We believe that single-family, owner occupied, residential mortgage loans owned by Fannie Mae would be subject to the Mortgage Escrow Account Act’s requirement to notify borrowers of their right to terminate their escrow account when the balance of their mortgage loan reaches 65% of the original loan balance.

Although the Act provides an exception to the requirement to the borrower’s escrow cancellation right for “mortgages insured, guaranteed, supplemented, or assisted by the State of Illinois or the federal government that require an escrow arrangement for their continuation,” this exception does not apply to the Act’s notification requirement.

Further, we do not believe that mortgage loans owned by Fannie Mae would qualify as being insured, guaranteed, supplemented, or assisted by the federal government (such as FHA or VA loans). Although Fannie Mae was originally charted by the U.S. government, it is now a private shareholder-owned company operating under a congressional charter. Also, we do not believe that loans owned by Fannie Mae necessarily “require an escrow arrangement for their continuation” — unless a Fannie-owned loan qualifies as a higher-priced mortgage loan (HPML) and does not meet the criteria needed for HPML escrow cancellations.

Consequently, we believe the Mortgage Escrow Account Act would take precedence over the Fannie Mae Servicing Guide’s general prohibition on soliciting borrowers with “an offer to waive” escrow account requirements. We would also note that notifying a borrower of their legal right to terminate their escrow account is not necessarily the same as offering to waive escrow account requirements. The Fannie Mae servicing guide also advises servicers to “[e]valuate whether it is appropriate to waive the escrow account requirement based on the mortgage loan documents and applicable law,” and in this case, applicable Illinois law gives borrowers the right to terminate their mortgage escrow accounts when certain conditions have been met.

For resources related to our guidance, please see:

• Illinois Mortgage Escrow Account Act, 765 ILCS 910/3 (“Escrow Accounts or escrow-like arrangements established after the effective date of this Act in conjunction with mortgage agreements for single-family owner occupied residential property are hereby declared separate and distinct transactions from mortgages and, hence, subject to the laws and regulations of this State.”)

• 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.”)

• Illinois Mortgage Escrow Account Act, 765 ILCS 910/7 (“The borrower shall not have the right to terminate any such arrangement under Section 5 in conjunction with mortgages insured, guaranteed, supplemented, or assisted by the State of Illinois or the federal government that require an escrow arrangement for their continuation.”)

• FHFA website, Fannie Mae and Freddie Mac (“Fannie Mae was first chartered by the U.S. government in 1938 to help ensure a reliable and affordable supply of mortgage funds throughout the country. Today it is a shareholder-owned company that operates under a congressional charter.”)

• Fannie Mae Servicing Guide, What are the requirements to waive an escrow account? (“The servicer must not solicit a borrower with an offer to waive the escrow account requirements but is authorized to evaluate a borrower’s request subject to the requirements in the following table. The servicer must . . .

  Evaluate whether it is appropriate to waive the escrow account requirement based on the mortgage loan documents and applicable law.

  Deny a request to waive escrow requirement for a mortgage loan if
   

  • the borrower has received a prior mortgage loan modification, or previously been approved for an escrow waiver and failed to make all payments timely, as required,
     
  • the borrower has experienced any delinquency in the 12 months immediately preceding the request,
     
  • the borrower has experienced a 60+ day delinquency in the 24 months immediately preceding the request, or
     
  • the principal balance for the mortgage loan is greater than or equal to 80% of the original appraised value.”)