and the mortgaged property was sold in violation of the program's requirements for proceeding to a judicial sale. Other changes provide some relief to residential borrowers who are serving in the armed forces. In addition, Circuit Courts have enacted local rules that impact the manner in which a foreclosure is completed. In Cook County, all residential foreclosures are referred to formal mediation. In each case, Chicago Volunteer Legal Services (“CVLS”) is appointed to represent the borrower in the mediation, the purpose of which is to reach a loan workout program that will alleviate the need for a foreclosure. CVLS appoints panel attorneys (members of the private bar) to attend the mediation hearings. These mediations also allow the parties to apply for assistance under the Making Home Affordable Program and to otherwise attempt to modify their loans. On February 21, 2013, the Illinois Supreme Court adopted 3 procedural rules (99.1, 113, and 114), which are “aimed at mitigating abuses and uncertainty in mortgage foreclosures, and helping those who face loss of their homes by imposing several requirements on mediation programs and lenders seeking foreclosure.” These rules, while intended principally to address residential foreclosures and “robo-signing” concerns, apply equally in the commercial context and may present procedural hurdles, especially in cases where the loan was acquired from another lender.

MORTGAGOR PROTECTIONS

Illinois defines “mortgagee” more broadly than just the holder of a note of indebtedness, and includes “any person designated or authorized to act on behalf of such holder.” <a href="http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=1000008&DocName=IL735S5%2F15-1208&FindType=L">735 ILCS 5/15-1208</a>. In Mortgage Electronic Systems, Inc. v. <a href="http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=578&FindType=Y&ReferencePositionType=S&SerialNum=2023973514&ReferencePosition=124">Barnes,</a> <a href="http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=578&FindType=Y&ReferencePositionType=S&SerialNum=2023973514&ReferencePosition=124">406 Ill. App. 3d 1 (Ill. App. Ct. 2010)</a>, the court held that the plaintiff (“MERS”) could foreclose on the mortgage, even if it was not the beneficial interest holder of the debt, in part because of the broad statutory definition of “mortgagee” under Illinois law. In HSBC Bank USA, N.A., v. Hardman, No. 12 C 00481, 2013 U. S. Dist. LEXIS 11864 (N.D. Ill., Jan. 29, 2013), the court held that because the mortgage unambiguously stated that MERS possessed, and could assign, the right to foreclose on the mortgaged property, MERS was entitled to do so and the assignee would then step into the shoes of the assignor with respect to the rights and duties of the assignor (including foreclosure). The court further held that even though the Note was not endorsed, possession of the note was sufficient to confer standing to enforce it because, under 810 ILCS 5/3-301(ii), a “non-holder in possession of the instrument who has the rights of a holder” may also enforce the Note.

FORECLOSURE BY TRANSFEREE OF MORTGAGE

It is common practice in Illinois foreclosure cases for the plaintiff to join as parties defendant “Unknown Owners” and serve them by publication, thereby acquiring jurisdiction over them and making them bound by the court's orders in the foreclosure case. This satisfies the constitutional requirement that due process must be provided to those who cannot be known because their interests are not of record (parties in possession of the real estate) and who, upon diligent inquiry cannot be found (often because they are trying to avoid being found but sometimes because the public records may be defective or contain faulty information). A recent case from the Illinois Second District Court of Appeals, however, finds that process ineffective to eliminate prior mortgages. In Bank of New York v. Langman, 2013 IL App. (2d) 120609, a forged release was recorded as to a mortgage. A subsequent mortgage was recorded (relying on the forged release), which then went into default and a foreclosure suit was filed, properly naming and publishing for “Unknown Owners” but not naming the mortgagee of the mortgage that was the subject of the forged release. Once the owner of the mortgage that was the subject of the forged release discovered the forgery and filed its own foreclosure, the Appellate Court held that such foreclosure somehow resurrected the prior mortgage, which had seemingly been extinguished, since its owner had been properly named and served as an “Unknown Owner” in the earlier foreclosure case. Such mortgages may be called “zombie” mortgages. Thus, the safer approach arguably may be to add all prior mortgagees of record.

TITLE DERIVED THROUGH FORECLOSURE

Subject to the exemptions noted below, the usury limit on written debt instruments is 9% per annum and the criminal usury limit is 20% per annum.

USURY CEILING

The major exemption is that all loans secured by a mortgage on real estate are not subject to the usury limitations. Furthermore, there are other express exceptions such as loans for business or investment purposes, loans to corporations, and loans insured by federal agencies or guaranteed by the Veterans Administration. Please note that installment credit and certain other consumer credit transactions have special interest rules as well. Although not technically a usury issue, it should be noted that a few late 19th-century Illinois Supreme Court cases hold that “interest-on-interest,” i.e., compound interest, is uncollectible as a matter of public policy. See Bowman v. Neeley, 137 Ill. 443 (1891); Bowman v. Neely, 151 Ill. 37 (1894); but see Breed v. Baird, 139 Ill. App. 15, 30 (1st Dist. 1907) (noting exceptions in Bowman: (1) interest bearing coupons attached to securities; and (2) agreement by debtor, after interest became due, to add accrued interest to principal). Although the problem has been greatly alleviated as result of express statutes and federal programs permitting residential loan programs involving compound interest, the problem remains for commercial transactions. Practitioners believe that a modern court would uphold the collectability of compound interest in a commercial transaction. As a practical matter, most title insurers will endorse over the compound interest feature for a reasonable premium.

