GMAC-Funded Home Buyers to Get Refunds

GMAC Mortgage, the nation’s fourth-largest mortgage lender, agreed Monday to refund homeowners at least $50 million to settle a lawsuit brought by attorneys general in California and 11 other states over inflated impound account payments.

The settlement was the first to result from a two-year investigation into the way mortgage companies handle impound accounts.

Impound accounts are maintained by lenders to collect funds for property taxes and insurance premiums. They are usually required of home buyers whose down payment is less than 20% of the purchase price.

The attorneys general said refunds or payment reductions totaling $100 million would go to 380,000 homeowners nationwide, including 45,500 in California. Deputy California Atty. Gen. Al Sheldon said the sum represented the amount homeowners would save over the term of their mortgages. It would translate to a savings of $100 to $350 for each California homeowner with a GMAC impound account.

However, most Californians would actually receive much less because most of the savings will come from reduced future payment into the accounts rather than refunds. A spokesman for GMAC Mortgage estimated that homeowners nationwide would receive no more than $50 million. The settlement gives GMAC one year to calculate and pay refunds.

GMAC Mortgage was sued in December, 1990, after the attorneys general investigated payment practices in the mortgage industry. The group said GMAC’s method of calculating payments was typical of mortgage servicers. Indeed, GMAC has maintained that it did not break the law and was merely following industry practice.

It wasn’t clear whether other mortgage lenders, none of whom has been sued, would follow GMAC’s lead and change the way they determine the payments, known outside California as escrow payments.

The Mortgage Bankers Assn., a Washington-based industry group, said “it will take some time to assess” the complicated 124-page settlement. The group added, “It is important to note that GMAC has reached an agreement on its own escrow procedures and not on behalf of the industry.”

Other mortgage services previously criticized by the attorneys general for allegedly overcharging consumers--Citibank, Fleet Mortgage and Lomas Financial--had no comment Monday. The attorneys general said their investigation into impound accounts was continuing.

“This is an area we’ve been interested in for some time, and I don’t think our interest is over in this area,” Sheldon said.

The lawsuit, filed in U.S. District Court in Manhattan, asserted that the method GMAC Mortgage used to determine impound account payments violated the federal Real Estate and Settlement Procedures Act. The act establishes limits for the size of the impound account.

Specifically, the law says that, once a year, the amount in the escrow account should not exceed two months’ payments. For example, if a monthly payment is $100, the amount in the impound account should be no more than $200.

The attorneys general said GMAC kept higher balances by splitting the impound account into smaller accounts for insurance, property taxes and other required payments. While the balances in the sub-accounts met legal limits, the entire impound account did not, the attorneys general said.

The attorneys generals said that GMAC also violated the terms of contracts with homeowners that required lower balances than set by law.

GMAC Mortgage, a unit of automotive giant General Motors Corp., said it settled the year-old suit to avoid costly litigation. The Elkins Park, Pa.-based mortgage company maintained that its method of handling impound accounts was proper.

“This agreement is a tremendous victory for GMAC Mortgage customers across the nation and one that we hope will be repeated for the country’s 28 million other homeowners who are victims of illegal escrow overcharges by other lenders,” said New York Atty. Gen. Robert Abrams, whose office coordinated the lawsuit.

“GMAC Mortgage overcharged its customers’ escrow accounts at least 95% of the time, and its practices resulted in an undue confiscation of about $100 million of consumers’ money,” said Abrams.

Besides New York and California, Connecticut, Florida, Idaho, Iowa, Massachusetts, Minnesota, New Jersey, Pennsylvania, Texas and Wisconsin were involved in the suit.