IBA Compliance Connection

Your go to source for compliance!

We discovered that we have not been sending the right to terminate notice required by Mortgage Escrow Account Act (Act) when a mortgage loan balance is reduced to 65% of its original amount. Should we review all loans covered by this act and send the notice to all qualifying loans, even if the current mortgage is well below 65% of its original amount? Additionally, if a customer requests to cancel escrow, we deny the request if there is one instance of a thirty day delinquency in the previous year. Does this practice conflict with the Act?

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We recommend consulting with legal counsel before sending out notices that are untimely under the Mortgage Escrow Account Act (Act). Your bank potentially is liable to each customer for the actual damages (or losses) they incurred by your bank’s failure to send the notices at the time required by the Act.

Your current practice of denying requests for escrow account cancellations likely comports with the Act’s requirements. The Act permits lenders to reject an escrow account termination request if the borrower is in default or failed to make payments that were “timely made according to the provisions of the loan agreement.” For a borrower who had at least one untimely payment (based on the loan agreement), your bank is not required to accept a request to terminate the borrower’s escrow account. 

Note that federal law sometimes requires escrow accounts to remain in place for higher-priced mortgage loans, when the Illinois law otherwise would permit the borrower to terminate the escrow account. The higher-priced mortgage loan regulations require lenders to maintain escrow accounts for five years after the loan consummation (unless the underlying loan has been terminated) and prohibit lenders from terminating an escrow account unless the unpaid principal balance is less than 80% of the original value of the property securing the loan and the consumer currently is not delinquent or in default on the loan. However, these federal law requirements do not negate the Illinois Act’s notice requirement, and they apply only in the context of higher-priced mortgage loans (for which the interest rate exceeds 1.5%, 2.5% or 3.5% over the average prime offer rate, depending on the lien position and loan amount).

For resources related to our guidance, please see:

  • Mortgage Escrow Account Act, 765 ILCS 910/5 (“When the mortgage is reduced to 65% of its original amount by payments of the borrower, timely made according to the provisions of the loan agreement secured by the mortgage, and the borrower is otherwise not in default on the loan agreement, the mortgage lender must notify the borrower that he may terminate such escrow account or that he may elect to continue it until he requests a termination thereof, or until the mortgage is paid in full, whichever occurs first.”)
  • 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.”)
  • Regulation Z, 12 CFR 1026.35(b)(3)(i) (“Except as provided in paragraph (b)(3)(ii) of this section, a creditor or servicer may cancel an escrow account required in paragraph (b)(1) of this section only upon the earlier of: (A) Termination of the underlying debt obligation; or (B) Receipt no earlier than five years after consummation of a consumer’s request to cancel the escrow account.”)
  • Regulation Z, 12 CFR 1026.35(b)(3)(ii) (“Notwithstanding paragraph (b)(3)(i) of this section, a creditor or servicer shall not cancel an escrow account pursuant to a consumer’s request . . .  unless the following conditions are satisfied: (A) The unpaid principal balance is less than 80 percent of the original value of the property securing the underlying debt obligation; and (B) The consumer currently is not delinquent or in default on the underlying debt obligation.”)