The D.C. Court of Appeals yesterday rejected portions of a District law that enabled homeowners to avoid monthly payments for taxes and homeowners insurance required by some savings and loans as part of their mortgage loans.

The decision, which is considered a setback for consumers, will allow District S&Ls to require a borrower to make monthly escrow payments beyond the normal interest payments required on a mortgage. Federal regulations let S&Ls require such payments, and the court said these rules preempt D.C. law.

Lenders often require such escrow payments to make sure money is on hand when taxes and insurance premiums are due.

Under consumer protection provisions of D.C. law, any borrower who has made a down payment equaling 20 percent or more of the total purchase price of the property does not have to make such payments, and he can pay for the taxes and insurance himself.

Real estate lawyers said the spirit of the law is that a lender can cover any missed taxes or defaults on the insurance by foreclosing on the property. Meanwhile, the borrower, rather than the lender, can earn interest on the money that would have gone into the escrow account.

Two Washington borrowers sued Standard Federal Savings and Loan Association for violating the D.C. law after they borrowed $108,000 to buy a house in 1981.

That was less than 80 percent of the purchase price, but the Gaithersburg-based association still required the borrowers to make monthly payments of real estate taxes and insurance into a non-interest-bearing escrow account.

After a hearing, a Superior Court judge dismissed the lawsuit, and yesterday a three-judge panel of the D.C. Court of Appeals upheld his decision.

The judges cited rules adopted by the Federal Home Loan Bank Board, the regulator of the savings and loan industry, which permit associations to require advance payments. They said these rules preempt the District consumer protection statute.

"The bank board's regulations reflect the agency's view of the 'best practices' of federal savings and loan associations," the judges wrote.

They added that, by prohibiting escrow accounts under certain circumstances, D.C. law "deprives federal savings and loan associations in the District of an option that the bank board considers one of the 'best practices' for the 'full protection' of an association's interest."

Richard B. Nettler, who had argued the case for the D.C. corporation counsel, said that most area S&Ls currently offer borrowers who put up enough money the option of putting funds in the escrow account or paying the insurance premium and taxes on their own.

But as a result of this decision, savings and loan associations are likely to rethink this policy, he added.

"I think that, given the option, the banks would rather keep the money," said Nettler, who is now in private practice. "This gives the banks some money to play with and also may give them a greater sense of security," he said.

He pointed out that the ruling applies only to federally insured savings and loans. Mortgage bankers, who originate a large proportion of loans, are unregulated at the federal level and thus must obey the District law.

Standard Federal officials declined to comment on the case.