USURY EXEMPTIONS

As in many states, borrowers have filed class actions against lenders claiming that charging interest using an assumed 360-day year was deceptive and, consequently, illegal. These claims were based upon the text of the notes involved and therefore were very fact specific. Those cases where there was an explanation of the manner in which the interest would be calculated, elaborating on the relationship to a 360-day and 365-day year are generally being resolved in favor of the lenders involved. If calculating interest using a 360-day year, additional clarifying language may be necessary.

360/365-DAY YEAR LITIGATION

Fixture filings are made in the county in which the property is located. Under the UCC, the mortgage can be used as a fixture filing. (Some counties have separate fixture-filing records.) Subject to the UCC's multistate filing rules, financing statements for nonfixtures would be centrally filed with the Secretary of State of Illinois.

LOCATIONS FOR FILING

UCC): In Illinois, if a security agreement covers both personal and real property (including fixtures), the secured party may proceed solely as to the personal property (i.e., by a UCC sale of the personal property) without prejudicing its rights with respect to the real property, or it may proceed against both the personal property and the real property “in accordance with the rights with respect to the real property” (i.e., foreclosure). But IMFL does apply exclusively to the foreclosure of collateral assignments of beneficial interests in land trusts under certain circumstances. See 735 ILCS 5/15-1106(a)(3). Article 9 of the UCC contains, as an Illinois “non-uniform” amendment, language that allows a security interest in a beneficial interest in a land trust to be perfected by the filing of a UCC financing statement. Alternatively, a security interest can also be perfected by “control.” A secured party has “control” of the beneficial interest in an Illinois land trust if the secured party has transmitted to the land trustee a collateral assignment of or a security interest in the beneficial interest signed or otherwise “authenticated” by the debtor, provided that the trustee has given written or other “record” acceptance thereof, by signing or otherwise “authenticating” the same. A UCC Insurance policy (Owner's and Loan), which is offered by some of the major land title insurance companies, insures the attachment, priority, and perfection of UCC interests in personal property and is available in Illinois.

UNIFORM COMMERCIAL CODE (

UNUSUAL PROVISIONS OR REQUIREMENTS

Under Illinois law, a guaranty may be enforced separately from the mortgage. Also, a claim under a guaranty may be joined in a foreclosure action but the judge in such actions has the discretion to postpone the guaranty claim to determine whether or not there is a deficiency in the foreclosure, which is typically done.

SPECIAL PROBLEMS IN ENFORCEMENT OF GUARANTY

In Bank of America, N.A. v. Freed, 2012 IL App. (1st) 110749, 983 N.E. 2d 509 (App. Ct. 1st Dist. 2012), appeal denied, 2013 LEXIS 601 (May 29, 2013), the Illinois Appellate Court held - in what it characterized as a matter of first impression - that the carveout provision of a guaranty was valid and enforceable against the guarantors. A section of the guaranty agreement provided a limitation of $50,325,000 on the guarantors' liability, subject however to four enumerated carveouts, including that the guaranty would become a full-liability obligation of the guarantors if the borrowers contested, delayed or hindered any action taken by the lender or its agent in connection with the appointment of a receiver for the subject property or the foreclosure of the mortgage on the property. Bank of America subsequently commenced a foreclosure proceeding and alleged that the guarantors were liable for the full amount of the debt under the carveout provisions of the guaranty agreement because the mortgagor and the guarantors (“defendants”) had contested the foreclosure proceeding and the court's appointment of a receiver. The court agreed, rejecting the argument of defendants that the guaranty was an unenforceable penalty. The court found that the guarantors' appeal of the trial court's appointment of a receiver “clearly qualifies as contesting the Bank's actions in connection with the appointment of a receiver that would trigger full repayment liability.” Id. at 517. The court also noted that the carveout clause did not constitute a liquidated damages provision because “the carve-out clause permits the lender to recover only damages actually sustained, namely the amount remaining on the loan at the time of breach. Such an amount is fixed by the terms of the contract and is therefore neither speculative nor incalculable.” Id. at 519. The court further rejected the defendants' argument that the carveout clause violated the guarantors' due-process rights, finding that the clause did not deny the defendants' right to contest the appointment of a receiver, but rather provided enforceable consequences if they did so, i.e., liability for full repayment of the loan. But see JLM Fin. Invs. 4, LLC v. Aktipis, 2013 U.S. Dist. LEXIS 77939 (N.D. Ill., June 13, 2013), at *26-27 (holding that mechanics liens filed against subject property were involuntary liens and therefore did not trigger full-recourse liability against guarantors under loan agreement or guaranty agreement).

ENFORCEABILITY OF CARVEOUTS TO NON-RECOURSE LOANS

A mortgage foreclosure must be commenced within 10 years after the right of action occurs, i.e., within 10 years after a default or the mortgage will be of no further force and effect and will no longer be a lien on the property. 735 ILCS 5/13-115. A mortgage ceases to be effective 20 years after the maturity date of the obligation secured, or 30 years after the date of the mortgage if no maturity date is stated. 10-year extensions may be effectuated by filing an affidavit or extension agreement executed by the lender. 735 ILCS 5/13-116.

STATUTE OF LIMITATION PERIOD

The lender has the duty to deliver to the borrower a release of lien within 1 month after repayment of the loan. Failure to do so can result in a penalty of $200 (plus attorney fees) for each offense, which may be enforced by a civil action. The release must contain the phrase “For the protection of the owner, this release shall be filed with the Recorder of Deeds in whose office the Mortgage or Deed of Trust was filed” in 1/4” type.

