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Escrow lawsuit is close to settlement

Consumers who've taken out home mortgages with major lenders could be the surprise beneficiaries of lawsuit settlement negotiations now under way over alleged escrow account abuses. Total refunds to homeowners could reach into the tens of millions of dollars nationwide, according to legal experts familiar with the cases.

One major mortgage banker has already agreed to pay back portions of escrow charges to 300,000 borrowers and revise its home loan escrow practices. Other firms, including industry giants like General Motors' GMAC Mortgage Corp., reportedly are close to negotiated settlements as well.

Ironically, large numbers of loan customers who stand to receive settlement awards are unaware that they're even potentially affected by class-action lawsuits, filed in distant cities.

Escrow accounts are required by the majority of American home lenders to ensure timely payment of property taxes, insurance bills and other periodic charges.

Pro-rata amounts to handle the escrowed items are added to the basic principal and interest charges due each month from borrowers.

Consumer plaintiffs in at least three dozen escrow lawsuits filed in the past year charge that lenders routinely have demanded excessive payments from borrowers to fund their escrow accounts.

A national study by six state attorneys general concluded that 70 percent of existing home mortgage escrows violate federal law, and that more than $3-billion worth of consumers' funds are held illegally by lenders.

The lending industry has disputed that claim vehemently. Firms targeted in class-action suits also deny the overcharge allegations, but some have begun seeking out-of-court settlements to end the controversy without the huge legal costs of trials.

Charles S. Zimmerman, a Minneapolis-based lawyer whose firm has filed a series of 30 class-action suits against the country's largest mortgage firms since January, said in an interview May 23 that GMAC Mortgage Corp. and his clients "are now close to an agreement in principle" to settle the case. He said he is also negotiating with Citicorp and three other firms that he declined to identify.

A spokesman for GMAC Mortgage said he could not discuss any of the firm's ongoing escrow litigation.

GMAC Mortgage, with 400,000 home loans in its portfolio nationwide, has been a high-profile target of the escrow account reform movement. Last December, it was sued by six state attorneys general for alleged escrow overcharges.

At the time the class action was filed a spokesman for the attorneys general said that GMAC Mortgage's escrow practices were essentially similar to those of other industry leaders, including Citibank, Fleet Mortgage Corp. and Lomas Financial Group.

The GMAC suit, said New York Attorney General Robert Abrams, was intended to force "the entire (home loan) industry to change its practices," not simply GMAC. In an interview May 24, Abrams said he could not discuss the settlement negotiations that have been under way with GMAC.

He did say, however, that "any agreement will have to involve repayments" to consumers who have paid excess monies into escrow accounts.

The net impact of settlements with large firms each with hundreds of thousands of mortgage borrowers "would be very positive for consumers," said Minneapolis attorney Zimmerman.

The framework for the agreements he's pursuing, Zimmerman said, includes these five points:

Mortgage lenders must advise borrowers that there may have been overcharges in escrow account balances, and that a specific refund formula has been worked out as part of the settlement.

Lenders must change their servicing and accounting systems to ensure that mortgage escrow imbalances do not occur in the future.

Plaintiffs in the suits will agree to drop demands for fines or other penalties against the lenders.

Lenders may assert that they engaged in no wrongdoing.

Reasonable lawyers' fees for the plaintiffs' counsel must be paid by the mortgage firms.

What may be the industry model for such settlements is currently being put into action by California-based Bowest Corp., a large mortgage banker servicing more than 200,000 mortgages.

Under an agreement to settle a class-action filed in Chicago, Bowest is now contacting 300,000 borrowers _ including approximately 100,000 former mortgage customers _ to advise them of their eligibility for monetary awards as "class" members touched by the suit.

Though Bowest admitted to no wrongdoing regarding its escrow practices, it is now offering to deposit into all existing loan customers' accounts funds equal to 5{ percent of the escrow overage as of a specific date.

For the 100,000 customers whose loans were paid off during the period covered by the settlement, Bowest has agreed to send refunds equal to 5{ percent of the escrow balance that existed at the date of the loan payoff.

George Dougherty, a Chicago attorney who negotiated Bowest's settlement, said the 300,000 customers should receive their individual settlements "in the coming months."

Bowest has no precise dollar estimate of what they settlement will cost it, Dougherty said, but "clearly it's substantial."

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