$1.5 Billion to Be Returned to Home Buyers : Mortgage: HUD’s new rules will lower the cushion that escrow accounts are used to pay.

WASHINGTON — Millions of Americans who have been required to pay too much into their home loan escrow accounts will receive credits or refunds under new rules to be announced today by the Department of Housing and Urban Development.

Overall, about $1.5 billion will be returned to consumers, HUD said. The agency also estimates that the new rules will save future home buyers about $477 million a year in closing costs.

Lenders usually require homeowners to make monthly payments into escrow accounts to pay borrowers’ property taxes, insurance premiums and other recurring expenses. In 1992, HUD performed a study that showed that 18% of the 31 million mortgages with escrow accounts would have held too much money under the new rules.

A regulation passed in 1976 limits monthly escrow charges to 1/12th of recurring expenses that are “reasonably anticipated” to be due over the next year. In addition to this amount, lenders are entitled to hold up to two months’ worth of the estimated expenses over the next year as a cushion.

Currently, about 90% of lenders hold a two-month cushion for each expense that escrow accounts are used to pay. Calculating the required cushion on an item-by-item basis usually results in too much money being held in escrow because insurance, taxes and other recurring expenses are paid out at different times of the year, HUD officials say. Mortgage servicers have an incentive to hold too much money in escrow accounts because they get to keep the interest earned on the balances.

“Attorneys general of a number of states have studied the issue and have claimed that single-item analysis has resulted in substantial over-escrowing of consumers’ money,” HUD said when the rule was proposed last December.

In response to pressure from state attorneys general, two mortgage servicing companies agreed to settle a $100-million to $150-million refund obligation.

HUD’s new rules require lenders to calculate the two-month cushion amount by aggregating all of the individual items that escrow accounts are used to pay. By considering what is available in the account as a whole, the required cushion usually will be lower than it would be with single-item analysis.

Lenders will be allowed six months to change their escrow procedures on newly originated loans, and up to three years to change their accounting on old loans, HUD said. Many lenders are expected to make the switch in less than three years for loans now on their books because of the expense of using two different accounting systems.

Consumers will also receive more disclosure about their escrow accounts soon after the rule is published, HUD officials say.