Beware of inflated costs at settlement

Nation's housing

April 22, 2001|By KENNETH HARNEY

WHEN YOU took out your new mortgage or refinanced, did you ask why the fee for your credit report on the settlement sheet was $55 or $60? And did you ask what type of appraisal was conducted to justify the $300 or $400 you were charged?

If you're like most mortgage borrowers, you probably didn't ask any detailed questions about settlement costs like these. Given the blur of paperwork, you may not have paid attention to them.

From now on, you need to. That's because credit and mortgage industry experts warn that technological advances have sharply reduced the costs of credit and appraisal services, and that consumers frequently are charged outdated - and inflated - fees on their settlement sheets.

Those inflated fees violate federal law, but rarely are flagged by regulators.

"It's an open secret," said one mortgage credit industry official. "You mark up [credit reports] to $57.75 or $60 or whatever. Nobody's going to challenge you." One major mortgage company, according to an industry source who requested anonymity, even gave an award at December's employee Christmas party to the loan officer who originated the largest number of $60 bills to customers for credit reports that cost the company just $15 or less. The difference was pure profit for the firm.

The cost of credit bureau information to lenders has plunged sharply in the past six years - far more than most consumers realize. The cost of the predominant type of credit report now used by lenders - an electronic "infile" - is about $2.50. An infile is a quick drawdown of all the relevant information about a consumer on file at one of the three giant credit repositories - Equifax, Experian or Trans Union.

A single-repository infile for a married couple might cost the lender only $5. A "triple-merged" infile for the couple sorting out everything on file at all three repositories might go for $15. The highest-volume commercial users of credit information get their data even more cheaply - 60 cents or less per infile.

Overcharges common

As recently as the mid-1990s, by contrast, credit report costs to mortgage companies often were $45 to $55 and involved hands-on fact-checking by local credit bureau personnel. That traditional form of credit check was used for 90 percent to 100 percent of all mortgage applications.

But today, according to credit industry estimates, barely 15 percent of new mortgage applications require anything beyond a merged infile. Yet many consumers are being charged for the full report.

"Unfortunately, it is quite common," says Terry Clemans, executive director of the National Credit Reporting Association, a trade group representing independent credit bureaus who provide credit information to lenders across the country. "You see the settlement sheet and it says $60 or $55, but the actual cost was $15."

That markup, absent any additional work by the lender, is illegal. The Department of Housing and Urban Development said so 16 months ago in a case involving Washington Mutual Bank. HUD told a federal court that where lenders "charge consumers marked-up prices [for credit reports or other services] ... without performing any additional services," they are breaking the law.

Lawyers representing mortgage lenders say they are aware of the markup practices and strongly advise against them.

`Naked upcharge'

"It's called a `naked upcharge,'" says Grant Mitchell, a Washington lawyer and former top HUD expert on real estate settlement practices. "The rule is, if it costs you a dollar, you charge [the borrower] a dollar."

How can you find out whether you're being "upcharged"? Lenders themselves will tell you: Ask.

"I always tell my clients what I paid for what, so there's no question," said Paul E. Skeens of Carteret Mortgage Corp. in Fort Washington. Randall suggests that consumers ask to see the bill for the credit report if they have doubts. After all, he says, "it's supposed to be there in the files" for auditors anyway, so lenders shouldn't object."

Bottom line: Don't end up as one of the price-gouged victims of the guy at the Christmas party, paying $60 without a peep for something the law says should be priced at $15.

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

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