Your Mortgage : Owners May Be Losers in Escrow-Account Suits

Mortgage escrow class-action suits involving hundreds of thousands of home loan borrowers are squeezing money--and business practice changes--out of major lenders nationwide.

But homeowners who receive surprise notices that they’re “beneficiaries” of class-action settlements better look hard at the fine print. They may find--as one northern Virginia homeowner did recently--that consumers are being asked to give up far-reaching legal rights in exchange for a pittance. The biggest beneficiaries may not be the borrowers themselves, but the lawyers who filed the class action.

How would you like to waive your rights to sue your lender in exchange for 95 cents, while your lawyer pockets $205,000 for representing you? Read on.

John W. Toothman is a homeowner in Alexandria, Va., as well as a home loan client of Household Mortgage Services Inc., a large Illinois-based mortgage banker. Toothman also happens to be a trial attorney and expert on legal fees and lawyers’ billing practices.

Recently Toothman and his wife Elizabeth received a letter in the mail that bore seemingly good news: They are members of a “class” of Household customers--estimated to number as high as 236,000 homeowners--who are covered by a pending class-action financial settlement involving Household’s loan-escrow practices.

The suit, one of dozens of class actions filed against large mortgage lenders in the past four years, was initiated in June, 1991, by Minnesota homeowners represented by the Minneapolis law firm of Zimmerman Reed. The suit alleged that Household routinely exceeded federal limits on how much of borrowers’ funds could be held in escrow accounts.

Most lenders require borrowers to contribute to escrow accounts--in addition to regular monthly principal and interest payments--to cover periodic charges for property taxes, insurance and other expense items. Federal law requires lenders to collect no more than is necessary to pay for escrow items when they come due. The law also allows lenders to maintain a “cushion” in borrowers escrow account balances that does not exceed two months’ worth of regular escrow charges. The cushion is intended to handle any unexpected jumps in insurance or tax costs that may arise during the year.

The settlement agreement that arrived in Toothman’s mail said that Household denied withholding more escrow money than federal law permitted. But, said the agreement, the firm concluded that “it is in its best interest to settle . . . to avoid further expense, inconvenience and interference with business operations.”

The proposed settlement outlined the compensation to Household’s mortgage customers allegedly victimized by the firm’s excessive escrow withholding:

--Within one year, Household would change its escrow computation procedures and refund any excess balances above $10.

--Household mortgagors covered by the settlement would each receive a “rebate” of $1.27, minus up to a 25% payment for the lawyers who filed the suit.

--Consumers benefiting from the settlement agree to “release and be enjoined from suing Household . . . with regard to any claim in any way related to their escrow account.”

The settlement detailed additional compensation for the lawyers. Household will pay Zimmerman Reed a $130,000 fee. That will be on top of the 25% cut from each borrower’s $1.27 award.

Toothman said he began toting up the flow of funds and waiver of rights in the proposed settlement and was “absolutely appalled at what was going on here.” The roughly 236,000 current and past Household customers covered by the suit would split about $300,000--$1.27 per loan account--but would give $75,000 of that (25%) to the law firm. The net rebate for each household, in other words, would come to 95 cents ($1.27 less the 32-cent legal fee). The entire class of 236,000 would net a maximum of $225,000.

The law firm’s potential take would equal 91% of the plaintiffs’ net award. The firm would get a maximum of $205,000 ($130,000 from Household, $75,000 from the plaintiffs), versus $225,000 for its clients.

What bothered Toothman the most about the settlement--besides what he termed the “grossly unfair” fee arrangements--was what borrowers like himself were being asked to give up.

“In exchange for as little as 95 cents,” he wrote to the Minnesota court now considering the settlement, “each class member would release all potential claims against Household for escrow funds.” That would mean, for example, that Household might be excused “from violations of federal or state law, employee fraud or embezzlement, breaches of escrow contracts or fiduciary duty or negligence in failing to pay the taxes, insurance or other expenses” during the 1991-1994 period covered by the suit.

Asked for comment, Thomas L. Kimer, Household’s Minneapolis-based legal counsel on the case, said, “We approached this as any litigation, and tried to get the best for our client.”

And what about the lawyers for the 236,000 potential plaintiffs in the class--Zimmerman Reed? Lead attorneys on the case declined to return repeated phone messages requesting comment about the proposed settlement. The entire settlement will be the subject of a court hearing Monday in Minneapolis.