Class-action suits focus on lenders' 'junk charges'


August 21, 1994|By Kenneth R. Harney

Washington -- They're called "garbage fees" and "junk charges" inside the mortgage industry, and they're the focus of a fast-moving wave of class-action suits on behalf of homebuyers and refinancers.

They've also triggered demands that the federal government toughen up "truth-in-lending" rules to protect borrowers nationwide from being hit with unexpected, undisclosed fees at settlement.

As a consumer, you ought to know about them, so here's a quick overview.

Earlier this month, the Federal Reserve Board was asked to draw up regulations that would effectively ban the imposition of last-minute junk charges in home mortgage transactions. What are these fees? In the words of Chicago attorney Daniel A. Edelman, they carry a wide range of creative terminology on settlement sheets, including "underwriting" fees, loan disbursement charges, tax service fees, amortization schedule charges, truth-in-lending disclosure preparation fees, processing fees, loan assignment fees, flood plain determination fees, document transportation or courier fees, to name just a handful.

Their common thread, says Edelman, is that they should be included in the federally mandated "finance charge" computation provided to borrowers three days after application, but in fact are not disclosed until settlement. The finance charge covers all the interest and other attendant costs or fees that are necessary to obtain the loan.

Edelman, whose firm has filed several class-action suits against mortgage lenders in the Midwest and South, says the use of junk charges has grown sharply in recent years so that some lenders "can appear to offer more competitive [annual percentage] rates [or APRs]" to potential applicants by not disclosing all the fees they plan to charge at closing. One side effect of this practice, Edelman says, is "to shift overhead costs [some real, some fictitious] onto borrowers."

Even though certain of the fees seem relatively small -- typically ranging from $30 to $250 -- they can amount to substantial aggregate sums on the annual bottom line for lending institutions. Whatever the dollar size of the garbage charges, Edelman argues, "they violate federal law." Under the Truth-in-Lending Act, they are supposed to be included in the "finance charge" advance disclosure.

Recent court decisions around the country appear to lend support to Edelman's position. According to a memorandum sent to clients by Brownstein Zeidman and Lore, a Washington law firm that represents large numbers of banks and mortgage companies, a federal appeals court ruling in a Florida case this spring held that courier charges and a state "intangibles tax" are indeed "finance charges" under the Truth-in-Lending Act when they're passed on to borrowers at settlement. The memorandum urged clients to "review carefully [your Truth-in-Lending] compliance procedures, forms and closing instruments to ensure . . that [your] charges are properly characterized."

Elsewhere, a federal court decision this year in Maryland cited by Edelman held that a $290 "origination fee" that was excluded from the finance charge violated the Truth-in-Lending Act.

What's the bottom line of all this for you? Be aware that garbage fee practices exist and may in some cases constitute violations of federal law. Ask your lender at application what fees typically are included in the finance charge computation, and what fees may be charged separately at closing. Bear in mind that any or all of them may be legitimate, but if any appears to be junk or padding, you're free to challenge the lender or take your business elsewhere. If you feel that you -- or perhaps other local borrowers -- have been victimized by junk fees in the past couple of years, consult an attorney for specific guidance.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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