Escrow errors create fear, irritation

March 14, 1993|By Linn Allen | Linn Allen,Chicago Tribune

Late last summer, a suburban Downers Grove, Ill., man got a letter from a St. Louis company that had just bought the servicing rights to the mortgage on his home.

It didn't say, "Hi! We welcome you as a valued customer." Instead it said, "You owe us $2,400."

The company said its analysis of the escrow account used to pay property taxes and insurance showed a shortage of $2,400, and that amount was due immediately.

The Downers Grove man, who always had thought of himself as scrupulous in meeting his payments, was not happy.

"He was ballistic," said Michael Brown, a Chicago real estate attorney to whom the man went for help. "He was extremely irritated, and the irritation was tinged with fear. He was thinking, 'What if I'm wrong? Where am I going to come up with $2,400?' "

Mr. Brown said he and the man had gone back through six years of records in the 8-year-old, $40,000-plus loan. They've amassed copies of tax bills and canceled checks to

prove the loan is not in arrears; in fact, there is a surplus.

The matter has yet to be settled.

Mr. Brown said his client was particularly angry because his loan servicing had been sold once before, and he had received a similar demand letter, though asking for only a few hundred dollars.

"People find it very scary," Mr. Brown said.

There are about 43 million residential mortgage loans outstanding in the country. With the majority of them, monthly payments are sent and duly entered without a hitch.

Brian Chappelle, vice president for residential finance for the Mortgage Bankers Association of America, estimated that even when including adjustable-rate mortgage loans -- which have had notorious problems relating to rate determination -- fewer than 5 percent of the loans have servicing problems.

But for the unlucky few, a computer error or a mislaid check can turn into a monster that devours peace of mind.

"If there's a problem with your home, that's what's closest to people's heart next to the family," said Patricia Cunningham, consumer af

fairs director for the Illinois Office of Savings and Residential Finance.

"People have become ill with worry over what they perceive as the impossibility of dealing with some strange big company and not being able to get through to get this kind of problem corrected," she added.

Most of the problems with loan servicing seem to come when a loan or its servicing is sold or transferred from one company to another. That practice has increased dramatically over the past 10 years, pushed mainly by industry specialization and income tax rules, Mr. Chappelle said.

These problems have continued despite a 1990 federal law designed to protect consumers when their loan servicing is transferred.

The law requires, among other things, that loan originators tell borrowers whether servicing might be sold or transferred and that borrowers receive notice 15 days before a transfer is made.

Whatever the law's effect, it has failed to address the problem of mistakes and overcharges in escrow accounts, which have generated numerous protests and lawsuits.

"It's an issue of national furor," Ms. Cunningham said.

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