Legislature(1995 - 1996)
01/23/1996 08:00 AM House STA
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HB 363 - INTEREST ON MORTGAGE ESCROW ACCTS
Number 0645
The next order of business to come before the House State Affairs
Committee was HB 363.
REPRESENTATIVE CON BUNDE read the following sponsor statement
into record.
"Congress found that many lenders were maintaining bloated escrow
accounts with a year or more of excess escrow payment in them.
Lenders called this excessive amount a "cushion," but are unable
to justify the need for such an excess. In response, Congress
has enacted the Real Estate Settlement Procedures Act (RESPA)
which prohibits lenders and mortgage servicers from requiring
consumers to maintain more than an extra two months' worth of the
yearly amount necessary to pay taxes and insurance premiums.
Some escrow accounts do not have more than two months' payment
available. However, the accounting system used by the
institutions holding the escrow account may cause the account to
be seriously over the two month ceiling set by RESPA.
"Lenders often invest these escrow accounts for the short term
and use the profits as their institution sees fit. The consumer
that pays into the escrow account gives the use of their money to
the bank and gains nothing."
Representative Bunde interjected and said it was considered
previously in Alaska to pay interest on escrow accounts but was
discovered it was only worth a few dollars. As a result, some
felt it was not worth the effort. Collectively, however, the
mortgages generated a great deal of money.
He continued to read his sponsor statement into the record.
"Therefore the institutions that hold escrow accounts have an
incentive to ignore RESPA and bloat their accounts in order to
maximize profits."
He further stated some mortgages did not allow the two month
cushion that RESPA supported. Most institutions, however, used
the two month cushion even though the underlying mortgage
prohibited any cushion or more than a one month cushion.
He continued to read his sponsor statement into the record.
"HB 363 would require lending institutions to pay interest on
money in escrow in reserve accounts. The interest shall be
credited to the principal balance of a mortgage or paid directly
to the borrower.
"It's certainly time lending institutions give the consumer a
better deal and I urge the committee to careful consideration of
passage of this legislation."
Representative Bunde said he would be happy to answer any
questions.
Number 0897
REPRESENTATIVE GREEN commented he understood the concept of a two
month pool built to pay insurance, but wondered about accounts
paid semi-annually such as property taxes.
Number 0929
REPRESENTATIVE BUNDE responded there was an accounting system
that separated the items.
Number 0965
REPRESENTATIVE GREEN stated it would be an additional safety if
an account was above the amount due.
Number 0975
REPRESENTATIVE PORTER enquired why a lending institution would
not make up the difference in fees performed on the loans for the
various costs they were reserving for the funds. They were
actively involved in paying and receiving bills, he said.
Number 1000
REPRESENTATIVE BUNDE responded there was a service and a cost
attached. However, an accounting for that cost needed to be
established rather than alluding to it as a "slush" fund, he
asserted.
Number 1037
REPRESENTATIVE SCOTT OGAN referred to the language "a bank" in HB
363, and questioned if there was a more generic term to cover
other entities such as credit unions. He recommended the term
"lending institution."
Number 1066
REPRESENTATIVE BUNDE agreed the more appropriate term was
"lending institution" and commented he did not attempt to single
out banks.
REPRESENTATIVE OGAN asked if it would be appropriate to make a
motion to amend the language.
REPRESENTATIVE BUNDE said it was an oversite on his part. He
thought the language had already been corrected.
Number 1109
REPRESENTATIVE GREEN suggested it be used in the definition of
"bank" to cover everything.
Number 1115
REPRESENTATIVE BUNDE said he was using the term "bank"
generically and suggested Willis Kirkpatrick, Director, Division
of Banking, Securities and Corporations, Department of Commerce
and Economic Development respond to the dialogue for technical
support.
Number 1135
REPRESENTATIVE IVAN asked how Representative Bunde arrived at the
2 percent figure stated in HB 363.
Number 1145
REPRESENTATIVE BUNDE responded it was an area of discussion and a
starting point for negotiation. He announced he was willing to
discuss the figure.
Number 1185
CHAIR JAMES asked why it was not the same as a savings account
interest rate.
Number 1190
REPRESENTATAIVE BUNDE responded it was a good suggestion.
