Can we charge a cancellation fee when customers elect to terminate their escrow accounts? What about a fee to obtain the current property value when customers cancel their private mortgage insurance (PMI)?

We are not aware of any law or regulation that prevents you from charging either fee.

Regarding the escrow cancellation fee, the Illinois Mortgage Escrow Account Act does not address whether a mortgage lender may charge a fee for terminating an escrow account at the consumer’s request (e.g., when the when the mortgage is reduced to 65% of its original amount). However, the Illinois Supreme Court has held that lenders may charge an “escrow waiver fee” when borrowers choose to forgo both an escrow account and the optional interest-bearing time deposit in lieu of an escrow account before a loan closing. In that case, the Supreme Court stated that “there is nothing in the Escrow Act which would preclude a lender from charging a fee for assuming an additional risk, namely, that a borrower would not pay his or her property taxes.”

By analogy, you also could argue that the Illinois Mortgage Escrow Account Act would not preclude you from charging a fee when a customer elects to terminate an existing mortgage escrow account after the loan closing. In addition, the Truth in Lending Act specifically acknowledges that there may be fees associated with closing an escrow account and requires creditors to provide a “timely and clearly written” disclosure of such fees.

Regarding your proposed PMI cancellation fee, we are not aware of any law, regulation, or court case that prevents it. In fact, the CFPB has stated that “in determining whether a borrower meets the requirements for borrower-requested cancellation of PMI coverage, servicers may require a property appraisal as evidence that the value of the property has not declined below the original value, and servicers may require the borrower to pay for the appraisal.”

However, the Homeowners Protection Act prevents you from charging any fee or other cost for providing required notices or disclosures regarding private mortgage insurance. Consequently, take care to ensure that your PMI cancellation fee does not include the cost — if any — of providing notices or disclosures to your borrower regarding their PMI cancellation.

For resources related to our guidance, please see:

Illinois Supreme Court, Weatherman v. Gary-Wheaton Bank of Fox Valley, N.A., 713 N.E.2d 543, 553 (Ill. 1999) (The Illinois Supreme Court stated that “this case involves a fee voluntarily agreed to by the borrower to obtain a tax payment option not granted by the Escrow Act after plaintiffs voluntarily rejected their options under section 6 of the Escrow Act.” The Court held that “there is nothing in the Escrow Act which would preclude a lender from charging a fee for assuming an additional risk, namely, that a borrower would not pay his or her property taxes.”)

Truth in Lending Act, 15 USC 1639d(j)(1)(B) (“If . . . a consumer chooses, and provides written notice to the creditor or servicer of such choice, at any time after such an [escrow] account is established in connection with any such transaction and in accordance with any statute, regulation, or contractual agreement, to close such account, the creditor or servicer shall provide a timely and clearly written disclosure to the consumer that advises the consumer of the responsibilities of the consumer and implications for the consumer in the absence of any such account.”)

Truth in Lending Act, 15 USC 1639d(j)(2) (“Any disclosure provided to a consumer under paragraph (1) shall include the following: (A) Information concerning any applicable fees or costs associated with either the non-establishment of any such account at the time of the transaction, or any subsequent closure of any such account.”)

CFPB Bulletin 2015-03, Private Mortgage Insurance Cancellation and Termination (August 4, 2015) (“In determining whether a borrower meets the requirements for borrower-requested cancellation of PMI coverage, servicers may require a property appraisal as evidence that the value of the property has not declined below the original value, and servicers may require the borrower to pay for the appraisal.”)

Homeowners Protection Act, 12 USC 4906 (“No fee or other cost may be imposed on any mortgagor with respect to the provision of any notice or information to the mortgagor pursuant to this chapter.”)