REQUIREMENTS FOR RELEASE OF LIEN

Under 735 ILCS 5/12-901 of IMFL, every individual has a homestead estate in his or her residence, owned or rightly possessed by lease or otherwise and occupied by him or her, in the amount of $15,000 that is exempt from attachment, judgment, levy, or judgment sale. The exemption is available to a spouse even if such spouse is not in title to the real estate if the other spouse is in title and the married couple occupies the residence. If there is more than 1 individual who is entitled to the exemption, then the maximum aggregate exemption is $30,000 prorated among such eligible parties. &nbsp;(Note that there is pending legislation that would increase the exemption to $30,000 for an individual and $60,000 where there are more than one individuals in title.&nbsp; See 2023 SB 244: 220 ILCS 5/1-101 (West 2023).) The homestead exemption can be released, waived, or conveyed in writing by the individual and spouse. When such release, waiver, or conveyance is pursuant to a mortgage the same shall only be operative as to such specific release, waiver, or conveyance. As stated before, Illinois mortgages customarily contain a homestead waiver.

HOMESTEAD ISSUES

Illinois is not a community property state. The only interest in real estate available due to the relationship of marriage consists of homestead rights as described above.

COMMUNITY PROPERTY

MORTGAGE TAX

DOCUMENTARY STAMP TAX

There are state ($.50 per $500 of property/consideration paid exclusive of mortgage balance assumed) and county ($.25 per $500) transfer taxes, and many home-rule municipalities have transfer taxes in amounts that vary greatly and are set by the particular municipality. Exemptions from the imposition of a real-property transfer tax include the following: On Foreclosure Sale: Transfers of property to the mortgagee pursuant to a foreclosure are exempt from state, county and Chicago transfer taxes. The ordinances of other municipalities should be examined for specific transactions. On Deed in Lieu of Foreclosure: Under state and county law deeds in lieu of foreclosure to the mortgagee are exempt from transfer taxes. The City of Chicago, which otherwise has an aggregate $5.25 per $500 transfer tax, also exempts deeds in lieu of foreclosure to the mortgagee. The ordinances of other municipalities should be examined for specific transactions. The definition of “mortgagee” at 735 ILCS 5/15-1208 supports the interpretation that the state transfer tax exemption extends to a nominee or designee of the lender. “Mortgagee” under this section is defined as (i)&nbsp;the holder of an indebtedness or obligee of a non-monetary obligation secured by a mortgage or any person designated or authorized to act on behalf of such holder and (ii)&nbsp;any person claiming through a mortgagee as successor. The Cook County Real Property Transfer Tax Ordinance also provides an exemption, &sect;&nbsp;6.M, for transfers “in which the deed or other instrument of transfer is issued to the mortgagee or secured creditor pursuant to a mortgage or security interest foreclosure proceeding or sale pursuant to a transfer in lieu of foreclosure.” <ul>
 <li>3-33-060(M) of the Chicago Real Property Transfer Tax Ordinance similarly exempts “Transfers in which the deed or other instrument of transfer is issued to the mortgagee or secured creditor pursuant to a mortgage or security interest foreclosure proceeding or sale or pursuant to a transfer in lieu of foreclosure.”</li>
</ul> The City of Chicago contested the applicability of the Chicago Real Property Transfer Tax Ordinance exemption provided in &sect;&nbsp;3-33-060(M) to “private investors” who purchased debt instruments from institutional lenders and acquired title via such a deed by completing the foreclosure or accepting a deed in lieu of foreclosure. The City of Chicago contended that such parties should not be considered “mortgagees” because they “intended” to acquire title to the property in question. The Illinois Appellate Court, in City of Chicago v. Elm State Prop. LLC, 2016 IL App (1st) 152552, overturned the Circuit Court's ruling and held that there was no basis in the City's transfer tax ordinance for transfer taxes to be imposed on an assignment of mortgage interests. The Court reasoned that the assignment of a mortgage in default does not convey a beneficial interest in real property. [ACMA filed an Amicus Curiae brief in the Elm State Property case in support of appellant.]

TRANSFER TAX

Illinois will enforce consensual choice of law provisions so long as the chosen law bears a reasonable relationship to the loan transaction and the enforcement of the loan documents in accordance with the chosen law is not dangerous, inconvenient, immoral, or contrary to public policy in Illinois.

ENFORCEABILITY OF AGREEMENT OF BORROWER AND LENDER AS TO CHOICE OF LAW PROVISIONS

In foreclosures of non-residential real estate, if the Security Instrument so provides and the mortgagee establishes a reasonable probability that it will prevail on a final hearing (typically a payment default gives rise to a reasonable probability of success), then a receiver will be appointed upon the motion of the mortgagee. The motion requesting the receiver must be supported by an affidavit or other sworn pleading. The receiver typically will be a party selected by the mortgagee rather than a party selected by the court, however the receiver is still an agent of the court. Receivers typically are property management companies. If approved by the court, a receiver may execute a lease binding on all parties, including purchasers at a foreclosure sale, for a term beyond the expiration of the appointment of the receiver. 735 ILCS 5/15-1704.