Number 1195
REPRESENTATIVE GREEN said 2 percent mentioned in HB 363 narrowed
the difference more than a savings account. He stated there was,
more often than not, a larger gap than 2 percent between the
lending and saving account. He said he understood why
Representative Bunde wanted to close the gap.
Number 1211
CHAIR JAMES responded institutions would be obliged to stay at
the 2 percent rate rather than give an accelerated rate based on
the overall banking theory. Therefore, paying extra money, for
the use of money, in this case, challenged that concept. She
asserted this would result in more service charges because it
would cost the banks extra.
Number 1258
REPRESENTATIVE GREEN further stated this created a tendency not
to use the money. He alluded the bill was intended to reduce the
number of banks using the reserve accounts for their own gain.
Number 1266
CHAIR JAMES asked if Representative Bunde had any figures on the
discrepancy in reserved accounts. She said she knew of a number
of institutions where there were insufficient funds demanding
adjustments the following year. She stated this was especially
true when taxes were increased. She further questioned if the
cushion was sufficient - too much or too little.
Number 1300
REPRESENTATIVE BUNDE responded he had figures nationwide and
reminded the committee members many Alaskans took their mortgages
to banks outside. The purpose of the cushion, he further said,
was so that lending institutions would not have to dip into their
funds. He said institutions did not dip into their accounts
nationwide. The cushion sometimes was several months up to a
year in excess of what was needed to protect themselves.
Representative Bunde again stated Willis Kirkpatrick was here to
testify and to answer any technical questions.
Number 1355
CHAIR JAMES replied the balance in escrow accounts were
relatively small according to her experiences in tax preparation.
Number 1372
REPRESENTATIVE BUNDE stated a similar bill had been introduced to
the Alaska State Legislature several years ago. The impetus was
based on a situation where a woman could not move her money from
one mortgage to the next.
CHAIR JAMES asked if there were any further questions or
comments.
Number 1425
WILLIS KIRKPATRICK, Director, Division of Banking, Securities and
Corporations, Department of Commerce and Economic Development,
said he was not here to testify but to answer any questions.
Number 1465
REPRESENTATIVE GREEN referred to the question asked earlier, if
it was customary for lending institutions to have a "cushy"
amount or a modest amount in excess.
Number 1480
MR. KIRKPATRICK responded according to RESPA, institutions were
not allowed to have more than two months of cushion as far as
taxes and hazardous insurance were concerned. In his situation,
he shared, his escrow account was always short especially when
taxes were paid in September, and his payments tended to increase
every year due to the shortage. Mr. Kirkpatrick shared with the
committee member his tax bill was around $2,000 which meant he
would have around $2,000 in September in his escrow account. He
further stated 90 institutions outside of Alaska regulated under
Title VI - banks, credit unions and mutual savings banks - had a
certificate of authority to do lending business in the state. He
questioned how an escrow account outside of Alaska would be
affected by HB 363. He also commented mortgage loans were
accessed over the internet now and wondered how this would affect
the bill.
Number 1625
REPRESENTATIVE GREEN said there were many institutions not
adhering to the federal law. He also asserted the law was not
being enforced. He asked if there really was a problem, or was
something needed to reassure the federal law.
Number 1655
MR. KIRKPATRICK said he did not have the information available to
answer Representative Green's question. He felt the commercial
banks, credit unions and mutual savings banks were complying with
the federal law.
Number 1673
REPRESENTATIVE PORTER asked if HB 363 would put Alaska in an
inferior position.
Number 1693
MR. KIRKPATRICK responded financial institutions were targeted
under the generic term "bank." He stated it was a highly
competitive business and Congress was continually battling the
over regulation of banks. There were other financial
intermediaries that had no Congressional regulations, such as
American Express. He divulged there were other states that had
this law and were not put at a disadvantage. A financial
institution would have to look at the law as the cost of
conducting business, and it would increase their interest
expense. He concluded, he really did not know if HB 363 would
put Alaska at a disadvantage.
CHAIR JAMES asked if there were any further questions or
comments.
Number 1765
REPRESENTATIVE CAREN ROBINSON asked if the committee was going to
change the wording to read "financial institutions" rather than
"banks."
