Home sellers and those refinancing homes who pay off their mortgages frequently wait for weeks or months before receiving the funds sitting in their own escrow accounts.
The balances in those escrows can amount to thousands of dollars -- all intended for property taxes, insurance and other annual or semiannual expense items. But mortgage servicers are free to retain and profit from that money long after the underlying loan has been paid off.
Why? Because of a glaring loophole in federal law. While Congress has prescribed detailed rules on how much a mortgage company can require a borrower to contribute to an escrow account, there are no provisions in the law about returns of escrowed funds. The law only requires mortgage servicers to provide borrowers an "escrow statement" within 60 days of loan payoff.
Say you sell your home and pay off your existing mortgage balance -- principal and interest -- with the sale proceeds. Your escrow account, however, still contains $3,000 or $4,000. You could make good, immediate use of that money to buy or improve your new home. But the odds are that you won't see it for an extended period. And if you complain about it, nobody has the power to compel the mortgage company to return your money within any deadline.
That would all change, however, if forthcoming new mortgage reform legislation passes Congress. Under the bill, escrow account balances would have to be repaid on the same date as your closing, either in cash or as an offset against the principal owed to the lender. The only proviso would be that you must give your servicer at least seven days' notice of your intent to pay off the loan. If you give less than seven days' notice, the servicer would still have to send back your full escrow balance in no less than 21 days.
Dubbed the Mortgage Loan Consumer Protection Act, the bill is expected to be introduced before Memorial Day, and is likely to attract strong bipartisan support. Its author is the ranking minority member of the House Financial Services Committee, Democratic Rep. John J. LaFalce of New York.
Escrow accounts long have been vexing issues to homebuyers, who frequently complain to federal regulators that they are being asked to contribute too much. Escrows, or impound accounts, are required by most lenders to ensure that recurring large expenses such as local property taxes, hazard insurance premiums, condominium fees and others are paid on time.
The rationale is that, left on their own, some borrowers would forget to pay their taxes on time, thereby potentially creating a lien on the property that endangers the lender's legal claim to the property. Ditto for insurance premiums. If the home is not insured against fire and other hazards, the lender's collateral securing the mortgage could be wiped out in minutes.
Escrow accounts allow loan servicers to collect pro-rata contributions toward these important expense items. Millions of American homeowners pay principal, interest and an escrow contribution through their monthly mortgage installments. In high-tax markets, the monthly escrow payment often reaches hundreds of dollars per month. The mortgage servicer is supposed to administer the account, paying bills on time from the accumulated funds over the course of the year.
After mortgage escrow account overcharge scandals in the 1980s and early 1990s, federal rules were tightened to specify how much money borrowers could be required to pay into their escrow accounts. Under those rules, a lender can collect one-twelfth of the anticipated cost of each escrow item per month -- one-twelfth of annual property taxes, one-twelfth of insurance premiums, etc. It can also collect up to two months' worth of "cushion" for the account, just in case one or more of the escrow items costs more than projected.
There is no federal requirement for interest to be paid to consumers on their escrow balances, and for most loan servicers escrow accounts represent a source of revenue.
Besides the return-of-escrow deadline, LaFalce's forthcoming bill would also make mortgage servicers liable for any fees or penalties that arise when they fail to make timely payments of property taxes or insurance premiums on the borrower's behalf. Under current federal rules they are free to tack penalties onto borrowers' accounts -- in effect charging consumers for the servicer's own lateness or poor administration.
LaFalce's draft mortgage reform bill goes far beyond escrow accounts. It seeks to correct a long list of problems in federal law related to home mortgage settlements, from junk fees and markups to last-minute deliveries of settlement statements. Under the bill, all consumers would have to be given their settlement documents no later than two days before the closing.
Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071. Or e-mail him at firstname.lastname@example.org.