Q & A : What New Escrow Account Rules Mean

The Department of Housing and Urban Development unveiled rules last week that will enable millions of homeowners who paid too much into home-loan escrow accounts to recoup at least $1.5 billion in total refunds and credits. Here are some questions and answers on how the standards will affect homeowners.

Question: What is an escrow account?

Answer: Escrow accounts are set up by banks, thrifts and other mortgage lenders to ensure home buyers pay property taxes, insurance premiums and other loan-related charges on time. The funds that go into the account are contained in a homeowner’s monthly mortgage payment.

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Q: What do the new rules do?

A: They place a clear-cut ceiling on the amount consumers may be required to place in escrow when buying a home.

The company that runs the account--either the lender or a specialized “servicer” firm--will be allowed each month to collect 1/12th of annual property taxes, insurance premiums or other recurring items.

The company also will be able to maintain a “cushion” equal to two months’ worth of those payments. This cushion is used to cover a possible increase in a homeowner’s property taxes or a potential default on a mortgage payment.

If a homeowner’s mortgage requires a stricter standard--say a one-month cushion--that language will take priority over the federal rules. Many firms had required a three-month cushion, with some even requiring an eight-month surplus.

Further, lenders in the future must use “aggregate” accounting when analyzing escrow accounts instead of “single-item” accounting, in which escrow items were computed separately.

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Q: How did the rules come about?

A: HUD says use of single-item accounting was “prevalent” among lenders and resulted in more funds being held in escrow accounts than were necessary.

Further, various state attorneys general--spurred by angry consumers--filed suit against big mortgage lenders in recent years alleging escrow abuses. The cases brought the issue of over-escrowing into the limelight.

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Q: How can a homeowner know whether he or she is owed a refund or a credit?

A: After next April, annual escrow statements mailed to homeowners will contain more detailed information about their accounts. The information will be provided in a more readable format and designed to enable homeowners to know whether they are owed money.

Bankers and HUD officials said it is premature now to call the firm servicing your mortgage because the new rules will not take effect until late April, 1995.

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Q: How does a homeowner collect a refund or a credit?

A: The company servicing the mortgage will be required to send a check if an escrow account contains a surplus of more than $50. For accounts with surpluses of less, the company can either mail a check or lower a homeowner’s mortgage payment by applying a credit equal to the surplus.

HUD officials said any payments will probably be made by April, 1996, at the latest.

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Q: How many people are affected?

A: HUD estimates almost 6 million mortgage holders.

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Q: What is the average likely refund or credit?

A: HUD figures about $150, although the amounts are expected to vary widely.

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Q: How do the new rules affect future home buyers?

A: HUD estimates some future home buyers will pay up to $250 less in upfront closing costs when purchasing a house because of the change in standards.