U.S. joins fray over markup of buyers' fees at settlement

Nation's housing

March 17, 2002|By KENNETH HARNEY

WITH A MAJOR new legal move by the U.S. Department of Justice, the Bush administration has weighed into the simmering controversy over widespread markups of homebuyers' settlement fees.

In a friend-of-the-court brief filed on behalf of a Maryland mortgage borrower, the administration left no doubt about federal policy: Lenders break the law, said the Justice Department, whenever they tack extra fees onto credit reports, appraisals, messenger charges and other settlement items without performing additional services to justify the extra cost to the consumer.

In other words, a lender cannot pay an appraiser $175 and charge you $300 at settlement without some additional service. A lender, title or escrow company cannot pay a messenger $26 to courier your mortgage documents and charge you $67 with no additional services. If it does so, it opens itself to federal prosecution, $10,000-per-violation fines, treble-damage court awards and even jail time.

The department's brief, filed in the case of Boulware vs. Crossland Mortgage Corp., marks the federal government's first direct intervention in litigation over settlement-cost markups. It also signals an aggressive effort to push the issue to the U.S. Supreme Court for final resolution. The Boulware case is scheduled for hearing early in April in the 4th U.S. Circuit Court of Appeals in Richmond, Va.

Plaintiff Tyna L. Boulware filed suit after being charged $65 for a credit report that she alleges cost her lender, Crossland Mortgage Corp., no more than $15. That markup, Boulware argued, violated the Department of Housing and Urban Development's long-standing prohibition against markups of any settlement fee when no additional goods, services or facilities are rendered.

Crossland persuaded a federal district court to dismiss the case. Boulware appealed, and the Justice Department intervened with its unexpected friend-of-the-court brief.

HUD's pro-consumer position on fees was rejected last summer by the 7th U.S. Circuit Court of Appeals in Echevarria vs. Chicago Title and Trust Co. In that case, a title company had marked up recordation fees charged to home mortgage borrowers. The appellate court ruled that because the title company was not splitting the markup with any other party, it did not violate federal law. The Maryland district court rejected the Boulware complaint based on the precedent set in the Echevarria case.

The logical conclusion of both courts' decisions, say federal legal experts, is that a lender or title company could mark up consumer's fees without limit. In the Boulware case, the alleged credit report markup was more than 300 percent. Credit industry leaders say 20 percent of mortgage applicants or fewer require full-blown, manually checked credit reports that cost $45 to $80 to complete.

Most other applicants' credit can be checked quickly and cheaply through "in-file" electronic downloads of information from the three giant credit repositories, Equifax, Experian and Trans Union. Those in-files can cost as little as $3 or $4 each. High-volume users of credit in-files pay even less, less than $1 in some cases.

Consumers generally have no idea of the true costs of settlement services such as credit, appraisals, loan documents, couriers and recordations, and frequently are charged marked-up amounts on their HUD-1 settlement sheets. Given the prohibition under federal law of markups without additional services, federal legal sources say, the government feels industry practices need to be challenged.

The strategy of intervening in the Boulware case carries risk.

If the appellate court in Richmond rules against Boulware, the government will have two federal court circuits lined up against it on settlement-cost markups. Other courts would be likely to cite those decisions as precedents, and consumers could lose in markup cases across the country. Then the only remedy, if the Bush administration chose to pursue it, would be to ask Congress to strengthen the law.

The central issue is whether federal law is sufficiently explicit on fee markups. The law says that "no person" may receive "any portion, split or percentage of any charge ... other than for services actually performed." It does not say, however, explicitly that settlement companies may not mark up credit reports or other fees.

HUD consistently has looked to the law's consumer-protection purposes and concluded that "any portion, split or percentage" includes all unearned markups.

The best course of action for consumers is to challenge - or at least ask about - fees for services that look inflated on settlement documents. A minority of credit report charges this year should total $65 or more. You have the right to challenge unearned markups in federal court, which should give lenders and title companies pause before imposing them.

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. Or e-mail him at kenharney@aol.com.

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