RECEIVERSHIP

With respect to non-residential mortgage loan transactions, there are no prohibitions or special rules regarding loan applications, loan fees, or commitment fees. With respect to residential mortgage loan transactions, the “organization, funding, purchasing and brokering” of residential mortgage loans must be licensed by the State of Illinois and is heavily regulated. See 205 ILCS 635/1-2 et seq. This statute affects what may be charged to a residential mortgage borrower. ILCS 635/1-3(a) expressly provides that the licensing provisions of the statute do not apply to any entity engaged solely in commercial mortgage lending. ILCS 635/1‑4(d) also provides that certain financial institutions, most notably state and federally chartered banks, are exempt from the statute's licensing requirements.

ANY PROHIBITION OR SPECIAL RULES REGARDING LOAN APPLICATION, LOAN FEES OR COMMITMENT FEES

The act of lending money in another state and securing the repayment of the loan by mortgage of land in Illinois is not considered doing business in Illinois and an entity need not qualify to do business in Illinois in order to make such loan or to file a foreclosure action to realize upon that collateral. A lender that wishes to engage in business activity within Illinois (e.g., establish a loan production office), however, would have to qualify to do business in Illinois. That qualification typically would be regulated by the regulatory authority that has jurisdiction over the lending institution and its Illinois counterpart. However, if the (non-qualified) entity subsequently acquires title to property in the State and does not sell real property within 5 years of acquiring such title and does not qualify to do business in Illinois within that time frame, the State's Attorney for the county in which the real property is sited has a duty to proceed with legal action in the Circuit Court for the County in which the real property is located, in the name of the People of the State, to bring action to sell the real property and after deducting expenses pay the remaining proceeds to the (non-qualified) entity previously in title. Foreign Corporation Lending Act (815 ILCS 125/1). With respect to residential mortgage loan transactions, all entities intending to originate, fund, purchase or sell mortgage loans are required to obtain a license issued by the State of Illinois unless any such entity qualifies as an exempt institution (e.g., as a state or federally charted bank), under 205&nbsp;ILCS 635/1-4(d).&nbsp; Note that there is pending legislation that each full service office at which a residential mortgagee licensee conducts any part of his or her business must be recorded with the State of Illinois. This legislation would also allow mortgage loan originators to work from a remote location under specified conditions.&nbsp; See 2023 HB 2325:&nbsp; 205 ILCS 635/1-4 (West 2023)

LENDER QUALIFICATION AND/OR LICENSURE

Many states, including Illinois, have enacted various forms of “credit agreements statutes.” These statutes specifically require a written agreement between the lender and borrower as a prerequisite for any legal action against the lender. Such actions include affirmative claims or defenses of borrowers based on an alleged oral agreement to lend; to extend, modify or refinance an existing loan; to forgive debt; or to forbear from exercising contractual remedies. The Illinois Credit Agreements Act (“ICAA”), 815 ILCS 160/01 - 160/3.1, defines a credit agreement as “an agreement or commitment by a creditor to lend money or extend credit or delay or forbear repayment of money not primarily for personal, family or household purposes, and not in connection with the issuance of credit cards.” 815 ILCS 160/1(1). The ICAA also states that “A debtor may not maintain an action on or in any way related to a credit agreement unless the credit agreement is in writing.” 815 ILCS160/2. Illinois courts, both state and federal, have given an expansive meaning to credit agreement and have issued nearly unanimous rulings in favor of the lender since the enactment of the ICAA in 1998. See, e.g., Gen. Electric Business Financial Services, Inc. v. Silverman, 693 F. Supp. 2d 796, 803 (N.D. Ill 2010) (ruling that guaranty agreement and limited joinder were part of credit agreement and thus governed by ICAA); R and B Kapital Development LLC v. North Shore Community Bank and Trust Co., 358 Ill. App. 3d 912, 919 (2005) (holding that escrow agreement was integral part of construction loan and borrower actions for negligent misrepresentation and breach of fiduciary duty were barred by ICAA because they were oral agreements); Van Pelt Const. Co. v. BMO Harris Bank, N.A., 2014 Ill. App. (1st) 121661, at &para;28, reh'g denied (Apr. 23, 2014), appeal denied, 20 N.E.3d 1264 (Ill. 2014) (finding that language of ICAA is broadly worded and was intended to extend beyond the existing Frauds Act; court ruled that settlement agreement meets definition of credit agreement under ICAA, even in the face of harsh results).

PROVISIONS OR REQUIREMENTS FOR MODIFICATION OF EXISTING MORTGAGE LOANS

The Seventh Circuit Court of Appeals, in River East Plaza, L.L.C. v. Variable Annuity Life Co., 498 F.3d 718 (7th Cir. 2007), determined that the yield-maintenance prepayment-premium provision in a commercial real-estate mortgage note was not subject to a liquidated damages analysis and was not a penalty. The Seventh Circuit ruled that the prepayment clause at issue was enforceable because it reflected the intent of the parties to balance (1)&nbsp;the concern of the lender in guarding against the risk of lower interest rates and (2)&nbsp;the desire of the borrower to be able to prepay the loan and unburden itself of significant financial debt. With respect to mortgages of owner-occupied residential properties, charges in addition to interest payable to the lender are limited, and non-interest charges, such as late charges and prepayment premiums in the case of a loan with an interest rate in excess of 8% are limited in the aggregate to 3% of the loan amount. These charges limit the ability to charge prepayment premiums in residential loan transactions, which, while permitted in certain respects, are limited in amount, 815 ILCS 205/4.1a. Regulations issued by federal or quasi-federal agencies regulate or limit, to some extent, the imposition of prepayment penalties. For example, Federal Reserve Regulation Z, enforcing the Federal Truth in Lending Act, requires mortgage lenders, in transactions covered by the Act, to disclose whether or not a prepayment fee will be imposed or a rebate of a precomputed finance charge will be given for early payment. 12 C.F.R. &sect;&nbsp;226.18(k). Also, prepayment fees in mortgage loans guaranteed by the Veterans Administration (“VA”) and insured by the Federal Housing Administration (“FHA”) are prohibited and may be prepaid at any time. See 38 C.F.R. &sect;&nbsp;36.4310 (VA) and 24 C.F.R. &sect;&nbsp;203.22(b) (FHA). The standard form of note form approved by Freddie Mac and Fannie Mae, both quasi-federal entities, permits prepayment without penalty. This is significant because many lenders sell their mortgages to these entities, and therefore prepayment fees continue to be uncommon in conventional residential loans.