Number 1693
MR. KIRKPATRICK suggested to change the wording under Title VI,
chapter one, the administrative title, would direct all
institutions under the title. He was not sure how to include
mortgage companies, but agreed the term "bank" needed to be
broadened.
Number 1765
REPRESENTATIVE ROBINSON suggested Mr. Kirkpatrick think about the
wording further and return with a recommendation.
Number 1828
MR. KIRKPATRICK agreed with Representative Robinson's statement.
Number 1830
REPRESENTATIVE ROBINSON asked Mr. Kirkpatrick to respond to
Representataive Ivan's earlier question regarding the 2 percent
interest referenced in HB 363.
Number 1840
MR. KIRKPATRICK cited if the mortgage loan interest rate was 10
percent, therefore, according to HB 363, the escrow interest
would be 8 percent. That, he said, was a favorable rate. Mr.
Kirkpatrick shared with the committee his account was only paying
2.3 percent interest. He suggested looking at the relationship
between the deposit and the interest of a depository institution.
If, however, it was not a depository institution he did not know
what to recommend.
Number 1893
REPRESENTATIVE ROBINSON said this discussion made her curious
about her own mortgage account.
Number 1906
CHAIR JAMES called on a banking industry representative to
testify.
ROBIN WARD, President, Summit Title Insurance Agency Ltd., said
the Alaska Mortgage Bankers Association (AMBA) opposed HB 363.
She said it would cause a problem with competitive mortgage rates
within Alaska. There was a national law in effect that
restricted institutions to a small escrow cushion account.
Consequently, the institutions could no longer hold the excess
needed to pay the taxes, insurance or any other items held in
escrow. The important part, however, was that investors provided
a free flow of competitive rates in Alaska. With this
requirement came an administrative service cost to monitor each
loan, she asserted. Right now, the servicers were providing the
service at no charge. However, HB 363, would result in
institutions charging a fee for that service. She alleged it was
an administrative and an accounting nightmare to keep track of
and pay interest. As a result, interest rates would increase to
cover the fees. The greatest concern, she asserted, was the
possibility companies would not want to do business in Alaska
affecting the competitiveness of the interest rate and the
attractiveness of the state to loan money to.
Number 2071
REPRESENTATIVE GREEN enquired if Ms. Ward's banking institution
was not complying with federal law.
Number 2077
MS. WARD said as far as she knew the banking institutions were
complying with federal law and were holding a very small cushion
of two months in excess.
Number 2090
REPRESENTATIVE GREEN remarked that HB 363 did the same thing.
MS. WARD replied it did not.
REPRESENTATIVE GREEN asked where it was different from the
federal law.
Number 2093
MS. WARD said HB 363 required the servicer to pay interest on the
amount of money held to the buyer in reserve to pay their taxes
and insurance.
Number 2110
CHAIR JAMES commented escrow accounts were calculated at the
beginning of the year based on an estimate of the amount of
insurance and taxes due.
Number 2126
MS. WARD responded that was exactly what happened. That was the
only difference in a payment on a loan. She said they based it
on the past years taxes for the coming year.
Number 2138
CHAIR JAMES responded 1/6 of taxes and 1/6 in addition to the
requirement for the taxes and insurance was held.
Number 2146
MS. WARD said it was more complicated than the above description
by Chair James. She cited in Anchorage taxes were paid in two
separate installments and insurance was paid in one installment.
Ms. Ward agreed, however, that was the general idea.
Number 2159
REPRESENTATIVE BUNDE referred to a handout titled "Overcharging
on Mortgages: Violations of Escrow Account Limits by the
Mortgage Lending Industry" by the attorneys general of
California, Florida, Iowa, Massachusetts, Minnesota, New York and
Texas." The report found the banking industry was not as service
oriented as prior testimony had indicated. He referred the
committee members to page 8 of the report and called their
attention to the individual item analysis verbiage. He alluded
the accounting system allowed only a two month cushion the day
the insurance payment was due and an equal amount due in taxes in
six months. Therefore, the two month cushion sat for six months.
Representative Bunde said there was a cost for this service. It
was derived from the interest gained on the float. He stated it
might be equal to the cost of doing business, but no one really
knew. If interest were paid on the escrow, the state of Alaska
would attract more money and mortgages, he suggested.
