Legislature(1995 - 1996)
02/01/1996 08:00 AM House STA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 363 - INTEREST ON MORTGAGE ESCROW ACCTS The first order of business to come before the House State Affairs Committee was HB 363. CHAIR JAMES called on Representative Con Bunde, sponsor of HB 363. REPRESENTATIVE CON BUNDE said he appreciated the House State Affairs Committee for hearing HB 363 again. He said additional research had been done to determine the actual cost to service an account, and the amount of money made in interest on accounts held in escrow. However, the information and numbers were not available today. He mentioned the concern regarding an increase in mortgage prices according to testimony from the industry. He alleged there were people who serviced mortgages and did not have a piece of the action so they were obviously making a profit from the escrow account. He also stated there were people who kept the mortgage and serviced it doubling their profits. Representative Bunde further stated the Real Estate Settlement Procedures Act (RESPA) law was passed in 1970 prohibiting lenders and mortgage servicers from requiring consumers to maintain more than an extra two months' cushion in their accounts. He alleged this was widely ignored. He read the following statement into the record. "In issuing this proposed rule HUD reviewed the existing escrow accounting procedures. The prevalent practice exists called single item analysis where the lender accounts for each escrow item separately. The lender may collect more money under the single item then under aggregate." REPRESENTATIVE BUNDE further said the lending institutions had been ignoring RESPA since the 1970's and more regulation was needed. He cited institutions simply ignored the two month limitation and used the single item accounting process to make more money. He asserted he was not against a profit being made, but rather he wanted to bring some sunshine into the industry so the consumer could make an informed decision. Representative Bunde, in conclusion, said fences needed to be placed appropriately to encourage due diligence. The record reflected the presence of Representatives Robinson, Green and Ogan. CHAIR JAMES called on the next witness via teleconference in Anchorage, Richard Enberg. Number 0410 RICHARD ENBERG, Executive Vice President, First National Bank of Anchorage, said he was opposed to HB 363 because it was liable to cause lending operations to reconsider what they were doing. The banks in Alaska were subject to the federal laws mentioned and the appropriate violations under the laws, he stated. He further said mortgages had become a commodity item sold to a national market. Those mortgages, he said, were serviced by people outside of Alaska, and alleged a law of this nature would put Alaskan mortgage firms at a distinct disadvantage. Mr. Enberg said he would have to look at both the originating and servicing side to determine the impact HB 363 would have on his business. He further said the other problems associated with HB 363 would be reprogramming computers, changing rates on mortgages, and slowing down municipal tax collections. In conclusion, he said, to offset the problems, a service charge would have to be required. Number 0662 CHAIR JAMES wondered if the work done on mortgage escrow accounts was comparable to other escrow accounts. Number 0680 MR. ENBERG replied he was not sure what other escrow accounts she was referring to. However, if she was referring to collection escrows, there were three parties involved - the bank, the buyer, and the seller. He further said a collection escrow was not the same as an escrow mortgage account as each involved different duties. Number 0720 CHAIR JAMES said she wanted to compare the work load for a bank between mortgage escrow accounts and other escrow accounts. Number 0736 MR. ENBERG asked if she meant the other escrow collection services. Number 0740 CHAIR JAMES replied, yes, she wanted to compare the work load between an escrow collection and a mortgage escrow. She said she understood there were more payouts because of insurance and taxes for a mortgage escrow account compared to an escrow where there was only a buyer and a seller. She wondered again if the work load was the same. Number 0775 MR. ENBERG replied the work load was not the same. He cited the fees depended on the size of the escrow rather than the type of account. He further said there were a variety of things a fiduciary agent could do for a seller and a buyer, and these were two separate issues. Number 0820 CHAIR JAMES said she was trying to determine what the service charge would be on servicing a mortgage escrow account if there was no interest to cover the fees. Number 0860 MR. ENBERG said he would have to look at both the servicing and the originating operations. He said it cost money to originate a loan. He further stated it was important to look at establishing a long- term relationship with the customer, which would hopefully offset the cost of producing a loan. Number 0890 CHAIR JAMES asked if an origination fee was paid separately. Number 0900 MR. ENBERG