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As to Section 7 of the Mortgage Escrow Account Act, does federal law preempt the mortgage escrow requirement for higher priced mortgage loans or where Fannie Mae requires an escrow account? Is the 65% notification still required, even though we would not be able to release the escrow account under federal law? – IBA Compliance Connection

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As to Section 7 of the Mortgage Escrow Account Act, does federal law preempt the mortgage escrow requirement for higher priced mortgage loans or where Fannie Mae requires an escrow account? Is the 65% notification still required, even though we would not be able to release the escrow account under federal law?

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Section 7 exempts mortgages guaranteed by the federal government from Section 5 (allowing cancellation at 65%). 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”).

However, Section 7 does not exempt higher-priced mortgage loans from Section 5. Borrowers are permitted to terminate escrow accounts for such loans: Regulation Z authorizes higher-priced mortgage loan borrowers to cancel an escrow account with a dated written request to the lender, once 365 days have passed since the consummation of the loan. 12 CFR 1026.35(b)(3)(iii). To the extent that a federal requirement conflicts with the Illinois law, federal law will preempt the state law. Olsen v. Financial Fed. Sav. & Loan Ass’n, 105 Ill.App.3d 364, 371 (1st Dist. 1982).