Representative Bunde further said in response to a previous
comment, this was not an accounting nightmare due to computer
technology. He agreed with previous testimony the money belonged
to the homeowner. Representative Bunde further stated the entire
purpose of HB 363 was to make sure the bank complied with RESPA.
He advised the bill was an encouragement to comply with federal
law and further suggested banks should be required to pay
interest on anything over the two month cushion. He said, he did
not want the bank to use its own money nor charge a service fee.
However, there was no assurance the banks were only using the
amount of money they needed for the service charge now.
Number 2324
CHAIR JAMES stated the mortgage owner needed to take individual
responsibility. She questioned whether the mortgage escrow
account was setup for the benefit of the bank or the individual.
If it were setup for the individual they would have a choice
where their money went until it was required to make their
insurance and tax payments. Currently, individuals did not have
a choice. She further voiced there was little argument to pay
interest other than what was the standard passbook savings
interest. Lastly, Chair James declared the individual needed to
take more responsibility to ascertain if their account was being
handled legally.
REPRESENTATIVE BUNDE responded the market forces would respond if
there was a lending institution acting unlawfully. He further
stated the main issue was no one knew how much money was being
made on servicing a loan. The difference between the interest
and the charges, he asserted, was the problem. He agreed with
Chair James that passbook savings was a logical interest amount.
Number 2405
CHAIR JAMES stated we did not know the situation collectively,
but each person would be able to ascertain their situation
individually.
Number 2425
REPRESENTATIVE BUNDE cited an example where an individual
negotiated a mortgage with no escrow account so the individual
was responsible for paying his own taxes and insurance. He
further stated escrow accounts were a product of the 1930's when
individuals could not pay their taxes and insurance. However,
that was not the situation today. Representative Bunde lastly
pointed out there were 14 states that passed similar legislation
and mortgages were still being made.
TAPE 96-2, SIDE B
Number 0000
REPRESENTATIVE ROBINSON questioned why HB 363 was necessary when
a federal law existed and suggested a resolution requiring the
state financial lenders to follow the federal law.
Number 0037
REPRESENTATIVE BUNDE responded a state resolution would not have
an impact when they did not follow the federal law now.
Number 0042
CHAIR JAMES questioned if there was evidence the banks were not
following the federal law.
Number 0047
REPRESENTATIVE BUNDE said there was evidence at a nationwide
level.
CHAIR JAMES asked about Alaska.
REPRESENTATIVE BUNDE replied many mortgages went outside Alaska
and on a national level there was evidence they were not
following the federal law. Based on the individual item analysis
accounting system, literally billions of dollars were in excess
of actual expenses. He suggested billions of dollars was a lot
of money when considering the cost of servicing a loan.
Number 0071
REPRESENTATAIVE GREEN referred to page 9 of the report titled
"Overcharging on Mortgages: Violations of Escrow Account Limits
by the Mortgage Lending Industry" by the attorneys general of
California, Florida, Iowa, Massachusetts, Minnesota, New York and
Texas." He referred the committee members to the bar graph
depicted which illustrated the escalation in the account before
each payment. Representative Green questioned why passbook
interest could not be paid to the amount above the RESPA ceiling.
Number 0100
REPRESENTATIVE BUNDE replied that was his original idea.
However, the individual item analysis accounting method
calculated a two month cushion. The goal he reiterated was to
forbid the individual accounting method, require a collective two
month cushion, and mandate institutions to pay interest on
anything collected over the two month cushion. The consumer,
however, had no choice in the amount of money the bank required
for their mortgage payments to service the loan without interest.
He asserted, the question was how much was actually needed to
service the loan. He commented he would prefer to see the bank
charge a service fee and then pay interest.
Number 0163
REPRESENTATIVE GREEN said he knew of lending institutions that
paid interest on checking accounts without charging a service fee
and it did not appear to be an accounting nightmare as previous
testimony indicated. He suggested, the 1/4 to 1/2 percent
additional loan fee to cover the cost was inflated.
Representative Green further suggested there must be a method to
discourage the banks from collecting beyond the two month cushion
and perhaps charge a fraction of the amount of money they planned
to make on the excess. He cited, if the banks were making 10
percent and paying 3 percent on the excess they were still making
money as well as the customer.
