`Busy year' for HUD probing suspect fees

Nation's Housing

April 03, 2005|By KENNETH HARNEY

FEDERAL investigators are taking hard looks at real estate closings nationwide and are turning up practices that might disturb you as a homebuyer.

In settlements announced March 21, regulators broke up what they alleged to be a sophisticated kickback scheme in which realty agents, homebuilders and title and escrow executives shared portions of consumers' closing fees illegally.

According to the Department of Housing and Urban Development, realty agents in Tulsa, Okla., created a shell corporation that then bought a part interest in a local title insurance and escrow agency at a below-market price. A group of builders created a separate corporation that allegedly did the same.

The agents and builders sent their clients' title and settlement work to the title agencies in which they had interests. Those agencies then recycled portions of the title and settlement fees to individual agents and builders, based on the amount of business they referred. In some cases, according to the agreement, the title agencies also illegally marked up consumers' fees -- charging homebuyers more for certain services than the actual cost.

The participants admitted no wrongdoing, but agreed to pay nearly $500,000 to the government to close the case.

Are kickback and referral fee schemes like this unusual? Not unusual enough, in the view of federal regulators such as Ivy Jackson, who heads the government's real estate settlement oversight unit at HUD. Jackson's investigators receive information on hundreds of alleged kickback schemes every year, and have probes or negotiations under way on more than 60 cases. He says more agreements "are on the way -- we are anticipating a busy year."

A central thread running through many of the kickback arrangements that HUD investigates is title insurance. Though most consumers are unaware of it, a substantial portion of the title premium they pay at closing does not go to the national insurance company underwriting the title policy. Frequently, 80 percent or more goes to the local title agent or lawyer who ordered the policy and may well be running the closing.

If you paid title charges of $1,500, for example, just $300 of that amount might be going to pay for the actual insurance policy; $1,200 might be going to the closing or title agent. When a title agent kicks back a portion of the premium to realty agents or loan officers solely for referring your business, that violates federal law.

Other problems HUD's settlement police are turning up in investigations around the country, according to Jackson:

Nondisclosure of settlement costs. Federal law requires a settlement agent to provide a copy of the home purchaser's settlement sheet -- a form known as the HUD-1 -- one business day in advance of the closing, if requested to do so by the purchaser. While some closing agents routinely deliver the HUD-1 in advance, others fail to provide it even when asked.

Low-balling settlement fees on the good faith estimates. This can be especially harmful to consumers who shop the mortgage marketplace for the best deals -- the lowest interest rates combined with the lowest closing fees. When loan officers low-ball estimates of fees, that is a deceptive and fraudulent trade practice. HUD gets complaints from many homebuyers and refinancers alleging wide disparities between upfront estimates and the final charges on the settlement sheet.

"Upcharges" and markups. HUD's rules prohibit lenders and settlement agents from charging more for appraisals, credit reports and other third-party services they order, unless they provide additional services to justify the higher costs.

Though several federal appellate courts have ruled against HUD's position regarding markups, HUD continues to pursue the issue, as it did in the just-announced Oklahoma settlement.

How can you avoid being ripped off by settlement swindles? First, make sure you ask for guaranteed fees up front. After all, loan officers are in the business and should know what fees to expect. If your lender or broker won't stand by a good faith estimate with a guarantee, maybe there is less good faith in the estimate than you want.

Next, always request to see the HUD-1 settlement sheet in advance. If necessary, remind the settlement agent about the federal requirement, and insist on timely performance.

Finally, question fees that you don't understand or didn't expect. And if you have evidence or a suspicion of hanky-panky, let HUD know about it. Write to RESPA Unit, HUD, 451 7th St. S.W., Washington, D.C. 20410. Or visit www.hud.gov.

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

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