replied, yes, an origination fee was paid separately, but it did not cover the cost. He cited the First National Bank of Anchorage was offering a $150 coupon off loan origination and closing fees. He said the bank was eating those fees. Number 0940 CHAIR JAMES said she understood the business decisions and the net result was to make a profit. She further said she wanted to know what was fair and if the interest on the escrow accounts was contributing in a major way to offset the cost of maintaining the accounts. She commented on the varying sizes of escrow accounts and wondered if individuals were paying disproportionately. Number 0990 MR. ENBERG said he did not know if they were paying disproportionately as taxes and insurance were based on the value of the property. Number 1000 CHAIR JAMES said she meant the balance in the escrow was different based on the value of the property and wondered if the cost of servicing the accounts was the same. Number 1015 MR. ENBERG said the cost of servicing a loan was the same whether it was for $50 thousand or $150 thousand. Number 1028 CHAIR JAMES said there were varying balances in escrow accounts and the interest would be more for those with a bigger balance. Number 1040 MR. ENBERG said he agreed, but it was a dollar cost averaging situation. He alleged all mortgages would be covered to make a profit. Number 1059 CHAIR JAMES said she did not want people to pay more for the services they were currently getting. She thanked Mr. Enberg for his time today. CHAIR JAMES called on the next witness via teleconference in Anchorage, Robin Ward. Number 1088 ROBIN WARD, President, Summit Title Insurance Agency Ltd., said the testimony regarding the abuse of over escrowing was six years old, and aggressive action had been taken to correct the abuses nationwide. She said she was concerned about another regulation over correcting the situation. She also said she was concerned about the administrative cost for reporting interest, and was more concerned it would end-up costing the consumer more. She thanked the committee members and said she was available to answer any questions. CHAIR JAMES called on the next witness via teleconference in Fairbanks, Gary Roth. Number 1175 GARY ROTH, President, Denali State Bank in Fairbanks, said he was opposed to HB 363. He said it was poorly worded, but more importantly he wanted to see the bill killed. He said his customers were happy to escrow their insurance and tax payments so they did not have to worry about delinquency. Mr. Roth further said the cost of administering an escrow was costly to the bank. He cited, Denali State Bank subscribed to a service that provided information on taxes from the borough. He also said HB 363 referred to banks only and would jeopardize entry into a secondary market, and was concerned the secondary market would withdrawal from Alaska as a result. He cited the contract collection fees associated with an escrow account were a $100 set-up fee, $50 annual fee and $5 per month dispersement fee, and was viewed as a service to the community rather than a profit maker. In conclusion, he cited an example of interest paid on escrow. He said a $2,000 escrow account for taxes and insurance on the mortgage loan would produce a $1,000 average balance throughout the year yielding $30 in interest at passbook savings, which was much less than what the contract collection holder in the bank was charged. He thanked the committee members and said he was available to answer any questions. Number 1360 CHAIR JAMES thanked Mr. Roth for his testimony. She said the escrow account varied based on the value of the property, and was concerned about the disproportionate interest and service fees. She was concerned legislation would affect those with smaller escrow accounts by paying more. Number 1412 MR. ROTH said he understood and agreed with Chair James. He cited his previous example of a $2,000 escrow account with an average monthly balance of $1,000. He further said the more expensive homes in Fairbanks would probably double to an average monthly balance of $2,000. CHAIR JAMES called on the next witness via teleconference in Anchorage, Heather Bostley. Number 1450 HEATHER BOSTLEY representing the Alaska Public Interest Research Group (AKPIRG), said she was concerned about the cost. She said she supported HB 363 because at the end of a 30 year mortgage loan, if no interest was paid the money would work less. She stated other states such as Iowa and California were practicing this and doing it well. She cited the interest rates were ranging from 2 percent to 5 percent. She reiterated she was in favor of HB 363. CHAIR JAMES called on the next witness via teleconference in Anchorage, Lucille Stietz. Number 1530 LUCILLE STIETZ, Senior Vice President, National Bank of Alaska (NBA), said she agreed with Mr. Enberg's and Ms. Ward's testimony. She said the average mortgage loan was written for a 15 or 30 year period. The average life of a loan nationwide was six years due to refinancing and moving. She said NBA provided local servicing for Alaskan borrowers and if HB 363 was passed, the loans, she alleged, would