PREPAYMENT PREMIUMS

Illinois law provides that response costs for which a responsible person is liable constitute a lien in favor of the state on all property that belongs to such responsible person and is subject to investigation or removal, or a remedial, preventive, corrective, or enforcement action. The lien is effective from the time of filing in the county where the property is located. The lien is not valid unless notice has been sent to the owners of the real property. Priority over purchasers, mortgagees, and other lienholders arises at the time of filing. However, the lien is subordinate to liens for general taxes, special assessments, and special taxes levied by political subdivisions of the state even if they are levied after the lien takes effect.

ENVIRONMENTAL LIEN ISSUES

There is no current local bar opinion report in Illinois. In the early 1990s, the Chicago Bar Association's Real Property Finance Subcommittee prepared a local bar opinion report applicable to loan transactions in Chicago including a form opinion as a resource. While sometimes used, most practitioners rely on other sources for standard opinion practices

LEGAL OPINIONS

<ol>
 <li> INCEPTION OF L&M LIENS (Priority of Lien of the Mortgage): L&M Liens in Illinois are created under the Mechanics Lien Act (“MLA” or “Act”) found at 770 ILCS 60/1 et seq. and may arise in favor of a person who, pursuant to contract, furnishes labor, materials or services in connection with either the improvement of a parcel of land or the repair, rehabilitation or remodeling of a building on that land. In addition to general contractors and subcontractors, the MLA affords L&M Lien rights to architects, structural engineers, professional engineers, land surveyors, property managers, and, effective August 17, 2018, registered interior designers. L&M Liens attach to the parcel of land in the amount due under the contract and the priority of the lien as to third parties is established as of the date of the contract between the contractor and the owner or his or her agent.</li>
</ol> L&M Liens arising from contracts let prior to the date the mortgage is recorded have complete priority over the mortgage provided the L&M Lien is recorded or suit filed within the periods required by the Act. L&M Liens, if preserved pursuant to the Act, arising subsequent to the date of the recording of the mortgage will have complete priority over the mortgage to the extent that the proceeds of the loan secured by the mortgage have not yet been disbursed. Although a provision of IMFL enacted in 1987, 735 ILCS 5/15-1302, states that advances under a mortgage made within 18 months after the mortgage is recorded have the same priority as if the funds were disbursed on the date of recording, the title insurers do not rely on its enforceability since there are no cases that have interpreted said provision. Effective February 11, 2013, 770 ILCS 60/16 was amended to limit the lender's recovery to the pre-contract land value (assuming the mortgage is recorded before the contract) and allows lien claimants to recover their lien claim amounts out of the value of all improvements, and not just their own improvements, before the lender recovers anything further on the mortgage. A recent law allows for bonding over L&M Liens in Illinois. Effective January 1, 2016, 770 ILCS 60/38.1 authorizes interested parties in a mechanic's lien dispute to petition for an order substituting an eligible surety bond for any lien rights arising in (a) the improved real property, and (b)&nbsp;the funds or other consideration due or to become due from the owner to the general contractor. &sect;&nbsp;38.1 therefore provides a needed alternative mechanism to clear title exceptions resulting from bona fide payment disputes. However, &sect;&nbsp;38.1 contains additional provisions, such as mandatory prevailing-party attorneys' fees, that must be considered in an overall cost benefit analysis before deciding to pursue “bonding over.” There are eligibility requirements to bond over L&M Liens and the right to file a petition for a particular lien claim arises at the earliest of (a)&nbsp;service of a subcontractor's 90-day notice under 770 ILCS 60/24, (b)&nbsp;the recording of a general contractor's lien claim; or (c)&nbsp;the filing of a suit to foreclose a mechanic's lien by either the contractor or subcontractor. Notably, the statute is silent regarding the common situation where a subcontractor records a claim for lien but has not complied with the &sect;&nbsp;24 service requirements for a 90-day notice. As written, &sect;38.1 does not appear to authorize a petition in this circumstance until the subcontractor either serves a proper 90-day notice or files a foreclosure action under 770 ILCS 60/28. Note that there is pending legislation that would expand the parties to whom notice may be given and preserve the mechanics lien.&nbsp; See 2023 SB 1704: 770 ILCS 60/24 (West 2023). <ol>
 <li> PRIORITY AS TO REMOVABLE FIXTURES: The Act provides an L&M Lien on the land improved by a contractor, subcontractor, or material supplier. The Act does not provide for separate priorities in specific parts of the land, such as removable fixtures, although there are special rules for contractors installing improvements serving subdivisions (e.g., a lien is permitted on the individual lots, but not specifically on the installation). Consequently, if a contractor installs heating equipment that is capable of being removed, the contractor will have no rights in the specific heating equipment. Rather, the contractor will have an L&M Lien on the property as a whole if the contractor otherwise complies with the requirements of the Act. But with respect to a purchase-money lender financing the purchase of removable fixtures, such as heating equipment, if the lender has a perfected security interest, the UCC would grant to that lender property rights in the removable fixture, in this case heating equipment, that would be prior to the rights of an existing mortgagee of the property.</li>
</ol>

