In a move unpopular among mortgage lenders and servicers. HUD sided with consumer groups by striking the widely used single-item analysis escrow accounting method from its books and will require an industrywide switch to the new aggregate method that could be in effect as soon as May 1997.
The rule will establish a new section, 3500.17, in escrow accounting procedures of Regulation X Real Estate Settlement Procedures Act. HUD is expected to publish the rule in the Federal Register between Nov. 29 and Dec. 3. After that, lenders will have 180 days to comment on the rule. But according to some mortgage industry sources, the likelihood of any change is remote.
The rule, coupled with an earlier decision by HUD Secretary Henry Cisneros to publicly back Rep. Henry Gonzalez's Escrow Account Reform Act that mandates interest payments on those accounts, is a telling indicator that the Clinton administration plans to listen closely to consumers and that a sympathetic ear won't be waiting for lenders.
Mortgage bankers had thought the single-item vs. aggregate item battle was a nonissue earlier this year. In Interpretive Rule 1993-1 issued in January, HUD indicated that "the single-item method was fine." said Neil O'Brien, an associate with the consumer financial services group at Blank Rome Comisky & McCauley, a Philadelphia-based law firm that tracks Respa issues for several lenders.
But O'Brien said a strong push by consumer groups, coupled with a new administration active in pursuing consumer interests, provoked the change that will be a burden for many lenders.
"The single-item method is what's used and switching will be a huge expense for the industry," O'Brien said. "Setting up new [software and administrative] systems will run up enormous costs, not to mention costs associated with retraining people to run them."
But while O'Brien thinks burdens with escalate, consumer groups say the costs associated with the change are necessary to help eliminate accounting errors and potentially abusive practices, and point toward lenders who have already started programs to convert.
"A number of larger mortgage bankers saw it coming and have reformed their billing procedures over the last two or three years." said Chris Lewis, a lobbyist for the Consumer Federation of America. "Countrywide has been doing aggregate accounting for the last two years and they--and lenders like them--are setting the standards that laggard mortgage bankers will now have to meet."
The aggregate method isn't the only new thing lenders and servicers will be getting used to. Under the new rule, lenders will be required to give expanded disclosures to borrowers during the three-year phase-in period, including amounts held in their escrow accounts and disclosure of any employed method that differs from aggregate accounting.
Mortgage servicers used to pre-accruing escrow accounts beyond the allowable two-month limits will be required to stop, and if an escrow surplus is discovered during the loan's annual account computation, the servicer will have 30 days to refund the surplus to the borrower or credit it to his account.
By contrast, if a shortage is discovered, the servicer can require the borrower to repay the difference within 30 days, or allow that person to make up the shortage in equal payments over the course of the year.
The rule also notes some differences between mortgages that are originated before and after the rule, which the rule calls "pre-" and "post-rule" accounts. Single-item or aggregate-analysis methods are acceptable for all pre-rule accounts, as are methods combining characteristics of both, as long as the amounts of borrower payments and the amounts retained in escrow don't exceed what would result from the use of the accepted single-item standard, the rule said.
All accounts, however, must still be converted to the aggregate method, barring delays, by May 1997.