We believe the best practice would be to comply with the Illinois Mortgage Escrow Account Act (the “Act”) for loans “granted or serviced” in Illinois that are secured by residential property located outside of Illinois, provided the Illinois law does not conflict with the law of the other state where the property or borrower is located.

A strict reading of the Act states that it applies to “each mortgage lender” that “grants or services” mortgage loans secured by single-family, owner-occupied residential property. Nowhere does it exclude mortgage loans secured by property located outside of the state. (While the Act also does not limit its definition of “mortgage lender” to Illinois mortgage lenders, as a matter of law it would not reach out-of-state lenders that are not doing business in Illinois.) Consequently, we believe the Act by its terms applies to any mortgage loan made by your Illinois institution that is secured by single-family, owner-occupied residential property, irrespective of where the property is located.

We recognize that the choice of law provisions in the loan documents name another state, and there is a possibility that an Illinois court, as well as a court in another state, might find that only the other state’s laws apply. The general rule in Illinois is that unless a choice of law provision contradicts Illinois public policy, the choice of law provision will be enforced, provided that there is “some relationship” between the chosen state and the parties to the transaction. However, this Act is a consumer protection law, providing borrowers with a cause of action and entitling them to damages for violations, which makes for a strong argument that the Illinois General Assembly intended the Act to be an expression of public policy, and thus an exception to the choice of law rules.

Notably, one bank has informed us that its FDIC examiner requires compliance with the Illinois High Risk Home Loan Act for all loans made by Illinois-chartered banks, irrespective of where the property or borrower is located, and it is possible that your examiners may take the same view on this law.

For resources related to our guidance, please see:

• Mortgage Escrow Account Act, 765 ILCS 910/2(c) (“‘Mortgage Lender’ means any bank, savings bank, savings and loan association, credit union, mortgage banker, or other institution, association, partnership, corporation or person who extends the loan of monies for the purpose of enabling another to purchase a residence or who services the loan, including successors in interest of the foregoing.”)

• Mortgage Escrow Account Act, 765 ILCS 910/4 (“On or after the effective date of this Act, each mortgage lender in conjunction with the granting or servicing of a mortgage on a single-family owner occupied residential property, shall comply with the provisions of this Act.”)

• Mortgage Escrow Account Act, 765 ILCS 910/9 (“Failure of any mortgage lender operating within this State to comply with the provisions of this Act shall entitle the borrower to actual damages in a court action.”) 

• Emigrant Mortg. v. Chicago Financial, 386 Ill.App.3d 21 (1st Dist. 2007) (“So long as the provision does not contravene Illinois public policy and there is some relationship between the chosen forum and the parties to the transaction, an express choice of law provision will be given full effect.”)