New rules to lower mortgage escrow


October 16, 1994|By Kenneth R. Harney

Washington -- The Clinton administration has come up with new rules that will directly affect the more than 35 million American homeowners whose mortgages contain escrow accounts.

In regulations scheduled for publication this month, the Department of Housing and Urban Development (HUD) seeks to end the long controversy over alleged widespread "padding" of consumers' escrows by the nation's mortgage lending industry.

The new rules ban the most popular -- and heavily criticized -- accounting technique used by lenders in calculating how much to charge borrowers. In a concession to the industry, however, the rules allow lenders six months to change their escrow procedures on new loans, and up to three years to revise their accounting on existing loans.

By May 1995, in other words, all new home loans made by lending institutions will have to employ the new, more consumer-friendly escrow rules. For all loans outstanding as of the rule's effective date, lenders will be allowed to convert to the new system as soon as feasible, but no later than three years afterward. The precise dates will depend upon publication date of the new rule this month.

Escrow accounts traditionally have been used by lenders to accumulate funds to pay borrowers' property taxes, insurance premiums and other recurring expenses on a timely basis. The monthly escrow charge is in addition to the regular principal and interest charges on the mortgage. Your principal and interest on your loan, for example, may come to $1,500 a month. Another $250 may get tacked on for escrowed items, giving you a $1,750 per month mortgage bill.

Controversies over escrows arose in the late 1980s, when studies by state attorneys general and others revealed that many consumers were being charged hundreds of dollars more on their escrows than they should have under federal law. Once lenders begin implementing the newly prescribed accounting rules, the net effect, in many cases, will be a reduction in the monthly amounts escrowed.

The basic rules on your monthly escrow, whether you're a new or existing borrower, will be this: Your lender cannot charge you more than one-twelfth per month of the combined property tax, insurance and other recurring expenses "that are reasonably anticipated" to be due and payable during the coming 12 months. On top of the pro-rata one-twelfth, your lender is permitted under federal law to maintain a "cushion" as high as two months' worth of the estimated total charges to cover "unanticipated" increases in insurance, tax or other costs.

A simple way of looking at this computation: Your escrow account ought to be set up so that at some point in the year, all charges get paid down to zero and there's nothing more than a two-month cushion in the account. If your total escrow charges are $4,800 a year, for example, your loan servicer should make sure that at least once a year the balance in the account is down to $800.

If your loan documents prescribe a stricter standard than this -- such as a one-month maximum cushion or zero cushion -- then your loan's language will take precedence over the federal standard. If your loan documents allow a fatter cushion or higher payments than the federal standard, the federal standard will prevail.

Other key features:

* Surpluses.

If you find that you have contributed too much to your escrow, you'll now be able to get an immediate refund from your loan servicing company. If the surplus is less than $50, the servicer will have the option of crediting it to your account or refunding it.

* Shortages.

If you've contributed too little to escrow, and your servicer has to pay tax or insurance bills out of its own funds, you'll have to make up the difference. If the shortfall represents one month's escrow payment or less, you'll be expected to pony it up immediately. For larger shortages, you'll be able to spread out the balance and repay it in equal monthly installments over a two to 12-month period.

* Interest and "opt outs."

The new federal rules do not mandate interest payments on your escrow balance. Nor do they require lenders to let you opt out of your escrow requirement when your loan balance falls below 80 percent of the original principal amount. HUD has no authority to do either.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St., N.W., Washington, D.C. 20071.

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