NATION’S HOUSING : Administration Backs Changes in Escrow Accounts

The Clinton Administration has jumped into one of the hottest fights under way on Capitol Hill over consumer protections for homeowners:

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The Administration came out in favor of mandatory, nationwide interest payments on mortgage borrowers’ escrow accounts, and a federally guaranteed right for consumers to terminate escrow accounts if they choose.

The Administration’s position--strongly opposed by the mortgage lending industry--came in a late November endorsement of pending legislation sponsored by House banking committee chairman Rep. Henry B. Gonzalez (D-Tex.). In a letter to Gonzalez, Housing and Urban Development (HUD) secretary Henry G. Cisneros applauded the Escrow Account Reform Act and promised the Administration’s help in pushing it through Congress.

Escrow accounts frequently add hundreds of dollars a month to a homeowner’s mortgage payment, and are found in over three-quarters of all outstanding home loans, according to federal estimates. They are used by lenders to accumulate funds to pay borrowers’ property taxes, insurance premiums, special local levies and other periodic expenses on a timely basis. They have become controversial in recent years because state attorneys general in more than a dozen states have charged that lenders routinely pad borrowers’ escrow accounts--loading them up with far higher fund balances than necessary. In most states the funds sit in the accounts interest-free. Industry and government defenders of escrow practices have denied that accounts are padded, and have argued that lenders often undercharge consumers on escrows.

Among the key changes to existing law, the Gonzalez bill would:

--Force all lenders and mortgage servicers to pay interest annually, at a “passbook savings rate” determined by HUD, on all balances in mortgage borrowers’ escrow accounts. Homeowners who refinanced or otherwise paid off their loans during the course of a year would be owed any accrued interest attributable to their escrow balances. The mandatory interest provision would take effect for all mortgages originated one year or more after the enactment date of the bill.

--Provide virtually every mortgage borrower in the country with the right to “opt out” of an escrow account whenever more than 20% of the original loan principal has been paid to the lender. This change would affect every mortgage borrower with an existing account 180 days after enactment of the bill. A borrower who took out a $100,000 loan, for example, would have the legal right to terminate his or her escrow account when the principal debt outstanding dropped below $80,000. Under current practice, borrowers who want to pay their own taxes and insurance bills frequently are turned down by their lenders. A handful of state legislators have enacted opt-out guarantees, but most consumers are forced to maintain escrow account arrangements, no matter how far they’ve paid down their loans.

--Open the door to more aggressive legal actions against lenders who overcharge consumers on escrow accounts. The bill would allow the filing of individual or class action suits in federal court by borrowers, HUD, state insurance commissioners or attorneys general up to three years after the alleged escrow overcharges were first detected by borrowers.

The Clinton Administration’s strong public endorsement of Gonzalez’s escrow reforms came on the heels of proposed regulations drafted by HUD that would prescribe for the first time a uniform escrow accounting system nationwide by all mortgage firms. The rules would also sharply expand lenders’ responsibilities to inform borrowers about how their escrow account funds were being used, and why their monthly escrow charges were set at the present level.

An entirely new disclosure statement would accompany home buyers’ and refinancers’ settlement sheets at loan closing. Entitled Initial Escrow Account Statement, it would itemize the expenses covered by the escrow account, and their due dates. This breakout would allow the consumer to examine--and perhaps challenge--the lender’s underlying assumptions regarding the amount and timing of charges for escrow items.

The proposed new rules would also require detailed escrow inflow-outflow statements to be provided to all borrowers by lenders at least once a year. Many mortgage lenders currently provide little or no detailed up-front disclosure about escrows at settlement. Annual statements about receipts and disbursements are often cryptic and short on detail.

Spokesmen for the mortgage industry consider the new legislation--which is scheduled for action in Congress early in 1994--to be ill-advised. Robert O’Toole, senior vice president for the Mortgage Bankers Assn. of America, says that forcing lenders to pay interest on escrows “is not going to save anybody money.” Any increases in the cost of doing business “will have to be passed along to the consumer” via higher mortgage rates or loan fees.

Similarly, according to O’Toole, giving borrowers the unilateral right to opt out of their escrow accounts will simply complicate a loan servicing system that is efficient and economical. He says reforms like Gonzalez’s will simply add to administrative costs--”and they’ll have to be paid for by borrowers.”

Distributed by the Washington Post Writers Group.