Number 0215
REPRESENTATIVE BUNDE responded it was not a huge amount of money.
However, it was a forced participation as Chair James stated
earlier. He suggested the comfort level would increase if the
participants knew that only the amount of money necessary to
service the loan was being used. Representative Bunde further
said this was a highly competitive industry and when given the
chance to make money institutions would.
Number 0261
REPRESENTATIVE OGAN asked if Ms. Ward had any further comments.
Number 0282
MS. WARD said, due to possible liens on mortgages, taxes and
insurance, payments were necessary to protect the lender. Most
of the loans made in Alaska, she stated, were high ratio
requiring less than 10 percent down. Therefore, to protect the
lender the property was used as collateral.
Number 0319
CHAIR JAMES said she felt it was not an accounting nightmare if
passbook savings interest was paid on the balance in the escrow
account. She further alleged it was an advantage to the bank to
pay interest to help ensure there was sufficient money in the
account to pay the bills.
Number 0338
MS. WARD said that was true, except currently, the mortgage rates
were 7.5 to 8 percent and the majority of the interest rate went
to the investor and not the servicer.
Number 0366
CHAIR JAMES asked whether servicers, not banks, maintained
escrows in an interest bearing or a trust account.
Number 0382
MS. WARD replied it was held in an interest bearing account. She
further commented the servicer was working for the investor.
Number 0388
CHAIR JAMES said in this case the homeowner did not get any
benefit from the interest bearing account.
Number 0395
MS. WARD replied the impound account protected the loan and the
collateral according to the servicer. She cited she recently
received a refund from her impounded account.
Number 0412
CHAIR JAMES asked if there were any further questions or
comments.
REPRESENTATIVE BUNDE informed the committee members the statues
defined "bank" and "banking."
CHAIR JAMES also reported the term "bank" was defined broadly and
included all other financial institutions.
Number 0430
CHAIR JAMES said she would like to work closely with the sponsor
of HB 363 and address the interest dilemma. She proposed a
possible committee substitute was necessary.
Number 0461
REPRESENTATIVE BUNDE thanked the chair and quoted 3 percent as a
fair amount or tie it to a passbook savings interest.
Number 0472
CHAIR JAMES responded there were institutions that did not have
passbook savings.
Number 0480
REPRESENTATIVE BUNDE replied then an average of passbook savings
paid in Alaska was fair. He further reiterated Ms. Ward's
testimony that servicers made money on the interest in the escrow
accounts. He suggested there existed the potential to pad the
escrow and urged the committee members to require paying a
predetermined percentage on the entire account to prevent
dishonestly.
Number 0509
REPRESENTATIVE PORTER suggested the subcommittee address other
issues as well. He expressed he was not sure if a problem really
existed. He commented there was the unknown cost factor added to
the mortgage account based on the institution benefitting, but
the borrower benefited as well by not having to pay for the
services. Furthermore, the testimony today indicated the
services were required. Representative Porter, in conclusion,
stated, if we were to compensate the borrower for using the money
then we should also compensate the institution for the service.
He further said he was not comfortable passing a bill that could
potentially cost people money.
Number 0580
CHAIR JAMES disagreed with Representative Porter. She alleged
the institutions were providing a service for themselves and not
for the mortgage holder.
Number 0629
REPRESENTATIVE ROBINSON appreciated the consumer right aspect of
HB 363 but again questioned whether or not a bill was necessary.
She stated the committee should enforce the banks to comply with
the existing laws rather than produce another piece of
legislation.
Number 0670
CHAIR JAMES said the issues involved were putting money into an
interest bearing account and not getting a return and taking away
individual responsibility. Chair James expressed it was an
individual's responsibility to comply with the escrow laws. She
lastly asked for members who were interested in working on HB 363
further.
Number 0743
REPRESENTATIVE BUNDE replied to Representative Porter's previous
comment regarding the service fee. He said, the consumer was
paying a service fee now, however, they did not know how much.
CHAIR JAMES asked Ms. Ward if she would be available in the
future to answer further questions.
MS. WARD responded, "yes."
Number 0788
CHAIR JAMES excused Representative Ogan due to an Oil and Gas
Committee meeting.
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