IBA Compliance Connection

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We are a national bank that is going to begin offering escrow accounts to mortgage loan customers. We are aware we will need to provide several documents in conjunction with these accounts, including an initial escrow account statement, annual escrow account statement, escrow closing notice, Illinois Mortgage Escrow Account Act notice, Illinois notice of right to terminate escrow, Illinois notice of tax payments, Illinois escrow account disclosure agreement, and Illinois escrow account election form. Are there any other federal or state documents we may be overlooking, and can you direct us to any model forms (other than the escrow closing notice, which we have)?

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While we cannot provide an exhaustive list of every document you might need in relation to offering your customers escrow accounts, as your needs may vary depending on the circumstances of each loan, we believe the federal documents you listed generally would meet federal requirements related to providing escrow accounts, with the caveats noted below. Regarding the Illinois documents, we do not believe you are required to comply with the requirements of the Illinois Mortgage Escrow Account Act, although you may choose to do so, as discussed in more detail below.

Federal Law

Regulation X is applicable to all “federally related mortgage loans” (essentially any non-construction residential loan made by your bank). After conducting an analysis to determine the escrow amount, Regulation X requires lenders to submit an initial escrow account statement to a borrower at settlement or within forty-five days of settlement if the account is a condition of the loan.  During the loan term, lenders must provide an annual escrow account statement to a borrower within thirty days after the end of the account computation year.

Lenders also must notify borrowers at least once during the escrow account computation year if there is a shortage or deficiency in the escrow account, and this notice may be part of the annual escrow account statement, or it may be a separate document. When a borrower pays off the loan, the lender is required to provide the borrower with a “short year” annual escrow account statement (short year statement) within sixty days after receiving the payoff funds.

Regarding sample forms, the CFPB has published an “Initial Escrow Disclosure Explainer” that links to a sample “Initial Escrow Disclosure,” which is included in the resources below. Regulation X also references certain “Public Guidance Documents” containing model escrow disclosures, which the CFPB maintains in their original form — as rules published by HUD from 1994-1998. These disclosures include initial and annual escrow account disclosure statements, as well as short year statements, deficiency and shortage statements, and a consumer disclosure for voluntary escrow account payments. However, as these documents may be outdated, we recommend ensuring that any samples you use meet the current requirements of Regulation X.

Additionally, Regulation Z requires lenders to provide an escrow closing notice if an escrow account that was established in connection with a closed-end consumer loan secured by a first lien on real property or a dwelling (other than a reverse mortgage) is going to be cancelled.

State Law

The Illinois Mortgage Escrow Account Act notice, Illinois notice of right to terminate escrow, and Illinois notice of tax payments referenced in your question all pertain to requirements under the Illinois Mortgage Escrow Account Act. In our view, this law is preempted by the National Bank Act, the regulations for which provide that a “national bank may make real estate loans . . . without regard to state law limitations concerning . . . escrow accounts.” However, we believe that some national banks in Illinois do comply with the Mortgage Escrow Account Act for competitive purposes.

If you choose to comply with the requirements of the Illinois Mortgage Escrow Account Act, you must provide a borrower with notice of the Act’s requirements at the closing of any mortgage loan made for the purpose of purchasing a single-family owner-occupied residential property. The Act also requires lenders of such loans to provide borrowers with notice of their right to terminate the escrow account when they have paid sixty-five percent of the loan balance. In addition, lenders must provide borrowers with a notice of tax payments when the lender makes a tax payment — either within forty-five days of making the payment or on any annual statement.

The administrative rules for the Residential Mortgage License Act of 1987 state that if an escrow account is to be maintained for payment of taxes and/or insurance premiums, “an Escrow Account Disclosure Agreement shall be required between the licensee and residential mortgage loan applicant” — but this rule does not apply to banks, which are exempt from the Residential Mortgage License Act of 1987. However, you may wish to have a borrower sign an escrow account disclosure agreement to document their consent to the account terms. Additionally, the Illinois Mortgage Escrow Account Act provides that in lieu of establishing an escrow account “a borrower may pledge an interest bearing time deposit with the mortgage lender in an amount sufficient to secure the payment of anticipated taxes.” Thus, if you offer borrowers the option to pledge an interest-bearing time deposit in lieu of establishing an escrow account, you may wish to have borrowers opting to open escrow accounts sign an escrow election form to confirm this decision. You also may wish to have a borrower sign an escrow waiver agreement if you choose to waive a contractual right requiring a borrower to establish an escrow account. 

