NEW YORK -- Holiday season or not, your mortgage lender could be overcharging you systematically as part of a mortgage scam involving billions of dollars.
The attorneys general of six states filed suit in federal court here earlier this month in an effort to prove the truth of this accusation.
Their lawsuit names only one lender -- GMAC Mortgage Corp., the fourth-largest home-loan servicer in the country and a subsidiary of General Motors. But the lawyers behind the suit say they could have targeted any of several other of the biggest-volume home lenders in the country, active in all 50 states.
The attorneys general charge that GMAC Mortgage routinely requires borrowers to pay more per month into escrow accounts than legally permissible. GMAC denied the allegations and vowed to fight the suit.
Mortgage escrows are required by the majority of American home lenders to ensure timely payment of property taxes, insurance bills and other periodic charges. Pro rata amounts to handle the escrowed items are added to the basic principal and interest charges due each month from borrowers.
The key to the alleged overcharges by GMAC and other lenders, according to the attorneys general, is the use of "creative" computational techniques that artificially inflate the amounts needed to pay upcoming escrow bills.
The practice was documented during a two-year joint investigation by the New York, California, Massachusetts, Texas, Minnesota and Iowa attorneys general.
For example, say the property taxes on your home are $1,200 a year, your hazard-insurance premium is $600 a year and a school-district assessment comes to $600 a year. To be certain these levies are paid, your lender needs to collect $2,400 ($1,200 + $600 + $600) over the course of the year. One way to do that would be to collect 1/12th of that amount, or $200, in an escrow account each month.
But say the property tax bill comes due in March and there is
only $600 escrowed from January, February and March. To avoid these imbalances, federal law allows lenders to perform cash-flow "escrow analyses" each year. The law also allows them to build a safety cushion into monthly escrows, just in case insurance premiums jump or taxes are higher than estimated.
Here's the rub: Under federal law that cushion cannot be so fat that at least once during the year the escrow account balance drops to a level where no more than two months' worth of escrow payments are undisbursed. In the example above, the lender could not charge the consumers so much in escrow that the account would not drop to $400 or less during the year.
Yet in two years' worth of investigation, the attorneys general found that in more than 70 percent of all mortgages made by a sample of large, industry-leading firms, the limits were illegally exceeded.
Some of the escrow cushions were three, four and five times beyond federal guidelines. Many of the loan documents specifically set even lower escrow cushion limits than the federal government's. Other loans banned cushions altogether, allowing no excess funds in the account.
Among the lenders studied were firms such as Citibank, Lomas Mortgage and Fleet Mortgage.
The net effect of the systematic overcharges, according to the attorneys general, has been a widespread pattern of needlessly higher monthly mortgage payments charged consumers: money illegally in the hands of lenders, at no or low interest, in violation of federal and state laws. In 1990, lenders held between $2 billion and $4 billion in overcharges.
Part of the motivation for last week's suit, according to New York Attorney General Robert Abrams, is the lack of action by the federal government.
The six states began informing the U.S. Department of Housing and Urban Development about their findings in 1989. In April they issued a formal report to the department and asked for strong corrective steps.
Under federal law, HUD has regulatory power over lenders on mortgage escrow and settlement issues.
But HUD Secretary Jack F. Kemp never responded to the study or request, according to Abrams.
An aide to Mr. Abrams charged that Mr. Kemp dragged his feet because he knows that loan servicers for the Federal Housing Administration's multibillion-dollar portfolio of insured mortgages may themselves be large-scale violators of federal law. That, in turn, could open the FHA to demands for escrow-account restitution by overcharged consumers.
HUD's top legal official, Attorney General Frank Keating, said last week that the agency has begun a study of the problem, and should be ready with recommendations in about three months.
The upshot of all this for you personally? In fairness, bear in mind that the GMAC lawsuit involves allegations, not facts proven before a court of law.
On the other hand, money-wise consumers should haul out their loan documents, look hard at what they're being charged, and ask for a detailed escrow-account analysis if they suspect too much fat.