`Markups' ruling a victory for reform

Nation's Housing

September 26, 2004|By KENNETH HARNEY

IN A MAJOR victory for proponents of real estate settlement cost reform, a federal appellate court has ruled that "marking up" mortgage fees - charging homebuyers hundreds of dollars for services or documents that cost the lender less than $50, for example - violates federal law if the lender performs no additional services that justify the increased charge.

The decision by the 2nd U.S. Circuit Court of Appeals in New York opens the way to possible Supreme Court consideration of the settlement fee markup issue. Three other appellate courts have sanctioned the widespread practice of marking up fees, arguing that federal law is ambiguous on the subject.

Markups of credit report fees, appraisals, title work, document preparation, flood zone certifications and underwriting fees can be significant revenue sources for some mortgage lenders and settlement agents, but they can add substantially to the cost of buying a house or refinancing a mortgage.

The U.S. Department of Housing and Urban Development and Justice Department have fought markups aggressively for three years but have had rough going in federal courts. Now they've got a solid win under their belts.

The New York ruling involves a class action lawsuit filed by homebuyers against Wells Fargo Home Mortgage Corp. The suit alleged that Wells, one of the country's highest-volume lenders, routinely marked up fees charged to its customers without adding any valuable services of its own.

According to the complaint, Wells Fargo contracted for loan-origination documents from third-party vendors that cost the company $20 to $50. Wells then allegedly charged borrowers "flat fees of between $150 and $300" for the same documents, a markup clearly prohibited by federal law, according to the plaintiffs.

In a potentially farther-reaching charge, the suit challenged Wells Fargo's alleged markups of Fannie Mae and Freddie Mac automated underwriting fees. When lenders take home loan applications, they frequently run the applicants' credit and property information through Fannie's or Freddie's electronic underwriting systems online. The systems render quick, low-cost underwriting decisions indicating whether, and on what terms, Fannie or Freddie might purchase the applicants' mortgages.

The online systems, which evaluate millions of loan applications a month, cost lenders trivial amounts, typically about $20 per application. Yet many lenders charge borrowers substantially more at settlement for "underwriting," often $250 or $300. In their class action, the buyers alleged that Wells Fargo's charges of up to $300 for underwriting constituted an unlawful markup of the $20 Fannie or Freddie fees.

Wells Fargo denied the allegations in its response, noting in a statement to this reporter Sept. 17 that the decision by the appellate court "does not in any way address the specific claims of the plaintiffs" but instead sent the case back to a lower court for reconsideration.

A Wells Fargo spokesman said the company has not decided whether to appeal directly to the U.S. Supreme Court, given the sharp differences in conclusions reached by other appellate courts.

Lenders, title agencies and other settlement service providers in 15 states are free to mark up fees charged to homebuyers without limit as the result of three federal appellate court decisions. Those states are Maryland, Virginia, North and South Carolina, West Virginia, Illinois, Wisconsin, Indiana, Minnesota, Missouri, Iowa, Arkansas, Nebraska and the Dakotas.

In the states covered by the 2nd Circuit decision - New York, Connecticut and Vermont - lenders and settlement service providers are prohibited from marking up fees without providing additional services. In the rest of the states, federal housing officials say closing cost markups are illegal, but lenders and title industry lawyers argue that that's not necessarily the case without a Supreme Court ruling.

Where does that leave you as a homebuyer or refinancer who'd prefer to pay as little as possible at settlement and avoid junk fees and padded charges?

For the time being, if you are buying or refinancing in any of the 15 states where appellate courts have sanctioned markups, you have no protection from federal law, though you may have recourse under state law. Check with your state attorney general's office if you suspect you are a victim.

In the three states covered by the 2nd Circuit ruling, you can challenge settlement cost markups and expect success in federal court if you can demonstrate that no additional services were rendered to justify the extra fees.

Everywhere else, consumers are left twisting in the wind until a federal appellate court for their area hands down a ruling, or the Supreme Court ends this long-running legal battle with a final decision covering all 50 states.

Ken Harney's e-mail address is kenharney@earthlink.net.

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