Escrow Accounts; Mortgages

Stern v. Norwest Mortgage, Inc., 1997 WL 656546 (Ill. 1997).

Facts: Borrowers obtained a mortgage loan to purchase a residence. To cover the payment of anticipated taxes, the Illinois Escrow Act (765 ILCS 910/1) gives a borrower the option of pledging an interest-bearing time deposit with the mortgage lender in lieu of the lender establishing an escrow account. When the borrower elected to pledge a certificate of deposit, the lender charged the borrower an "escrow waiver fee." The borrower brought a class action against the defendant alleging that the fee violated the Escrow Act and the Fraud Act (815 ILCS 505/2). The appellate court held that the Escrow Act prohibits an "escrow waiver fee," but the borrowers were unable to state a cause of action under the Fraud Act.

Holding: Affirmed. If a mortgage lender is allowed to charge an "escrow waiver fee" when a borrower exercises the escrow waiver, the lender would be able to effectively take away a right given to the borrower by the legislature. A lender cannot charge an "escrow waiver fee." Such a fee is inconsistent with the language of the statute and the legislative intent to provide a benefit to the borrower. However, the lender's action of charging an "escrow waiver fee" was not intended to deceive or defraud the borrowers. The lenders made an honest mistake concerning the interpretation of a statute that had yet to be construed. Therefore, the lender's actions did not violate the Fraud Act.

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