go to an outside servicer affecting the 56 people employed by NBA's Servicing Loan Department. She thanked the committee members and said she would be happy to answer any questions. CHAIR JAMES called on the next witness in Juneau, Lisa Bell. Number 1650 LISA BELL, Senior Vice President, Alaska Federal Savings Bank, said she supported the previous testimony. She stated Alaska Federal Savings Bank had been a mortgage banking participant since 1935. She said the headquarters was located in Juneau and the bank served four southeast communities. She said the servicing portfolio was similar in size to Mt. McKinley's. She commented smaller banks would be more affected by HB 363 compared to larger banks. She alleged the bill would be burdensome to the banks and probably provide very little benefit to the borrowers. She felt her bank was already a conservative custodian of the customer's money and exercised due diligence. She cited in the wake of RESPA's changes trial runs were tested and discovered more money would need to be collected from the borrowers therefore it was decided to adopt a more conservative approach. She announced the bank now collected only a one month cushion. She cited the average escrow balance was $1,000 over the course of the year. According to a profitability analysis of the servicing department in September of 1995, she found the bank was barely making a profit and the scales would tip easily if required to pay interest on escrow accounts. She further commented on accounts served at the local community level. She said she felt strongly the citizens needed instate servicing. Ms. Bell said California paid 2 percent in interest which equated to about $20 a year on a $1,000 average balance. She asserted that was not a lot of money especially coupled with taxes. She also said the California law did not provide for payment of interest to out-of-state borrowers if the land was not located in California. She said she could see a situation whereby HB 363 would scare the borrowers out of Alaska. Number 1880 REPRESENTATIVE CAREN ROBINSON commented Alaska Federal Savings Bank was following and practicing the federal law, and asked if other banks were also. Number 1895 MS. BELL said she would have to ask the other bankers because she was the only servicer located in Juneau. She said she did not know what cushion they adopted, but said they were all acting within the law and probably even more conservatively than realized. Number 1912 REPRESENTATIVE BUNDE reiterated he was not anti-profit. He asserted every business needed to make a profit. He said a banker commenting on eating the cost was being disingenuous. He stated they did not eat the cost but simply made it up elsewhere. He again stated he wanted everyone to make a profit. Representative Bunde commented on the previous testimony regarding the minimal amount of interest made, and further said it was a matter of principle, and the informed choice of a consumer. He commented on previous testimony regarding the happy mortgage holders in Fairbanks, and wondered if they would be as pleased if they received an exact accounting of what it cost to service the loan and how much was being made on interest in the escrow. He asserted that was the question, and he heard no answers today. He said there was specific testimony on the cost between a borrower and a seller, but it was not available on a mortgage. He wondered why that was kept in the dark. He said he was not suggesting there was something to hide, but the information was very slow in forthcoming. Representative Bunde questioned the banks treating the consumers as children because it was more comfortable if the bank paid the taxes and insurance. He further said a similar law was passed in 14 other states of which no one was put out of work and the banks did not close. He said he did not want that to happen, but the people deserved an accurate accounting. Therefore, side boards were needed to raise the confidence of the general public. Number 2090 CHAIR JAMES said Representative Bunde made a good argument. She cited previous testimony stating the average escrow account was $1,000 yielding approximately $50 in interest. Other testimony indicated that escrow for buyers and sellers was $200 a year which was a sizeable amount more. She stated her biggest fear was passing legislation that would make the people pay more. She stated she agreed with HB 363 philosophically, but because of the manner in which a bank calculates a profit overall considering the money in the accounts to service their customers, she could not support HB 363. She further said the majority of people were happy to pay their taxes and insurance per month in their house payment and for those reason she would not support HB 363. Number 2148 REPRESENTATIVE BUNDE said there were questions that remained unanswered, and asked the House State Affairs Committee to pass HB 363 to the next committee of referral - the House Labor and Commerce Committee. Number 2163 REPRESENTATIVE BRIAN PORTER said he did not want to hear this bill again as a Labor and Commerce Committee member. He cited a bill was being discussed