IBA Compliance Connection

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In answer to a previous question, you indicated that an escrow account holding funds for purposes of paying both property taxes and insurance premiums would be subject to the Mortgage Escrow Account Act. We understand that we must provide the initial disclosure required under the law at closing if taxes are paid from the escrow account. However, when the loan reaches 65% of the original loan balance and we must provide notification of the option to cancel the escrow account, would this apply only to the tax portion of the escrow or are we required to provide the option to cancel the insurance portion of the escrow — including HOI and PMI premiums but excluding flood insurance?

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We believe that the notice of a borrower’s right to terminate their escrow account under the Mortgage Escrow Account Act would apply to only the tax portion of their escrow account.

The Mortgage Escrow Account Act defines “escrow account” as “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.” As such, any funds in an escrow account not earmarked for the payment of taxes (such insurance escrow payments) would not be subject to the statutory right to terminate.

For resources related to our guidance, please see:

  • 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 910/2(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.”)