Maryland case tests legality of markups in closing fees

Nation's Housing

April 14, 2002|By KENNETH HARNEY

A MAJOR real estate issue argued last week before a federal appellate court boils down to this: Is it OK for homebuyers to be overcharged on settlement costs by a single company, but illegal to be ripped off by two?

That may sound preposterous, but it was the core question before the 4th U.S. Circuit Court of Appeals in Richmond, Va. The case has huge potential significance for homebuyers and mortgage borrowers nationwide.

It pits consumers and the Bush administration against key elements of the title insurance, mortgage and real estate brokerage industries.

And strange as it sounds, the appeals court's decision, which is expected sometime in the next several months, may well go against consumers.

Here's the story: Maryland homeowner Tyna L. Boulware took out a mortgage last year from Crossland Mortgage Corp. As part of her settlement, Crossland billed Boulware $65 for a credit report.

Boulware disputed the $65, charging that Crossland actually paid its credit information vendor $15 or less. The $50 excess, Boulware said, represented an illegal settlement-cost markup, prohibited by long-standing federal rules.

Crossland never denied the markup in court. But the company's lawyers convinced a federal District Court in Maryland that markups by lenders, title companies and others are not prohibited by federal law, as long as they are not split with another party.

They cited a federal appellate court decision in Chicago last summer that permitted a unilateral markup of title recordation fees by Chicago Title & Trust Co. Under the theory of that decision, a lender or settlement company can mark up whatever fees it chooses without limit, as long as it is not splitting the overcharge with anyone else.

U.S. backs suit

The issue caught the attention of the Justice Department two months ago. It weighed into the Boulware case with a friend-of-the-court brief arguing that federal law does indeed prohibit unearned real estate settlement charges.

Moreover, stated the Justice Department, courts are required to show due deference to the interpretations of federal agencies empowered by Congress to oversee federal laws.

In the case of the real estate settlement law, that agency is the Department of Housing and Urban Development - the federal housing department.

And HUD consistently has ruled that the Real Estate Settlement Procedures Act prohibits unearned fees, including markups of vendor fees where no additional services are performed.

In practical terms, this means your lender or settlement company is not supposed to charge you $400 for an appraisal that actually cost $250, nor charge you $65 for courier fees that actually cost $18. Ditto for the commonplace practice of marking up credit report charges.

The problem with HUD's staunchly pro-consumer position, however, is that it hasn't been very persuasive to federal courts.

The 1974 settlement procedures law may have been intended to protect consumers against settlement-cost ripoffs, say HUD's critics, but its language does not expressly prohibit markups of fees by single settlement-service providers.

Instead, it says that "no person shall give and no person shall accept any portion, split or percentage of any charge made or received for the rendering of a real estate settlement service ... other than for services rendered."

Lawyers for Crossland Mortgage argue that if Congress wanted to bar markups of settlement charges, it would have said so explicitly in the law.

Instead, the language it employed targets situations where companies are involved in "splits" or "percentage-sharing" of markups - for example, the title agency takes 50 percent of an overcharge and a cooperating lender takes 50 percent.

Needs explicit language

Absent explicit language prohibiting markups by single companies - as in the alleged Crossland credit report markup - HUD exceeded its legal authority when it banned them outright, say industry critics.

They also argue that the agency has embarked on an even more sinister course - price regulation of real estate settlement services, a power Congress expressly rejected when crafting the settlement law.

Counsel representing Boulware flatly rejected the price-regulation argument.

Attorney James E. Felman of Tampa, Fla., told the appellate court that "the only price we want to regulate is the price of doing nothing" - that is, marking up credit reports with no additional services rendered. "The price of doing nothing should be nothing," Felman said.

Industry critics of HUD's pro-consumer position already have convinced two federal courts that the law doesn't empower the agency to prohibit non-split markups - even for doing nothing.

Tough questioning of the government's position by the judges in Richmond last week suggested that their decision could well tilt in the industry's favor again.

Which could throw the issue to the U.S. Supreme Court or back to Congress to answer the essential question: Should settlement cost overcharges of any type - split or not - be legal?

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

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