The mortgage industry is actively opposing new legislation proposed in the House that would place mortgage servicer activities under the Real Estate Settlement Procedures Act.
The industry, led by the Mortgage Bankers Association of America, instead calls for the Department of Housing and Urban Development to establish guidelines for acceptable escrow practices.
The legislation, the Escrow Account Reform Act of 1993, H.R. 27, would require mortgage servicers to pay interest on escrow accounts, limits the amount servicers can require in such accounts and sets rules relating to the transfer of mortgages from one lender or servicer to another. It also mandates a specific escrow account method and allows borrowers to opt out of their escrow accounts once the principal has been paid down to 80% of the original balance.
But what really concerns the industry is that if the rules dealing with escrow accounts are put under Respa, lenders and servicers would be subject to significant new civil liability penalties. These would include potential fines, actual and punitive damages and court actions. state attorneys general and insurance commissioners would also be permitted to seek court sanctions under the legislation, another concern of the industry.
The industry's alternative is to have HUD issue standards that will help borrowers receive equivalent treatment no matter who services their mortgage. If HUD failed to act promptly, Congress could then act to require HUD to establish the standards.
In testimony before the housing subcommittee of the House Banking committee, an MBA official said that the trade group submitted recommendations to HUD in September 1991 for standardizing the various factors used to calculate allowable escrow balances, including accrual and disbursement dates, tax due dates, shortage and overage procedures and inflation.
Stephen B. Ashley, president-elect of the MBA. told the panel that paying interest on escrows would make it necessary for mortgage lenders to raise interest rates and/or fees paid by borrowers at the time a loan is originated in order to cover the increased loan servicing costs. "Mortgage origination costs exceed revenue from fees, so lenders depend upon the value of servicing to maintain profitability," he said.
By lowering servicing values, the bill "dramatically changes the equation," he said. "The bottom line for borrowers is that the bill would add an average of at least one-quarter discount point to the up-front cost of getting a mortgage." He estimated that on a $100,000 loan, the home buyer would need about $224 in added cash at settlement.