Despite court rulings, HUD continues to fight padded fees

Nation's Housing

October 12, 2003|By KENNETH HARNEY

Mortgage fee padders beware: You may think it's safe to charge unsuspecting homebuyers triple the true cost of their credit reports or other services. But a $370,000 settlement this month with a large national mortgage company suggests that the federal government takes a strikingly different view of such add-ons.

The settlement involved Allied Home Mortgage Capital Corp., a Houston company with more than 700 branch locations across the country. According to its settlement with the Department of Housing and Urban Development, Allied tacked extra fees onto mortgage customers' credit charges and pocketed the difference.

As part of the settlement, Allied admitted no wrongdoing, but agreed to pay $370,000 to the federal government and to cease the practice of "upcharging" on any mortgage services, credit-related or otherwise. It also agreed to refund any excess charges to consumers that turn up in audits of branch office files.

The company did not respond to a telephone request for additional comment on the case.

What is remarkable about the new settlement is that HUD's position on the illegality of markups has been rejected by three federal appellate courts covering 15 states.

Yet the department's top officials announced this month that they are continuing aggressive investigations or prosecutions of mortgage-fee markups in every region of the country, even in the 15 states where courts disagree. (Those states are Maryland, Virginia, North Carolina, South Carolina, West Virginia, Illinois, Wisconsin, Indiana, Minnesota, Missouri, Iowa, Arkansas, Nebraska, North Dakota and South Dakota.)

Speaking to several hundred mortgage executives, Federal Housing Commissioner John C. Weicher said that "tacking on additional costs to the consumer when there are no [additional] services involved is a violation of the law."

Attorneys who specialize in representing mortgage companies were puzzled by Allied's settlement. "Given the strong precedent in the [appellate] courts," said Phillip L. Schulman of the Washington law firm Kirkpatrick & Lockhart, "it comes as a surprise" that Allied didn't fight the government in court.

In the settlement document, Allied said it sought to "avoid further expenses and proceedings" and was therefore willing to accommodate the government.

The core legal issue boils down to this: The federal law governing home mortgage settlements prohibits charges "other than for services actually performed," but critics argue that it does not specifically address the practice of markups, where surcharges are not split between service providers.

Federal investigators say markups are frequently added by lenders to third-party services such as appraisals, courier fees and credit reports. Title insurance companies have admitted marking up even county courthouse recording fees.

Department of Justice lawyers say the legal fight over these practices might have to be resolved by the Supreme Court or by Congress.

The broader questions about markups get to the integrity of homebuying and mortgage settlements. Can consumers believe that hundreds or thousands of dollars of fees are for actual services rendered?

Or are they part real and part undisclosed extra revenue for the mortgage company, the title or escrow agency, or the attorney orchestrating the settlement?

The costs of buying a home can be staggering in itself. Should undisclosed add-ons push the bill even higher?

The answer from the federal government to the real estate finance and settlement industries this month was blunt: Cut costs for consumers; don't lard them on.

That way more people will be able to afford to buy houses.

Ken Harney's e-mail address is

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