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.