A sample “Illinois Notice of Right to Terminate Escrow Account” and “Escrow Waiver Agreement” are available in the forms library on GoToIBA.com and are included in the resources below.

For resources related to our guidance, please see:

  • Regulation X, 12 CFR 1024.2(b) (Federally related mortgage loan means: (1) Any loan (other than temporary financing, such as a construction loan): (i) That is secured by a first or subordinate lien on residential real property, including a refinancing of any secured loan on residential real property . . . and (ii) . . . (A) Is made in whole or in part by any lender that is either regulated by or whose deposits or accounts are insured by any agency of the Federal Government . . . “)
  • Regulation X, 12 CFR 1024.17(g)(1) (“[T]he servicer shall conduct an escrow account analysis before establishing an escrow account to determine the amount the borrower shall deposit into the escrow account . . . After conducting the escrow account analysis for each escrow account, the servicer shall submit an initial escrow account statement to the borrower at settlement or within 45 calendar days of settlement for escrow accounts that are established as a condition of the loan.”)
  • Regulation X, 12 CFR 1024.17(i) (“For each escrow account, a servicer shall submit an annual escrow account statement to the borrower within 30 days of the completion of the escrow account computation year. The servicer shall also submit to the borrower the previous year’s projection or initial escrow account statement. The servicer shall conduct an escrow account analysis before submitting an annual escrow account statement to the borrower.”)
  • Regulation X, 12 CFR 1024.17(f)(5) (“The servicer shall notify the borrower at least once during the escrow account computation year if there is a shortage or deficiency in the escrow account. The notice may be part of the annual escrow account statement or it may be a separate document.”)       
  • Regulation X, 12 CFR 1024.17(b) (“Escrow account computation year is a 12-month period that a servicer establishes for the escrow account beginning with the borrower’s initial payment date. The term includes each 12-month period thereafter, unless a servicer chooses to issue a short year statement under the conditions stated in § 1024.17(i)(4).”)
  • Regulation X, 12 CFR 1024.17(i)(4) (“A servicer may issue a short year annual escrow account statement (‘short year statement’) to change one escrow account computation year to another. By using a short year statement a servicer may adjust its production schedule or alter the escrow account computation year for the escrow account. (i) Effect of short year statement. The short year statement shall end the ‘escrow account computation year’ for the escrow account and establish the beginning date of the new escrow account computation year. The servicer shall deliver the short year statement to the borrower within 60 days from the end of the short year.”)
  • Regulation X, 12 CFR 1024.17(h)(1) (“The format and a completed example for an initial escrow account statement are set out in Public Guidance Documents entitled ‘Initial Escrow Account Disclosure Statement – Format’ and ‘Initial Escrow Account Disclosure Statement – Example,’ available in accordance with the direction in the definition of Public Guidance Documents in § 1024.2.”)
  • Regulation X, 12 CFR 1024.17(j) (“The formats and completed examples for annual escrow account statements using single-item analysis (pre-rule accounts) and aggregate analysis are set out in Public Guidance Documents entitled ‘Annual Escrow Account Disclosure Statement – Format’ and ‘Annual Escrow Account Disclosure Statement – Example’.”)
  • Regulation X, 12 CFR 1024.17(a) (“If an escrow account involves biweekly or any other payment period, the requirements in this section shall be modified accordingly. A Public Guidance Document entitled ‘Biweekly Payments – Example’ provides examples of biweekly accounting and a Public Guidance Document entitled ‘Annual Escrow Account Disclosure Statement – Example’ provides examples of a 3-year accounting cycle that may be used in accordance with paragraph (c)(9) of this section. A Public Guidance Document entitled ‘Consumer Disclosure for Voluntary Escrow Account Payments’ provides a model disclosure format that originators and servicers are encouraged, but not required, to provide to consumers when the originator or servicer anticipates a substantial increase in disbursements from the escrow account after the first year of the loan. The disclosures in that model format may be combined with or included in the Initial Escrow Account Statement required in § 1024.17(g).”)
  • Regulation X, 12 CFR 1024.2(b) (“Public Guidance Documents means Federal Register documents adopted or published, that the Bureau may amend from time-to-time by publication in the Federal Register. These documents are also available from the Bureau. Requests for copies of Public Guidance Documents should be directed to the Associate Director, Research, Markets, and Regulations, Bureau of Consumer Financial Protection, 1700 G Street NW., Washington, DC 20552.”)
  • CFPB, Escrow Disclosure Public Guidance Documents (“The Bureau has maintained HUD’s definition of Public Guidance Documents in Regulation X since assuming authority for RESPA and its implementing regulation, Regulation X, in 2011. The Bureau has not issued any new escrow disclosure Public Guidance Documents under RESPA or any other statements about the HUD Public Guidance Documents. The Bureau maintains a list of escrow disclosure appendices that were removed from the CFR and converted into Public Guidance Documents by HUD’s 1996 Streamlining Final Rule. . . . Public Guidance Documents are not ‘rules, regulations, or interpretations’ of the Bureau for purposes of RESPA section 19(b). . . . Examples of escrows disclosure appendices in Public Guidance Documents include:
  • Regulation Z, 12 CFR 1026.20(e) (“Escrow account cancellation notice for certain mortgage transactions

