Based on our discussion of this issue with an attorney at the CFPB, to the extent that a federal requirement conflicts with the Illinois law, federal law preempts the state law. (Also, we are aware of at least one case holding that federal escrow regulations that conflict with Illinois law preempt the Illinois law’s requirements. Olsen v. Financial Fed. Sav. & Loan Ass’n, 105 Ill.App.3d 364, 371 (1st Dist. 1982).) Therefore, if any of the requirements in the Illinois Mortgage Escrow Account Act conflict with federal regulations, such as the higher-priced mortgage loan rules, then the bank must follow the federal regulatory requirements.
For example, Section 5 of the Illinois law requires lenders to notify mortgage borrowers when the loan principal is reduced to 65% of its original amount. That section also requires lenders to terminate the escrow account on the borrower’s request. 765 ILCS 910/5.
First, we do not believe that the Illinois requirement to provide notice to a borrower (at 65%) necessarily conflicts with the federal regulations. However, the requirement to terminate an escrow account at the borrower’s request could conflict with the federal higher-priced mortgage loan (HMPL) regulations, which currently require lenders to maintain escrow accounts for the first five years after the loan consummation. 12 CFR 1026.35(b)(3). Therefore, if federal law requires that the bank maintain an escrow account, you must keep it open for the full five years, even if the Illinois law allows the borrower to cancel the account. However, if the federal law’s requirements are met (five years have passed, the unpaid principal balance is less than 80% of the original value of the mortgaged property and the customer is not delinquent or in default on the loan), then the customer may cancel the escrow account, even if the Illinois notice requirement has not been triggered (that is, even if the loan has not been paid down to 65% of the original principal balance).
As to the Illinois law’s requirement to permit borrowers to open interest bearing time deposit accounts in lieu of escrow accounts, we believe that banks can allow borrowers to open such accounts without violating the federal escrow account requirements. The CFPB attorney we spoke to stated that an interest bearing time deposit account would be sufficient to meet the federal escrow account requirements, provided that the escrow account meets all of the other conditions in the definition of “escrow account.” The federal rules define “escrow account” as:
any account that a servicer establishes or controls on behalf of a borrower to pay taxes, insurance premiums (including flood insurance), or other charges with respect to a federally related mortgage loan, including charges that the borrower and servicer have voluntarily agreed that the servicer should collect and pay. . . . For purposes of this section, the term “escrow account” excludes any account that is under the borrower’s total control.
As to the Illinois law’s notice requirements (in Sections 11 and 5 of the Act), banks will likely need to rewrite the escrow account notices to avoid confusing customers. For example, the disclosures could state that if a loan is considered a “higher-priced mortgage loan” under federal regulations, then the escrow account must be kept open for a minimum of five years and can be closed only if the unpaid principal balance is less than 80% of the original value of the mortgaged property and if the customer is not delinquent or in default on the loan.