Law offers protection in disputes over escrow

Nation's Housing

January 18, 2004|By KENNETH HARNEY

ACROSS THE country this month, millions of homeowners are receiving a document from their mortgage company that they might find confusing or nettlesome: the annual escrow account disclosure statement.

The very idea of an escrow account gets under the skin of some homeowners. After all, escrows mean that you pay more - often hundreds of dollars per month more - than the principal and interest you owe the lender. You're required to pay prorated amounts for hazard insurance premiums, property taxes, private mortgage or FHA insurance, condo fees and other expense items due at times during the year.

The lender or servicer then gets to tack on contributions toward a "cushion" of up to two months' worth of the total amount of the items covered by the account. That's partly because lenders don't trust borrowers to make their payments on time. Late payments or underpayments of property taxes, for example, could threaten the lender's security interest in your house, exposing it to a tax auction at a loss.

Late or missed payments on hazard insurance could leave your house unprotected against damage from a fire or other catastrophic event, again leaving the lender exposed to possible loss.

Whatever the rationale, lenders or loan servicing companies in most parts of the country require, receive and control huge amounts of escrow account cash every month, money that in most states they retain interest-free. That's the other part of the motivation: Control of escrow-account balances is a highly lucrative sideline benefit of being in the mortgage business.

What should consumers puzzling over their escrow statements this month know about the federal rules governing their accounts? What are your legal rights if you think you are being overcharged? Here are some basics:

To start, you should know that federal law permits your lender to require you to pay into an escrow account, but there is no federal law requiring escrow accounts per se. They are an option available to the lender and to you.

You can, as part of your loan comparison shopping, look for lenders who do not require escrow accounts for everybody. Some allow borrowers with sterling credit scores and immaculate payment histories to avoid escrows. Some are willing to make exceptions for longtime customers and those who are refinancing.

Others will let you pay your bills on your own from day one but insist on charging you for the "privilege." Often, those charges add a quarter of a percentage point to the interest rate.

To understand the mathematics of evaluating your escrow account, visit the helpful Web page on the subject maintained by the federal Department of Housing and Urban Development (

If you think your lender has miscalculated your escrow contribution or is taking a bigger cushion than the maximum of two months' worth, first and most important you should know that federal legal protections cover all your relationships with your servicer or lender.

Bear in mind, too, that in extreme cases, such as the $40 million settlement involving Utah-based Fairbanks Capital Corp. last fall, federal agencies will intervene aggressively when they think large numbers of borrowers' escrow accounts are being mismanaged intentionally.

To challenge escrow account computations, it is best to contact your lender or servicer in writing, not by phoning a toll-free customer call center. That's because legal protections kick in whenever you send a written request, including your loan account number and property address, to your servicer. It's best also to send the written request separately from your regular monthly payment check.

Once you've done that, your servicer is required to hew to federal deadlines: Within 20 business days of receipt of your letter, your servicer must respond to you, at the very least to acknowledge your communication. Within 60 business days of receipt, the servicer must "correct or clarify" the issue you've raised.

The 20/60 rule has a unique advantage for you in cases of disputes over escrow account charges and disbursements. If your argument with the servicer involves an allegation of unpaid or overdue funds, activating the 20/60 rule can give you added legal protection. During the 60 business-day period, the lender or servicer is prohibited by federal law from informing credit bureaus about your alleged nonpayment.

If you are not covered by the rule, the lender is free to tell the bureaus - and through them, the world - that you're delinquent on your mortgage payment.

Even if it turns out you really weren't.

Ken Harney's e-mail address is

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