There is a prohibition on escrow fees charged for use of a pledge time deposit in lieu of an escrow account. Stern v. Norwest Mortgage, Inc., 179 Ill.2d 160, 165 (1997). As to escrow waiver fees, another Illinois Supreme Court case authorizes lenders to charge fees when borrowers choose to forgo both an escrow account and the optional interest-bearing time deposit in lieu of an escrow account. Weatherman v. Gary-Wheaton Bank of Fox Valley, 186 Ill.2d 472 (1999); see also Cahnman v. Agency Rent-a-Car Sys., Inc., 299 Ill.App.3d 54 (1st Dist. 1998). The Supreme Court case states that because the escrow waiver fee “involves an option not addressed” in the Mortgage Escrow Account Act, it was a permissible fee. Id. (“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 could also argue that the Act would not preclude you from charging a higher interest rate to cover the additional risk brought by a borrower who does not establish an escrow account. However, note that there are no cases addressing this situation (charging increased interest rates in lieu of escrow accounts). Two caveats: always be sensitive to disparate impact and fair lending issues, and we’re just giving our musings and not providing legal advice.