Appellate Court OKs Lenders’ Markups
In a potentially far-reaching decision, a federal appellate court has given the green light to title companies and mortgage lenders to “up-charge” home buyers and refinancers without limit--that is, to mark up the actual prices of credit reports, appraisals and other real estate closing costs.
The court’s decision explicitly rejected long-standing efforts by the department of Housing and Urban Development to treat such markups as illegal.
If other federal courts adopt the same approach, consumers will have no basis under federal law to challenge situations such as the following:
* The appraisal charge to the lender on your new home purchase was $300. But the lender charges you $450 on the settlement sheet, pocketing the difference.
* The actual cost of the credit report to the lender was $15, but the lender marks it up and charges you $60 at closing.
* The cost of recording your deed and mortgage at the county courthouse was $38, but at settlement you paid $65.
* The actual cost of courier expenses for your loan closing was $15, but on the settlement sheet the item was marked up to $35.
Under what has been clear federal agency policy for at least a decade, such “up-charges” or markups, with no additional services rendered, have been illegal.
But under the new decision by the 7th U.S. Circuit Court of Appeals, companies that gouge consumers with markups are perfectly within their legal rights.
In the case of Echevarria vs. Chicago Title and Trust Co., the court held that intentional overcharges on document filings by the title company were not violations of the federal anti-kickback statute administered by HUD.
Sweeping aside repeated statements, opinion letters and regulations from HUD since 1992 holding that markups on settlement service items are illegal, the court said federal law itself did not specifically prohibit the practice.
The court acknowledged HUD’s statements, but said it read the law differently and was not bound by the agency’s opinions.
The most recent policy statement came in a case two years ago involving Washington Mutual Bank.
The general counsel of HUD told a federal court that when lenders “charge consumers marked-up prices (for credit reports or other services)
Absent a reversal by the U.S. Supreme Court, the appellate court’s decision is now federal law in the 7th Circuit--the states of Illinois, Wisconsin and Indiana. Other federal appellate courts are likely to cite the new decision as precedent--opening home buyers and refinancers in other parts of the country to unlimited up-charges behind their backs.
Industry sources say such markups are particularly commonplace on credit reports, appraisals, messenger fees and title-related settlement services.
In credit reports, for instance, some mortgage companies routinely mark up the actual costs for checking credit from the $9 to $15 they pay to credit agencies to the $45 to $60 they charge consumers at settlement.
No additional services are involved to justify the markups.
In the mounds of paperwork that constitute today’s home real estate closings, there are numerous places to tack on extra charges.
“Nobody ever complains,” said a mortgage broker who conceded that every firm he’s ever worked for marked up one or more items at closings. Consumers “are in a total daze--they’re signing everything you put in front of them,” he said.
One large Midwestern mortgage company actually rewarded one of its loan officers with a prize last year at its annual Christmas party for having produced the highest volume of $60 charges for credit reports that rarely cost the company more than $15.
“We thought we had made the department’s position [on this] absolutely clear,” said Grant Mitchell, a mortgage attorney now with the Washington, D.C., firm of Reed Smith, who drafted most of HUD’s regulations and opinion letters on the subject throughout the 1990s.
“I think there are potentially serious adverse consequences for consumers” as the result of the new decision, said Mitchell.
Sheldon Hochberg, a Washington attorney who represents the title insurance industry, said he agreed with the court’s reading of the federal law, but does not support the practice of marking up charges to home buyers behind their backs.
What’s the best course of action for you as a consumer in the wake of the latest decision?
Don’t be asleep at settlement--demand to know why you’re being charged $60 for a credit report instead of much less, and take a hard look at other fees if they seem high.
If you live anywhere except the 7th Circuit, you still have a federal legal basis to sue if you find you’ve been hosed at your closing.
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Distributed by Washington Post Writers Group.