LABOR AND MATERIAL LIEN CLAIMS (“L&M LIENS”)—PRIORITY ISSUES

The 2021 ALTA Owner's and Loan Policy title insurance forms are the customary forms used by owners and lenders in Illinois. These policies insure against loss that the insured party incurs due to the condition of title being other than as insured. Coverage under the Loan Policy continues for the benefit of the insured lender if the lender acquires title to the property by foreclosure or deed in lieu of foreclosure, but it is inaccurate and misleading to suggest that the lender now has an Owner's Policy or is provided the coverage of an Owner's Policy. Because the liability under the Loan Policy is generally reduced from the original face amount (and because mortgage loans are seldom made for 100% of the value of the property), the lender may have a difficult time demonstrating loss or damage, i.e., that the value of the land (even subject to the title defect) is less than the reduced liability under the policy.

FORM USUALLY REQUIRED BY LENDER

AVAILABLE ENDORSEMENTS TYPICALLY REQUESTED IN ILLINOIS

. If the insured property is unimproved then the lender typically requests a zoning 3.0 endorsement, which indicates the zoning classification for the insured property and which uses are permitted under that zoning classification. If the insured property is improved then the lender requests a zoning 3.1 endorsement. A zoning 3.1 endorsement indicates the same items as the 3.0 endorsement in that it insures as to the legal uses of the insured parcel, but it also insures against the required alteration of a structure on the insured property due to a violation of (i) the area, width or depth of the lot area; (ii)&nbsp;the floor space area of the structure; (iii) the setback of the structure; and (iv)&nbsp;the number of parking spaces.

Zoning Endorsement

. This insures the lender against loss by reason of inaccuracies in any of the following: (i) there are no covenants, conditions or restrictions that might invalidate or prime the mortgage; (ii) there are no current violations of any enforceable covenants, conditions or restrictions or plat building lines, unless they are shown in Schedule B; (iii)&nbsp;there are no covenants or restrictions shown in Schedule B that establish an easement, a lien for liquidated damages, assessment lien, an option to purchase or right of prior approval, unless otherwise stated in Schedule B; and (iv) there are no improvements that encroach onto adjoining land or onto an easement located on the insured land nor are there improvements on adjoining property that encroach onto the insured land, unless otherwise stated in Schedule B. This endorsement also insures that the future violation of any covenant will not impair the enforceability or priority of the mortgage.

Comprehensive Endorsement

. This describes the insured land by its physical location and dimension, the type of improvements located thereon and its street address.

Address Endorsement (a/k/a Location Endorsement)

. This insures that the parcels of land referenced in the endorsement are contiguous to each other and there are no streets, alleys, or intervening parcels that totally separate the insured parcels.

Contiguity Endorsement

. This provides that the survey identified in the endorsement accurately depicts the exterior boundaries and dimensions of the insured land and does not disclose any encroachments or easements that are not already raised as exceptions on Schedule B. ALTA Endorsement 25-06 (Same as Survey) is the preferred form of endorsement for the title companies as this endorsement insures that the description of the land shown in Schedule A is the same as the land shown on the mentioned survey rather than insuring over the deficiencies in the survey.

Accuracy of Survey Endorsement

. This insures that the insured property is the same property as the property described in the survey despite the fact that there is different language in each of the descriptions.

Legal Description Equivalency Endorsement

. This insures that the insured land is contiguous to the street that is named in the endorsement. This endorsement may be modified upon request to insure that there is pedestrian and vehicular access from said street and that said street is a public right-of-way.

Access Endorsement

. This insures that the land constitutes a separate parcel for real estate tax purposes and it indicates the permanent tax number.

Tax Parcel Endorsement

. This insures that if the insured property were to be sold a subdivision of said property would not be necessary prior to the recordation of a deed.

Subdivision Plat Act Endorsement

. This insures against loss of priority sustained if the rate of interest on the obligation secured by the mortgage is determined by a court to be usurious.

Usury Endorsement

. This insures that water, gas, electric, sewer and telephone utilities are available to serve the insured property via a public right-of-way or an easement appurtenant to the insured property leading to a public right-of-way.

Utility Availability Endorsement

. This insures against loss because of any violation of any covenant, restriction or plat building line shown in Schedule B.

