Consumers are lobbying to change the way money is deposited into escrow accounts on their home mortgage loans, and recently saw a bill introduced that may make it a reality. However, mortgage bankers are skeptical about the plan and are even more leery about how some people and groups would like to see it carried out.
Spurred on by growing consumer outcry, Rep. Henry B. Gonzalez. D-Texas, chaiman of the House Banking, Finance and Urban Affairs Committee, introduced a bill, the Escrow Account Reform Act (HR 27) in January, which may change the way escrow accounts are accomplished.
Mortgage bankers, recognizing that some changes introduced in the bill could have far-reaching effects on the way they do business, gathered in Washington July 8-9 to discuss this and other Real Estate Settlement Procedures Act-related issues.
"The basic [escrow] rule has permitted lenders to have one-twelfth of [a home mortgage's] annual payment in an escrow account, plus a sum equal to one-sixth of the annual payment as cushion, which was considered sufficient to pay for insurance, taxes, etc.," said Timothy Merideth, a mortgage banking adviser with Morrison & Foerster, a San Francisco-based law firm.
"For many years, lenders and servicers didn't have a problem," he said. "Then, all of a sudden, there was a cry over how the one-twelfths and the one-sixths were calculated. [The question arose as to whether they should be tallied] using the individual item analysis method or the aggregate method."
The individual item method treats each item to be paid from the escrow account separately. Under this system, a mortgage lender establishes an escrow subaccount for each item requiring an escrow payment. At origination and at each escrow analysis during the term of the loan, the lender or servicer, taking into account when a particular item was last paid, win collect from the borrower funds to be used to pay for each item as it comes due.
What consumer groups find most objectionable about this method is that an additional reserve or "cushion" may also be collected as the loan documents permit.
In contrast. these groups advocate the aggregate method. Under this method, lenders would have to perform a trial running balance, or some other appropriate calculation, for the upcoming 12-month period to ensure the aggregate escrow balance for each loan falls to the level authorized under the loan documents or one-sixth of the annual escrow payments. whichever is less.
If the lender determines that the balance would not fall to that level, the lender must notify the borrower that there is an excess in the escrow account and must issue a lump sum refund to the borrower, reduce the monthly escrow payment or make some other adjustment to ensure that such balance is reduced to the maximum level during the next 12-month period.
That isn't all the Gonzalez bill would do.
The bill "would require servicers to pay interest on escrow," said Joseph M. Kolar, senior associate with the Washington firm of Thacher, Proffitt & Wood. "It would require aggregate methods to be used unless the amount dropped to one-sixth below, give borrowers the option of limiting escrow accounts if the loan value drops below 8%. And it would give specific legal authority to regulators and borrowers to sue lenders for escrow abuses, as well as allow for actual punitive damages for escrow violations."
The consumer outcry stemmed from a 1990 New York attorney general report on escrow abuses, which surveyed the four of the nation's largest mortgage lenders - Citibank, GMAC Mortgage Corp., Fleet Mortgage Corp. and Lomas Financial Group.
In more than 70% of the accounts analyzed, the study found, much more money is being held to pay homeowners tax and insurance bills than is permitted by law or is necessary. The analysis also found that escrow accounts calculated under the individual item analysis method maintained a higher balance than those using the aggregate method.
However, a 1992 study by the Department of housing and Urban Development offered different findings. it concluded that an escrow account calculated under the individual item analysis will result in a higher balance than one using the aggregate method.
"By and large, we don't over-escrow," said Robert Chamness, executive vice president and general counsel for SFI ProServices Inc. in Portland, Ore. "There may be mistakes from time to time, misallocations or misprojections. but in most cases. we don't. In many incidences we go out of pocket for our customers because we haven't escrowed quite enough."
Despite the more recent studies, some feel Gonzalez's bill may be passed.
"There's a chance it could get passed in pad because of the new administration, and also because of growing consumer disgust with impound accounts," said Merideth.