in the Labor and Commerce Committee now which addressed the small loans chapters of the statutes. He said he was convinced the cap on required interest was doing a disservice to the consumer, because of the same issues being dealt with in HB 363. He said the loans went outside where there was no cap and demonstrated a loss of capital and jobs in Alaska. He further said it should be enforced through the federal law. In conclusion, he said, he had a general philosophical problem with legislating the market place and for all those reasons, he would not support HB 363. Number 2233 REPRESENTATIVE SCOTT OGAN said when he first read the bill he was in favor of it, but based on the testimony, he changed his mind. He said the industry should have the latitude it needed, and therefore would not support HB 363. Number 2266 REPRESENTATIVE ROBINSON wondered if a consumer had the option to not have an escrow account. REPRESENTATIVE BUNDE replied no it was not possible. Number 2280 REPRESENTATIVE ROBINSON said he was wrong. Number 2298 MS. STIETZ replied it depended on the holder of the loan. She cited some mortgage holders allowed the banks to waive the collection of escrow if the loan to value was 80 percent or less. She further said some outside lenders waived the escrow interest on conventional loans and paid less because it was a high risk loan. She cited some investors such as, VA and FHA, did not allow the escrow account to be waived. Number 2382 REPRESENTATIVE ROBINSON questioned if a state law was needed to enforce an already existing federal law creating more regulations. She also said she believed in consumer protection, and wondered what she was missing and not understanding because a law already existed. Number 2418 REPRESENTATIVE BUNDE replied the 55 miles per hour speed limit was also a law. He asserted RESPA was not being followed. The Attorneys General of seven states in the report titled "Overcharging on Mortgage: Violations of Escrow Account Limits by the Mortgage Lending Industry," said it was followed at face value, and the single item accounting system was used to get around the law. He stated it had to be enforced further and we were not getting the information. He further wondered what they were hiding, and if they were hiding something maybe the interest would keep them from continuing to hide it further. Number 2444 CHAIR JAMES asked if there was evidence RESPA was not followed in Alaska. Number 2450 REPRESENTATIVE ROBINSON further asked if the Attorney General from Alaska had looked at this issue. Number 2463 REPRESENTATIVE BUNDE said the Attorney General from Alaska was not part of the group that investigated this issue. He reiterated it would be better if the banking industry shared the information with their consumers. Number 2479 REPRESENTATIVE JOE GREEN wondered if there were statistics available that suggested the banks following the laws were disadvantaged somehow. TAPE 96-08, SIDE B Number 0000 REPRESENTATIVE BUNDE replied there were 14 states that required banks to pay interest, and there were still mortgages, people still bought homes, and the banking institutions still survived. Number 0021 REPRESENTATIVE ROBINSON wondered if the Labor and Commerce Committee would look HB 363 in more depth as it was the committee that dealt with these issues. However, she said, she was not ready to put do pass and if no one else put do pass she wondered if it would be able to move from the committee. Number 0040 CHAIR JAMES replied a motion was only needed with individual recommendations to move HB 363 from the committee. She further stated the bill could not leave the Rules Committee without at least one do pass recommended throughout the committee process. She said the House State Affairs Committee could pass this bill from the committee without a do pass. Number 0058 REPRESENTATIVE BUNDE replied a bill could come to the floor of the House of Representatives without a single do pass with a two-thirds vote. Number 0072 MS. BELL said she did not deny that there might have been banks that were not following RESPA previously, but the escrow accounting rules were new and tighter phasing out the single item analysis and moving towards an aggregate item analysis. The single item analysis, she alleged was a servicing nightmare anyway and assumed most banks would have opted for the aggregate item analysis. She commented on the bank examination process and suggested RESPA would be a high priority for the bank examiners in 1996. Number 0134 REPRESENTATIVE ROBINSON asked who were the examiners. Number 0140 MS. BELL said it depended if the bank had a state or federal charter. She cited federal chartered banks fell under the Federal Deposit Insurance Corporation (FDIC). The Alaska Federal Savings Bank, however, fell under the Office of Thrift Supervision (OTS), and state chartered banks were examined by the state. CHAIR JAMES commented no one wanted to move the bill. She offered to hear it again if the sentiment changed. She stated HB 363 would remain in the House State Affairs Committee until new information surfaced.
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