(1) Scope. In a closed-end consumer credit transaction secured by a first lien on real property or a dwelling, other than a reverse mortgage subject to § 1026.33, for which an escrow account was established in connection with the transaction and will be cancelled, the creditor or servicer shall disclose the information specified in paragraph (e)(2) of this section in accordance with the form requirements in paragraph (e)(4) of this section, and the timing requirements in paragraph (e)(5) of this section. For purposes of this paragraph (e), the term ‘escrow account’ has the same meaning as under 12 CFR 1024.17(b), and the term “servicer” has the same meaning as under 12 CFR 1024.2(b).

(2) Content requirements. If an escrow account was established in connection with a transaction subject to this paragraph (e) and the escrow account will be cancelled, the creditor or servicer shall clearly and conspicuously disclose, under the heading ‘Escrow Closing Notice,’ the following information: . . .”)

  • Illinois 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.”)
  • Illinois 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.”)
  • Illinois 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.”)
  • 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; . . .”)
  • OCC Regulations, 12 CFR 7.4008(d) (“A national bank may make non-real estate loans without regard to state law limitations concerning: . . . (5) Escrow accounts, impound accounts, and similar accounts; . . .”)
  • Illinois 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.”)
  • Illinois 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.”)
  • Illinois Mortgage Escrow Account Act, 765 ILCS 910/15 (“Notice of tax payments.

(a) When any mortgage lender pays the property tax from an escrow account, the mortgage lender must give the borrower written notice of the following, within 45 business days after the tax payment: (1) the date the taxes were paid; (2) the amount of taxes paid; and (3) the permanent index number, mortgage account number, address of the property, or other property description that is used for assessment and taxation purposes under the Property Tax Code.

(b) The notice required in subsection (a) may be included on or with other documents, notices, or statements provided to the borrower. . . .

(c) Notwithstanding the requirements in subsection (a), a mortgage lender that provides notice at least annually to a borrower in the manner provided in subsection (b) of a means of communication for the borrower to access the information set forth in subsection (a) by telephone, facsimile, e-mail, Internet access, or other means of communication, is deemed to be in compliance with subsection (a).”)

  • Residential Mortgage License Act of 1987 Rules, 38 Ill. Adm. Code 1050.1360(b) (“If the mortgage represents a first-lien position and provides for an escrow account to be maintained for payment of taxes and/or insurance premiums, an Escrow Account Disclosure Agreement shall be required between the licensee and the residential mortgage loan applicant.”)
  • Residential Mortgage License Act of 1987, 205 ILCS 635/1-3(a) (“No provision of this Act shall apply to an exempt person or entity as defined in items (1) and (1.5) of subsection (d) of Section 1-4 of this Act.”)
  • Residential Mortgage License Act of 1987, 205 ILCS 635/1-4(d)(1) (“‘Exempt person or entity’ shall mean the following: . . . (ii) any national bank, federally chartered savings and loan association, federal savings bank, federal credit union; . . . (iv) any bank, savings and loan association, savings bank, or credit union organized under the laws of this or any other state; . . .”)
  • Illinois 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.”)