Application of Escrow Laws to Commercial Mortgage Loans

We are not aware of any federal regulations that apply to escrow accounts for commercial loans. RESPA excludes from coverage any loan made “primarily for a business, commercial, or agricultural purpose,” as defined by Regulation Z (12 CFR 1026.3(a)(1) and the accompanying official staff commentary). 12 CFR 1024.5(b)(2).

There are at least three Illinois statutes that apply to escrow accounts, but only two of those could apply to an escrow account for a commercial loan, and in only certain situations:

• The Mortgage Payment Statement Act, which allows borrowers to request, in writing, an itemized statement following an increase in escrow payments, applies to any mortgage, without an exclusion for mortgages securing business-purpose loans.

• Another law that could apply is the Mortgage Tax Escrow Act, as it applies to any “agreement for the mortgage of a single-family residence,” without an exclusion for business-purpose loans. Therefore, we believe this law could apply to a business-purpose loan secured by a single-family residence (possibly even if purchased as rental property). (The law prohibits lenders from requiring a borrower to maintain more than 150% of the property taxes paid on the property in the past year; usually this requirement is preempted by RESPA, except in the case of commercial loans.)

• The Mortgage Escrow Account Act, which imposes several requirements on escrow accounts, applies only to “the granting or servicing of a mortgage on a single-family owner occupied residential property” and only to lenders who make the loan “for the purpose of enabling another to purchase a residence or who services the loan.” 765 ILCS 910/4; 2(c). We believe these provisions would exclude all business-purpose loans from the law’s scope.

Illinois Laws Applying to Mortgage Escrow Accounts

Further, as we discussed, there are several aspects of Illinois laws that apply to escrows that may be unique. Some of the important provisions of these laws are discussed below. I have also attached our “Frontline for the Illinois Banker” presentation, which we created in 2006 to provide an overview of Illinois-specific banking laws. (In fact, I apologize for not sending this to you sooner!) Pages 25 and 26 of the attached document discuss the Illinois mortgage escrow laws in more detail.

• Section 5 of the Mortgage Escrow Account Act applies when the borrower has made all timely payments to reduce a mortgage to 65% of the original principal, at which point the lender must notify the borrower and allow the borrower to terminate the escrow account on request. 765 ILCS 910/5.

• Section 6 of the Mortgage Escrow Account Act requires lenders to allow borrowers to pledge “an interest bearing time deposit” (generally, certificates of deposit) in lieu of establishing an escrow account at the bank. (This was enacted in Illinois to allow consumers to benefit from interest they could be earning on escrow deposits.) 765 ILCS 910/6.

• The Mortgage Tax Escrow Account Act prohibits lenders from requiring a borrower to maintain more than 150% of the property taxes paid on the property in the past year. 765 ILCS 915/1. (But, as discussed in the attached document, this requirement is usually preempted by the RESPA (if RESPA does apply to the account), and RESPA prohibits lenders from requiring a borrower to maintain a cushion of more than one-sixth of the estimated total annual payments (116.6%) (unless there is a shortage or deficiency). 24 CFR 3500.17(c)(1).

• Borrowers may request, in writing, an itemized statement following an increase in escrow payments for taxes or insurance on the property under the Mortgage Payment Statement Act. 765 ILCS 920 et seq.