IBA Compliance Connection

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Is there an established definition of the Mortgage Escrow Account Act’s reference to payments “timely made according to the provisions of the loan agreement”? If a borrower with a history of delinquency is current on their loan when the loan reaches 65% of the original loan balance, must we notify them of their right to terminate their escrow account? Must we provide notice even if an exclusionary factor prohibits the borrower from exercising this option (such as the loan being in default)? If an exclusionary factor exists when the principal balance reaches 65% of the original loan balance, must we monitor the loan until the exclusionary factor no longer exists and then provide the notification?

Apr 13, 2023

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We are not aware of any definition or guidance related to the phrase “payments of the borrower, timely made according to the provisions of the loan agreement secured by the mortgage.” The Mortgage Escrow Account Act does not define the phrase, and it appears in only one court case that we know of, which does not examine the phrase’s meaning.

However, we believe this phrase is clear and unambiguous and that courts would interpret it as written. There are three conditions that must be met before a mortgage lender is required to notify a borrower of their right to terminate their escrow account: 1) the mortgage is reduced to 65% of the original amount, 2) by payments of the borrower, timely made according to the provisions of the loan agreement secured by the mortgage, and 3) the borrower is not otherwise in default on the loan agreement.

Consequently, if a borrower has a history of delinquent payments, we do not believe they would meet the second condition — timely payments in accordance with the terms of the loan agreement. There is no language in the statute providing an exception for borrowers who bring their accounts current after a delinquency. As a result, we do not believe you would be required to provide such a borrower with notice of their right to terminate their escrow account.

Similarly, we do not believe you would be required to provide such notice to a borrower who is in default due to late payments at the time their loan balance is reduced to 65% of the original balance or who later cures the default. Again, these borrowers would not meet the second condition of timely payments, even if they later bring the loan current. However, if a borrower is in default for reasons other than late payments, you may need to monitor their loan and provide the notice when the default has been cured — but only if the borrower had made all loan payments on time in accordance with the terms of the loan agreement.

In any case when you do not provide the notice to a borrower when their loan balance is reduced to 65% of the original amount, we recommend documenting your reasons — such as their history of delinquent payments or default at the time their balance reached 65%.

For resources related to our guidance, please see:

Illinois Mortgage Escrow Account Act, 765 ILCS 910/5 (“When the mortgage is reduced to 65% of its original amount by payments of the borrower, timely made according to the provisions of the loan agreement secured by the mortgage, and the borrower is otherwise not in default on the loan agreement, the mortgage lender must notify the borrower that he may terminate such escrow account or that he may elect to continue it until he requests a termination thereof, or until the mortgage is paid in full, whichever occurs first.”)

Stern v. Norwest Mortgage, 284 Ill. App. 3d 506, 672 N.E.2d 296, (1st Dist. 1996), aff’d Stern v. Norwest Mortgage, 179 Ill. 2d 160, 688 N.E.2d 99 (1997) (Referencing Section 5 of the Mortgage Escrow Account Act)

Ranjha v. BJBP Properties, 2013 IL App (1st) 122155, ¶ 10, 988 N.E.2d 964 (“The cardinal rule in interpreting a statute is to determine and give effect to the legislature’s intent in enacting the statute. When a statute’s language is clear, it is unambiguous and we must give it effect as written and enacted without resort to further aids of statutory construction. An ambiguous statute is one that is capable of more than one reasonable interpretation. To interpret an ambiguous statute, we must go beyond the statute itself and resort to extrinsic aids of statutory construction to determine the legislature’s intent, which include consideration of the statute’s purpose, necessity for the law and policy concerns that led to its passage.”)

previous question, you indicated that an escrow account holding funds for purposes of paying both property taxes and insurance premiums would be subject to the Mortgage Escrow Account Act. We understand that we must provide the initial disclosure required under the law at closing if taxes are paid from the escrow account. However, when the loan reaches 65% of the original loan balance and we must provide notification of the option to cancel the escrow account, would this apply only to the tax portion of the escrow or are we required to provide the option to cancel the insurance portion of the escrow — including HOI and PMI premiums but excluding flood insurance?