Restrictions Endorsement

. This insures the construction lender against loss it may suffer should its lien not be prior to all mechanics' liens prior to the date of the policy. In Illinois, as mentioned above, mechanics' liens can have priority over the lien of the lender's mortgage even if the claims relate to work commenced after the date of the policy. The title company will typically issue “date down” endorsements with each loan disbursement insuring the priority of the lien of the mortgage over the total amount of all advances made as of the date of the endorsement. The current IMLA mechanic's lien coverage in Illinois covers a lien if the lien is from a named party for work done prior to a defined date and the lien is on account of amounts shown as paid on the sworn statement. ALTA Endorsements 32-06 (Loss of Priority), 32.1-06 (Direct Payment) and 32.2-06 (Insured Direct Payment), which are the interim coverage mechanics lien endorsements used nationally may also be available, which insure against loss or damage by reason of the invalidity or unenforceability of the lien of the insured mortgage as security for each construction loan advance made on or before the date of coverage. &nbsp;ALTA Endorsement 33-06 (Disbursement) extends the Date of Coverage as defined in the ALTA Endorsements 32-06, 32.1-06 and 32.2-06, but it does not alter the Date of Policy and is designed to be issued in conjunction with a construction loan disbursement during a construction project and used with ALTA Endorsements 32-06, 32.1-06 and 32.2-06.&nbsp; One must be aware that coverage under ALTA Endorsements 32-06, 32.1-06 and 32.2-06 will be subject to the exclusions from coverage in the policy, the provisions of the conditions in the policy, and the exceptions contained in Schedule B. &nbsp;Matters excluded may include failure to withhold funds as required by law, any other failure to comply with applicable law, failure to pay retainage, approval of extras resulting in additional costs, disputes over services, failure to provide adequate funds, failure to fully disburse or to disburse to lien claimants, and failure to require lien waivers from lien claimants.

Interim Mechanic's Lien Coverage

. This insures that the lender will not be prevented from enforcing its mortgage in the Illinois courts on the basis that the loan secured thereby violates the “doing business” laws of the State of Illinois.

Doing Business Endorsement

. This insures that advances under a revolving credit facility made subsequent to the date of the policy, which advances are secured by the mortgage, are insured and have the same priority as advances made as of the date of the policy. The following matters, however, are excluded from the priority coverage: real estate taxes, special assessments, mechanic's lien claims, bankruptcies and federal tax liens.

Revolving Credit Endorsement

. This insures the lender (i) against loss arising from the unenforceability of provisions in the mortgage related to changes in the interest rate; (ii) against loss of the priority of the mortgage lien as a result of changes in the interest rate; and (iii) if the change in the interest rate increases the principal to an amount greater than the policy amount, the amount of insurance coverage under the loan policy shall correspondingly increase.

Variable Rate Mortgage Loan Endorsement

. This is provided by the title company if there is an encroachment from the property onto either a building line, easement or neighboring property. It provides insurance against forced removal of the improvements.

Encroachment Endorsement

.&nbsp; This insures the lender on commercial real estate against loss of priority due to any recorded environmental protection liens.

Environmental Endorsement

.&nbsp; This insures against loss or damage from a final court order determining that the lien of the mortgage is unenforceable because the loan is usurious. Note: The following new forms were adopted by the ALTA Board and have an effective date of July 1, 2021: <ul>
 <li>ALTA&reg; Endorsement 3 Unimproved and Improved Land - Owner's and Loan Policies</li>
 <li>ALTA&reg; Endorsement 1 Improved Land - Owner's and Loan Policies</li>
 <li>ALTA&reg; Endorsement 2 Land Under Development - Owner's and Loan Policies</li>
 <li>ALTA&reg; Endorsement3 Completed Improvement/Non Confirming Use- Owner's and Loan Policies</li>
 <li>ALTA&reg; Endorsement4 No Zoning Classification - Owner's and Loan Policies</li>
 <li>ALTA&reg; Endorsement 4 Condominium Assessment Priority - Loan Policy</li>
 <li>ALTA&reg; Endorsement1 Condominium Current Assessments - Owner's and Loan Policies</li>
 <li>ALTA&reg; Endorsement 6 Variable Rate Mortgage - Loan Policy</li>
 <li>ALTA&reg; Endorsement2 Variable Rate Mortgage/Negative Amortization - Loan Policy</li>
 <li>ALTA&reg; Endorsement1 Manufactured Home/Conversion - Loan Policy</li>
 <li>ALTA&reg; Endorsement2 Manufactured Home/Conversion - Owner's Policy</li>
 <li>ALTA&reg; Endorsement1 Environmental Protection Lien - Loan Policy</li>
 <li>ALTA&reg; Endorsement 10 Assignment - Loan Policy</li>
 <li>ALTA&reg; Endorsement1 Assignment and Date Down - Loan Policy</li>
 <li>ALTA&reg; Endorsement 11 Mortgage Modification - Loan Policy</li>
 <li>ALTA&reg; Endorsement1 Mortgage Modification with Subordination - Loan Policy</li>
 <li>ALTA&reg; Endorsement2 Mortgage Modification with Additional Amounts of Insurance- Loan Policy</li>
 <li>ALTA&reg; Endorsement 12 Aggregation - Loan Policy</li>
 <li>ALTA&reg; Endorsement1 Aggregation/State Limits - Loan Policy</li>
 <li>ALTA&reg; Endorsement 14 Future Advance/Priority - Loan Policy</li>
 <li>ALTA&reg; Endorsement1 Future Advance/Knowledge - Loan Policy</li>
 <li>ALTA&reg; Endorsement 14.2 Future Advance/Letter of Credit - Loan Policy</li>
 <li>ALTA&reg; Endorsement3 Future Advance/Reverse Mortgage - Loan Policy</li>
 <li>ALTA&reg; Endorsement 26 Subdivision - Owner's and Loan Policies</li>
 <li>ALTA&reg; Endorsement 27 Usury - Loan Policy</li>
 <li>ALTA&reg; Endorsement 30 One- To - Four Family Appreciation Mortgage - Loan Policy</li>
 <li>ALTA&reg; Endorsement1 Commercial Participation Interest- Loan Policy</li>
 <li>ALTA&reg; Endorsement 32 Severable Improvements - Owner's Policy</li>
 <li>ALTA&reg; Endorsement1 Construction Loan/Direct Payment- Loan Policy</li>
 <li>ALTA&reg; Endorsement2 Construction Loan/Insured Direct Payment - Loan Policy</li>
 <li>ALTA&reg; Endorsement 1 Identified Risk Coverage - Loan Policy</li>
</ul> Although some states require their own approval of ALTA forms (or promulgate their own forms), all of the foregoing new ALTA forms are available in Illinois.

