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Beneficiaries of class action just get change


Washington -- Mortgage escrow class-action suits involving hundreds of thousands of home loan borrowers are squeezing money -- and business practice changes -- out of major lenders nationwide.

But homeowners who receive surprise notices that they're "beneficiaries" of class-action settlements better look hard at the fine print. They may find -- as one Northern Virginia homeowner did recently -- that consumers are being asked to give up far-reaching legal rights in exchange for a pittance. The biggest beneficiaries may not be the borrowers themselves, but the lawyers who filed the class action.

How would you like to waive your rights to sue your lender in exchange for 95 cents, while your lawyer pockets $205,000 for representing you? Read on.

John W. Toothman is a homeowner in Alexandria, Va., as well as a home loan client of Household Mortgage Services Inc., a large Illinois-based mortgage banker. Toothman also happens to be a trial attorney and expert on legal fees and lawyers' billing practices.

Recently Toothman and his wife, Elizabeth, received a letter in the mail that bore seemingly good news: They are members of a "class" of Household customers -- estimated to number as high as 236,000 homeowners -- who are covered by a pending class-action financial settlement involving Household's loan escrowing practices.

The lawsuit was initiated in June 1991 by Minnesota homeowners represented by the Minneapolis law firm of Zimmerman Reed. The suit alleged that Household routinely exceeded federal limits on how much of borrowers' funds could be held in escrow accounts.

The settlement agreement that arrived in Toothman's mail said that Household denied withholding more escrow money than federal law permitted. But, said the agreement, the firm concluded that "it is in its best interest to settle . . . to avoid further expense, inconvenience and interference with business operations."

Toothman said he began toting up the flow of funds and waiver of rights in the proposed settlement and was "absolutely appalled at what was going on here." The roughly 236,000 current and past Household customers covered by the suit would split about $300,000 -- $1.27 per loan account -- but would give $75,000 of that, or 25 percent, to the law firm. The entire class of 236,000 would net a maximum of $225,000.

"In exchange for as little as 95 cents," he wrote to the Minnesota court now considering the settlement, "each class member would release all potential claims against Household for escrow funds." That would mean, for example, that Household might be excused "from violations of federal or state law, employee fraud or embezzlement, breaches of escrow contracts or fiduciary duty or negligence in failing to pay the taxes, insurance or other expenses" during the 1991-1994 period covered by the suit.

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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