Padding of closing fees varies by state

Nation's Housing

February 27, 2005|By KENNETH HARNEY

IT'S A white-hot legal issue within the home real estate field, but for consumers it basically boils down to this: Should you as a homebuyer or refinancer ever be charged $450 for an appraisal that cost your lender $175?

Should you ever pay $45 for a credit check that cost the lender less than $10, or be asked to fork over $65 for Federal Express document shipments that actually cost $18?

After a new move by a major mortgage lender, those questions will continue to generate diametrically opposite answers for consumers around the country, depending on where they live.

For example, if you are buying or refinancing a house in Maryland, Virginia or the Carolinas, a lender or title agency can mark up your loan charges without limit, surprise you at the closing with padded junk fees, and not violate federal law.

But if you are buying property in New York or Connecticut, federal law prohibits markups unless the lender or settlement company can demonstrate that it performed additional services to justify the higher charge.

That sharp divergence in the interpretation of federal law is the result of conflicting federal appellate court decisions about markups, which can add hundreds of dollars of extra costs to a home purchase.

Late last year, the issue appeared to be headed for final resolution by the Supreme Court after an appellate court in New York ruled against giant Wells Fargo Mortgage Corp. in a class action case.

But Wells Fargo has decided not to appeal to the highest court and intends instead to fight the plaintiffs at the District Court level. A spokesman, Alejandro Hernandez, declined to discuss why the company chose not to seek a nationwide resolution.

The plaintiffs in the New York case, homeowners from Brooklyn, alleged that Wells Fargo, one of the country's highest-volume lenders, routinely marked up fees to its customers without adding extra services to justify the surcharges.

For instance, according to the suit, Wells Fargo contracted for loan origination documents from outside vendors that cost the company $20 to $50, then charged the borrowers $150 to $300 at settlements.

The plaintiffs also alleged that Wells Fargo marked up "automated underwriting" fees imposed by mortgage investors Fannie Mae and Freddie Mac. Rather than simply passing along Fannie's or Freddie's $20 underwriting fees, according to the suit, Wells Fargo charged borrowers up to $300 for underwriting.

Wells Fargo denied all the allegations, and won a favorable decision on its interpretation of the underlying federal law governing markups from a federal District Court in New York. The homeowners then took the case to 2nd U.S. Circuit Court of Appeals, which overturned the lower court decision and opened the door to an appeal to the Supreme Court.

Legal experts felt the court would be highly likely to accept the case, given the disagreements among the various appellate courts. But now, with Wells Fargo's tactical decision not to appeal, the issue could remain unresolved indefinitely.

Here's the current lineup of the federal appellate courts on markups, and where that leaves you as a consumer: If the property you are buying or refinancing is located within the 4th, 7th, or 8th appellate circuits, lenders and other settlement service providers are free to mark up your fees with no fear of federal constraints.

The states within those circuits include these 15: Maryland, Virginia, North and South Carolina, West Virginia, Illinois, Iowa, Wisconsin, Indiana, Minnesota, Missouri, Arkansas, Nebraska and North and South Dakota. There may be state consumer protection statutes that protect you against fee-gouging or deceptive marketing practices, but no federal law.

If you are buying or refinancing in the 11th or 2nd circuits, lenders and other service providers are prohibited from markups that are not accompanied by additional services. The states within those circuits are Florida, Georgia, Alabama, New York, Connecticut and Vermont.

What if you are buying or refinancing a house in any of the states not yet covered by an appellate court decision? The Bush administration, which has mounted a nationwide fight against markups through the Departments of Justice and Housing and Urban Development for the past three years, believes that in all those states, markups without additional services violate federal law.

Lenders, title companies and other settlement services groups passionately disagree. Ultimately either Congress or the Supreme Court is going to have to weigh in on the issue. But don't hold your breath. Instead, ask about fees up front when you shop for a mortgage. If you spot suspiciously bloated items later on your settlement sheet, challenge them.

In most parts of the country, you may well have federal law on your side.

Harney's e-mail address is

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