Topic: Escrow Accounts
-
Our bank generally does not require consumers to set up an escrow account for a residential mortgage loan unless required by law. We have agreed to terminate an escrow account at the request of a borrower who voluntarily escrows funds for real estate taxes. Are we required to pay the escrow balance to the borrower after terminating the account? The borrower mentioned that they need the funds for a vacation, and we are concerned they will not be able to pay their property tax bill due next month. If the borrower is delinquent in paying their tax bill, our loan terms give us the right to require that an escrow account be reinstated.
—
by
We recommend reviewing your loan terms and any escrow account agreement the borrower may have signed. If your agreement does not expressly grant your bank the right to retain the escrow account balance after the escrow is terminated, we recommend refunding the balance — as your failure to do so may be deemed an unfair,…
-
Can we email the required notice that must be sent under the Mortgage Escrow Account Act when a loan reaches 65% of the original loan balance and the borrower is entitled to terminate their escrow account? If the notice must be mailed, can it be included as a separate document with another mailing or periodic statement?
—
by
Yes, when a borrower’s loan reaches 65% of their original loan balance and you have a valid email address on file, we believe you may use email to notify them of their right to terminate their escrow account. As a best practice, we recommend obtaining the borrower’s consent to receive electronic mail before sending any…
-
It appears that national banks are exempt from the Illinois Mortgage Escrow Account Act. If, as a national bank, we did not comply with the law’s disclosure requirement at origination, then switched our charter and now are subject to the law, must we comply with the law’s notification requirement when a loan reaches 65% of its original balance, or are loans we originated while still a national bank exempt from this provision?
—
by
We believe your bank must comply with the Illinois Mortgage Escrow Account Act’s second notice requirement when a loan reaches 65% of its original balance, regardless of whether the loan was originated before your bank converted its charter. The Illinois Mortgage Escrow Account Act requires two notices to be delivered to customers at two different…
-
If we make or service a loan secured by a property outside Illinois, would we be required to comply with the Mortgage Escrow Account Act, or is doing so simply a best practice? Our loan origination software is set up to recognize state-specific laws and provide related disclosures, so it typically does not generate Illinois disclosures for loans secured by out-of-state property. Does it matter if we originate the loan then sell it on the secondary market and do not retain servicing?
—
by
We believe that if you are a mortgage lender operating in Illinois, you would be required to comply with the Mortgage Escrow Account Act in originating or servicing mortgage loans secured by single-family, owner-occupied, residential properties located outside of Illinois. The Mortgage Escrow Account Act defines “mortgage lender” to include any bank or savings bank…
-
We retain servicing for loans sold to Fannie Mae, and Fannie Mae’s Servicing Guide states that a “servicer must not solicit” a borrower with an offer to waive the escrow account requirements. Is this guidance preempted by the Mortgage Escrow Account Act’s requirement to notify a borrower of their right to terminate their escrow account when the balance of their mortgage loan reaches 65% of the original loan balance? We are aware that the Mortgage Escrow Account Act excludes certain mortgages insured or guaranteed by the federal government that require an escrow arrangement.
—
by
We believe that single-family, owner occupied, residential mortgage loans owned by Fannie Mae would be subject to the Mortgage Escrow Account Act’s requirement to notify borrowers of their right to terminate their escrow account when the balance of their mortgage loan reaches 65% of the original loan balance. Although the Act provides an exception to…
-
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?
—
by
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…
-
Is there an established definition of the Mortgage Escrow Account Act’s reference to payments “timely made according to the provisions of the loan agreement”? If a borrower with a history of delinquency is current on their loan when the loan reaches 65% of the original loan balance, must we notify them of their right to terminate their escrow account? Must we provide notice even if an exclusionary factor prohibits the borrower from exercising this option (such as the loan being in default)? If an exclusionary factor exists when the principal balance reaches 65% of the original loan balance, must we monitor the loan until the exclusionary factor no longer exists and then provide the notification?
—
by
We are not aware of any definition or guidance related to the phrase “payments of the borrower, timely made according to the provisions of the loan agreement secured by the mortgage.” The Mortgage Escrow Account Act does not define the phrase, and it appears in only one court case that we know of, which does…
-
Do we need to determine whether a loan will be considered a higher-priced mortgage loan (HPML) when modifying the loan with a change-in-terms agreement? We have a borrower with a balloon note that is maturing soon, and we are trying to determine whether to modify the loan or refinance it. If we refinance the loan, the fees will be higher, and we would require an escrow account as the loan likely would qualify as an HPML.
—
by
No, we do not believe you need to determine whether an existing loan would be considered an HPML when merely modifying, and not refinancing, the loan. However, you are correct that you would need to make this determination if the loan is refinanced — unless an exception applies, as discussed below. The Federal Reserve Board…
-
While reviewing our annual escrow analysis statements, we identified some statements that did not include the reasons why the estimated low monthly balance was not reached, as required by Regulation X. We determined that our statements omitted this minimum balance disclosure on the first annual escrow statement after origination or on loans acquired through a merger. Are there any exceptions to this disclosure requirement?
—
by
No, we are not aware of any exceptions to the annual escrow statement requirement to disclose the reasons why the estimated low monthly balance was not reached, other than in circumstances in which the estimated low monthly balance was reached. If the low monthly balance was not reached, you must provide the reasons why by…
-
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).
—
by
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…