The typical agency contract between the title insurance company and the title insurance agent provides that the agent is a limited agent only and its authority extends only to the issuance of title insurance commitments, policies, and endorsements. Such contracts also specifically note that the agent acts on its own behalf, not on behalf of the title insurance company, when it serves as an escrow agent (identified in 215 ILCS 155/3(8)). The Title Insurance Act, 215 ILCS 155/1 et seq. (the “Title Act”), regulates title insurance and title-insurance companies in Illinois. The Title Act defines the title-insurance business as including the issuance of insured closing letters or closing protection letters (“CPLs”), when conducted or performed in contemplation of or in conjunction with the issuance of title insurance. CPLs are issued by the title company and are designed to provide, subject to the limitations contained therein, protection against unauthorized or fraudulent actions, or failure to comply with the lender's closing instructions, by the title company's approved closing agent or attorney (the “Agent”). CPL issues exist only when the closing is conducted, and the escrow handled by the Agent, and not when the title insurer itself directly controls and performs the closing function. The standard forms of ALTA CPLs (most recently revised and updated on December 1, 2018 with a technical correction on August 1, 2019) are used in Illinois. One should understand that it is good practice to require that a CPL be issued if the closing is conducted by an Agent on behalf of the title company. Further, one should consider requiring that closing funds be deposited and disbursed through the title company for any real estate transaction (even in instances where a CPL is issued) for an Agent handled closing, if it is determined that the restrictions and amount covered under the CPL do not provide for adequate coverage for the transaction. Subsection 16.1(f) of the Title Act provides in relevant part that an Agent cannot act as an escrow agent in a nonresidential real property transaction where the amount of settlement funds on deposit with the escrow agent is less than $2,000,000 or in a residential real property transaction unless the Agent, title insurance company, or another authorized title insurance agent has committed for the issuance of title insurance in that transaction and the Agent is authorized to act as an escrow agent on behalf of the title insurance company for which the commitment has been issued. The authorization to act as escrow agent on behalf of the title company is given either (1)&nbsp;by an agency contract with the title insurance company, in compliance with Section 16 of the Title Act, or (2)&nbsp;by a CPL in compliance with the requirements of Subsection 16.1 the Title Act. Subsection 16.1(g) provides that if an agency contract is the source of the authority for the Agent to act as escrow agent for a real property transaction, then the agency contract must provide for no less protection from the title insurance company to all parties than a CPL issued in conformity with Section 16.1 of the Title Act would provide. The escrow agent shall not charge a fee for a CPL, but shall collect from the parties the fee charged by and remit it to the title insurance company. The payment of any portion of the fee to the escrow agent by the title insurance company shall be deemed a prohibited inducement or compensation in violation of Section 24 of this Act. Notwithstanding the provisions of the Title Act, there are still at least 3 instances in which the recipient of a CPL may still be at risk: (1) When the title insurer goes out of business; (2)&nbsp;When the agent's failure does not affect title to real estate or a mortgage lien (e.g., payment of a credit card debt or other personal debt or obligation); and (3) When an agent improperly handles a possession or repair escrow.

CLOSING PROTECTION LETTERS

Effective January 1, 2009, Illinois passed the Uniform Environmental Covenant Act. 765 ILCS 122/1, et seq. The act provides for the creation of covenants imposing activity and use limits on land affected by an environmental response project. The covenants must be either recorded in the county in which the property is located or filed in the office of the Illinois Environmental Protection Agency (the “IEPA”). If filed with the IEPA, notice of such filing must be recorded in the county in which the property is located.

Environmental Covenants

As discussed above, “land trusts” are sometimes employed in commercial mortgage transactions, and more frequently with certain residential mortgages due to perceived tax and privacy advantages. Under the Illinois Land Trust Beneficial Interest Disclosure Act, 765 ILCS 405/1, a “land trust” is an express agreement or arrangement whereof a use, confidence or trust is declared of any land, or of any charge upon land, for the use or benefit of any beneficiary, under which the title to real property, both legal and equitable, is held by a trustee, subject only to the execution of the trust, which may be enforced by the beneficiaries who have the exclusive right to manage and control the real estate, to have the possession thereof, to receive the net proceeds from the rental, sale, hypothecation or other disposition thereof, and under which the interest of the beneficiary is personal property only. “Land trusts” should be contrasted with trusts, generally, and which are the subject of completely revised Illinois Trust Code, 760 ILCS 3, which became effective January 1, 2020. While the Illinois Trust Code is generally inapplicable to mortgages, drafters should take note that the parties may, by statute, specify in the trust agreement that the Illinois Trust Code applies, and doing so may vest the trustee with different or additional powers, or make such trustee subject to additional obligations. See 760 ILCS 3/605(d). &nbsp;

Illinois

Mortgage Law Summary

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Mortgage Law Summary for Illinois

Illinois

Mortgage Law Summary

Continue reading theMortgage Law Summary for Illinois

Continue reading the
Mortgage Law Summary for Illinois