Illinois law does not require interest to accrue on mortgage escrow accounts, but an Illinois law requires a bank to allow certain customers to open an interest-bearing time deposit account in lieu of an escrow account. For purchase-money loans secured by owner-occupied single-family homes, the Illinois Mortgage Escrow Account Act requires mortgage lenders to provide borrowers with the option of pledging an interest-bearing time deposit with the mortgage lender in lieu of funding an escrow account.
We should add that because your bank is a national bank, there is a reasonable argument that your bank is not required to follow the provisions in Illinois’ Mortgage Escrow Account Act. In our view, the National Bank Act preempts state laws relating to escrow accounts for both residential and nonresidential loans for national banks. Nonetheless, we believe that some national banks in Illinois do comply with the Mortgage Escrow Account Act for competitive purposes. Moreover, a recent Ninth Circuit case held that the National Bank Act does not preempt a California state law requiring the payment of interest on escrow accounts.
For resources related to our guidance, please see:
- Stern v. Northwest Mortgage, Inc., 179 Ill.2d 160, 165 (1997) (“Before passage of the Escrow Act, most standard mortgage loans required the borrower to make monthly deposits into an escrow account to cover future taxes and other anticipated expenditures. Lenders were under no obligation to pay the borrower interest on the funds in the escrow account; thus, lenders received the benefit of the funds deposited by the borrower in the escrow account. In passing the Escrow Act, the legislature sought to give borrowers the benefit of their early payments of taxes by allowing them to pledge interest-bearing time deposits as opposed to having lenders establish escrow accounts.”)
- Mortgage Escrow Account Act, 765 ILCS 910/2(a) (“‘Escrow Account’ means any account established by the mortgage lender in conjunction with a mortgage loan on a residence, into which the borrower is required to make regular periodic payments and out of which the lender pays the taxes on the property covered by the mortgage.”)
- 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 910/3 (“Escrow Accounts or escrow-like arrangements established after the effective date of this Act in conjunction with mortgage agreements for single-family owner occupied residential property are hereby declared separate and distinct transactions from mortgages and, hence, subject to the laws and regulations of this State.”)
- Mortgage Escrow Account Act, 765 ILCS 910/6 (“In lieu of the mortgage lender establishing an escrow account or an escrow-like arrangement, a borrower may pledge an interest bearing time deposit with the mortgage lender in an amount sufficient to secure the payment of anticipated taxes.”)
- Mortgage Escrow Account Act, 765 ILCS 910/11 (“Notice of the requirements of the Act shall be furnished in writing to the borrower at the date of closing.”)
- OCC Regulations, 12 CFR 34.4(a) (“A national bank may make real estate loans under 12 U.S.C. 371 and §34.4, without regard to state law limitations concerning: . . . (6) Escrow accounts, impound accounts, or similar accounts; . . .”)
- Lusnak v. Bank of America, N.A., 883 F.3d 1185, 1197 (9th Cir. 2018), cert. denied (“In sum, no legal authority establishes that state escrow interest laws prevent or significantly interfere with the exercise of national bank powers, and Congress itself, in enacting Dodd-Frank, has indicated that they do not. Accordingly, we hold that the NBA [National Bank Act] does not preempt California Civil Code § 2954.8(a).”)
- Truth in Lending Act, 15 USC 1639d(g)(3) (“If prescribed by applicable State or Federal law, each creditor shall pay interest to the consumer on the amount held in any impound, trust, or escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal law.”)