HUD loses 3rd round in fight to limit `junk' settlement fees

Nation's Housing

February 02, 2003|By KENNETH HARNEY

A NEW federal court decision could lead to higher mortgage settlement charges, "junk fees" and closing-cost markups for homebuyers and refinancers across the country.

Though the decision technically affects only seven Midwestern states, it follows on the heels of two consecutive, similar appellate court decisions covering consumers in eight other states.

In all 15 states, mortgage borrowers no longer have the federal legal protections against limitless markups of settlement fees that they once enjoyed. Equally important, the new decision removes the likelihood of pro-consumer appeals to the Supreme Court for relief.

Here's what happened and what it could mean to you, wherever you live. On Jan. 23, the 8th U.S. Circuit Court of Appeals rebuffed attempts by the Department of Housing and Urban Development to ban markups of settlement fees. Under the court's ruling, HUD no longer can prohibit lenders, title companies, mortgage brokers, escrow companies and other settlement-service providers from charging consumers, for example:

A credit check for $65 that actually cost $9.

A full appraisal for $350 that in reality was part electronic, part drive-by and cost the lender less than $50.

Courier services for $55 that cost just $15.

A long list of other markups that can add hundreds of dollars onto the final bills buyers and refinancers are asked to pay at settlement.

HUD, which has regulatory authority over mortgage settlements nationwide, long has prohibited fee-padding, and recently has forced prominent mortgage lenders to stop marking up costs charged to their customers.

In the case decided Jan. 23, Missouri homeowners claimed to have been illegally overcharged on their credit, appraisal and document-delivery fees by Bank of America. A U.S. District Court agreed, and the case went to the appellate court.

That court reversed the lower court and threw out government lawyers' arguments. HUD has no statutory authority to ban markups under existing law, said the court. It ruled that federal law bans "kickbacks," but does not specifically ban surcharges that are not split with a third party.

The decision directly affects consumers in Minnesota, Missouri, Iowa, Arkansas, Nebraska, and the Dakotas. The two earlier decisions covered homebuyers in Maryland, Virginia, North and South Carolina, West Virginia, Illinois, Wisconsin and Indiana.

The Justice Department, which had filed a friend-of-the-court brief in the latest case on behalf of the Bush administration, lost what may have been its best - and last - shot at reversing the tide of federal appellate decisions sanctioning markups.

The National Association of Consumer Advocates also filed a brief in support of HUD and the homebuyers.

"That should be the last nail in the coffin" for the government's position, said Phillip L. Schulman, the Washington attorney who represents mortgage and title companies and who has strongly opposed HUD efforts to ban markups.

Another Washington lawyer deeply involved in the issue, Sheldon Hochberg, said the decision reaffirmed that a federal agency "cannot go beyond what Congress adopted," even if the cause may appear to be in the interest of consumers.

Hochberg added that the government's zero-for-three record opposing markups should discourage it from challenging lenders and title agencies anywhere else in the country over the issue.

HUD officials had no immediate comment on the decision, nor did officials at the Justice Department.

Where does this leave you as a mortgage borrower? In the 15 states covered by the three appellate court decisions, you currently have no federal legal protections in force against unlimited markups of fees.

Absent an unlikely U.S. Supreme Court decision or congressional legislation to the contrary, markups are legal in those states because federal appellate court decisions represent the law of the land.

In other states, the presumption must be that HUD's ban against markups remains in effect. But HUD may be in a Wizard of Oz position here: It can speak with a booming voice warning lenders to avoid markups, but can it enforce its rules in the courts?

That is questionable, given the strikeout record thus far.

Consumers may not be without legal remedies, however. Many states have laws covering unfair trade practices, fraud and settlement services. Large, intentional last-minute markups of settlement fees may well be illegal under your state laws.

Finally, at the federal level the likelihood now is that Congress will be asked to explicitly prohibit or limit markups. But as always with Congress: Don't bet on it.

Ken Harney's e-mail address is

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