Our mortgage department has asked if we must have borrowers execute a document at closing indicating whether they accept or reject the use of a time deposit account in lieu of an escrow account if we do not provide borrowers with this option. Also, are we required to provide borrowers with a copy of the Illinois Mortgage Escrow Account Act and have them sign an Illinois Escrow Account Disclosure Agreement at closing? These documents and disclosures are referenced in Illinois administrative rules at 38 Ill. Adm. Code 1050.1360 and 1050.1110(f).

As a preliminary matter, we note that the administrative rules referenced in your question apply only to mortgage brokers subject to the Residential Mortgage License Act of 1987, which does not apply to banks.

However, banks are subject to the Illinois Mortgage Escrow Account Act, which applies to all mortgage lenders that extend or service a loan “for the purpose of enabling another to purchase a residence” that is secured by single-family owner-occupied residential property.

The law provides that “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.” Additionally, lenders are required to provide notice of the law’s requirements at closing. Failure to comply with the law’s requirements, including the failure to provide notice of the right to establish an interest-bearing time deposit account in lieu of an escrow account, “shall entitle the borrower to actual damages in a court action.”

We do not believe that you are required to have borrowers execute a document indicating their acceptance or rejection of the interest-bearing account option, but you may choose to do so to confirm the borrower’s decision. Additionally, you should provide borrowers with a copy of the entire law at closing. While you are not subject to the Residential Mortgage License Act of 1987 rule stating that “an Escrow Account Disclosure Agreement shall be required between the licensee and the residential mortgage loan applicant,” you may wish to have the borrower sign an escrow account disclosure agreement when establishing a new escrow account to memorialize the terms of the agreement.

Also, note that the law does require you to allow borrowers to pledge an interest-bearing time deposit account in lieu of funding an escrow account. If a loan is subject to the law — as a purchase money loan secured by a single-family, owner-occupied residential property — you should be providing this option to your borrowers.

For resources related to our guidance, please see:

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: (1) . . . any national bank, federally chartered savings and loan association, federal savings bank, federal credit union; . . . 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 910/4 (“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 910/6 (“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.”)

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 910/9 (“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.”)

Fowler v. Bank of America Corp., No. 10 C 3944, 2011 U.S. Dist. LEXIS 9080, at *8-9 (N.D. Ill. Jan. 28, 2011) (“That Act states that, ‘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.’ 765 ILCS 910/6. The Act also requires that the borrower be informed of these rights at the closing. 765 ILCS 910/11 (‘Notice of the requirements of the Act shall be furnished in writing to the borrower at the date of closing.’). If the mortgage lender fails to comply, the borrower is entitled to ‘actual damages.’ 765 ILCS 910/9.”)

Residential Mortgage License Act of 1987 Rules, 38 Ill. Adm. Code 1050.1360(a) (“If the mortgage is not FHA-insured or VA-guaranteed and relates to the purchase of owner-occupied, single-family security real estate: (1) A document shall be executed by the residential mortgage loan applicant at closing to indicate his or her acceptance or rejection of the use of a pledged time deposit account in lieu of an escrow account pursuant to the Mortgage Escrow Account Act [205 ILCS 910]; . . .”)

Residential Mortgage License Act of 1987 Rules, 38 Ill. Adm. Code 1050.1110(f) (“Before a mortgage loan applicant . . . signs a completed residential mortgage loan application or gives the licensee any consideration, whichever comes first, the licensee shall give the customer a Borrower Information Document. . . . Except for the explicit wording required by subsection (a) of this Section, the following format is for illustrative purposes only; however, all of the following information shall be included in the document: . . . (f) Mortgage Escrow Account Act, Related Document: If the mortgage is not FHA-insured or VA-guaranteed and relates to the purchase of owner-occupied, single-family security real estate, unless there is a certainty that the lender will not require maintenance on an escrow account for payment of taxes, a copy of the Mortgage Escrow Account Act [765 ILCS 910], along with a copy of the document to be executed by the applicant at closing with respect to use of a pledged time deposit account in lieu of an escrow account pursuant to that Act.”)

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. The agreement shall be in writing and executed at the closing. The agreement shall describe the procedures for adjustment to the escrow account and shall provide that, if there is an increase in the amount of the escrow account, the applicant shall receive written notice from the licensee at least 30 days prior to the date of the increase. The agreement may be amended from time to time as agreed upon by the parties, except that the 30-day notice requirement shall not be amended.”)