(2) “Escrow account” means an expense or escrow account which tends to protect the security of a loan by the accumulation of funds for the payment of taxes, insurance premiums, water and sewer facilities assessments, or other expenses.

(3) “Lending institution” means a bank, savings bank, or savings and loan association doing business in Maryland.

(4) (i) “Water and sewer facilities assessment” means a fee or charge that is:

1. Assessed on an owner of residential real property that is served by public water or wastewater facilities for which deferred water or sewer charges have been established by a recorded covenant or declaration to cover or defray the cost of installing or maintaining during construction all or part of the public water or wastewater facilities constructed by the developer; and

2. Paid to the lienholder of the lien recorded on the residential real property for public water and wastewater facilities.

(ii) “Water and sewer facilities assessment” includes a front foot benefit fee or charge.

(b) (1) A lending institution which lends money secured by a first mortgage or first deed of trust on any interest in residential real property and creates or is the assignee of an escrow account in connection with that loan shall pay interest to the borrower on the funds in the escrow account at an annual rate not less than the weekly average yield on United States Treasury securities adjusted to a constant maturity of 1 year, as published by the Federal Reserve in “Selected Interest Rates (Daily) – H.15”, as of the first business day of the calendar year.

(2) Interest on these funds shall be:

(i) Adjusted, if applicable, as of the first day of each calendar year to reflect the rate to be paid during that year, as determined under paragraph (1) of this subsection;

(ii) Computed on the average monthly balance in the escrow account; and

(iii) Paid annually to the borrower by crediting the escrow account with the amount of interest due.

(3) The lending institution shall annually provide the borrower with a statement of the escrow balance.

(c) The provisions of this section do not apply to a lending institution which provides for the payment of taxes, insurance, water and sewer facilities assessments, or other expenses under the direct reduction method by which these expenses, when paid by the lender, are added to the outstanding principal balance of the loan.

(d) This section does not apply if the loan is purchased by an out-of-state lender through the Federal National Mortgage Association, the Government National Mortgage Association, or the Federal Home Loan Mortgage Corporation and the out-of-state lender as a condition of purchase elects to service the loan. However, this section shall apply if the out-of-state lender sells the loan to a Maryland lender or places the loan with a Maryland lender for servicing.

(e) On request of a borrower, a lending institution that lends money secured by a first mortgage or first deed of trust on any interest in residential real property may, at the option of the lending institution, create an escrow account in connection with that loan solely for the payment of water and sewer facilities assessments.