If you’re a homeowner, chances are you’re required to pay certain yearly expenses, like your property taxes or your homeowner’s insurance, to your mortgage lender. You pay a little every month, and then once a year the lender pays the tax office or insurance company on your behalf.
But what happens to that money in the meantime? Is the lender earning interest on the money in the escrow account? Does the lender get to keep that interest?
Not in all states. In eleven states, your lender must pay you the interest on the escrow account:
But are mortgage lenders obeying these state laws? We’re investigating, and it looks like, with some lenders, the answer is no.
In some areas, the accounts are called impound accounts. Different states have different laws specifying the amount of interest that must be paid. It’s often around 2%, but the amounts can add up. If, over the course of a year, the average amount in your escrow account is $5,000, at 2% per year, that would be $100. On more expensive properties or those with higher property taxes, interest earnings can be even higher.
How do you know if you’re receiving interest payments from your lender? You may see them on your end-of-year mortgage statement, or your lender might send you a 1099-INT at tax time.
In a recent case in California, Bank of America tried to argue that the National Bank Act (NBA) pre-empted state laws and excused national banks from paying this interest. Although the trial court agreed, the appeals court disagreed. The US Court of Appeals for the Ninth Circuit found that the NBA would only pre-empt a state consumer financial law if the state law “prevents or significantly interferes with the exercise by the national bank of its powers” under the NBA. The state interest laws do not do this, so a significant hurdle has been crossed for consumers who have not been getting their interest payments.
We’re investigating to see if a class action is needed, but the first step is to find out if interest is being paid or not. If you live in a state that requires interest payments, check your end-of-year mortgage statement and look for any 1099-INT forms for previous tax years. If you still believe you have not been paid interest on your escrow account, fill out the form on this page and an attorney will contact you for a free consultation.