Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: WEDNESDAY, April 25, 1990 TAG: 9004250212
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: The New York Times
DATELINE: LENGTH: Medium
They estimated two out of three homeowners nationwide have overfinanced escrow accounts, which are used by lenders to pay taxes on homes and certain insurance premiums as they come due.
They estimated the average escrow account had an excess of $150, although in high tax areas that figure could rise to $300 to $500.
"This is a conscious, concerted action taken by an entire industry to rip off the public and get free loans at its expense," said Robert Abrams, attorney general of New York. He estimated that nationwide, lenders might hold more than $4 billion in excess escrow funds.
The state officials called for tighter enforcement of federal escrow rules and refunds or credits.
Tuesday's charges stemmed from a two-year study by attorneys general of practices at four of the nation's largest lenders, as well as a review of consumer complaints against other companies.
Other states in the study are California, Florida, Iowa, Massachusetts, Minnesota and Texas.
An executive of a mortgage-lending trade association said he had not seen the report but believed the state officials had overstated the case.
"I don't doubt there are isolated problems in this area, but we think the industry has tried to improve itself," said Brian Chappelle, a staff vice president of the Mortgage Bankers Association of America in Washington.
A spokesman for the Department of Housing and Urban Development said agency officials had not seen the attorneys generals' report. That spokesman, who asked not to be identified, also said the department did not have the authority to enforce rules on escrow accounts.
The lenders studied were Citibank in New York; the GMAC Mortgage Corp. in Elkins Park, Pa., a unit of the General Motors Corp. of Detroit; Lomas Mortgage USA, a subsidiary of the Lomas Financial Corp., both in Dallas; and the Fleet Mortgage Corp. in Milwaukee, a unit of Fleet/Norstar Financial Group Inc. of Providence, R.I.
A spokeswoman for Citibank, Susan Weeks, said the company follows all federal escrow rules and annually returns excess funds. "We are a little puzzled by the report's conclusions," she said.
Spokesmen at the other companies either said they had not seen the report or had no comment.
Under New York law, commercial banks must pay at least 2 percent on escrow accounts.
Not all states require commercial banks to pay interest on such accounts, and savings and loan associations are exempt from paying interest, said Leslie Gersing, a spokeswoman for Abrams.
Most homeowners must contribute to an escrow account monthly as they make mortgage payments. Escrow funds are paid out during the year for such assessments as taxes. The idea is to protect the lender and prevent foreclosure if, for example, a homeowner fails to pay taxes.
A 1974 law, passed as a result of abuses by some lenders, requires that surplus escrow payments must fall once a year to a level no greater than one-sixth of a homeowner's total yearly escrow payments.
The attorneys general charged some lenders either ignore contract provisions or use an accounting provision known as "individual item analysis" to build excess funds.
In effect, the technique, which is not illegal, treats each tax or insurance liability as a separate fund and requires the homeowner to keep money in each, even if the homeowner has enough overall to pay each bill as it is due.
The technique resulted in overcharges in 70 percent of the cases studied.
by CNB