Fee Markups Allowed in Some States

A little-noticed move by federal financial regulators gives official sanction to unequal treatment of home buyers and mortgage borrowers on settlement fees, depending on where their home is located.

Consumers in major metropolitan areas such as Chicago, Indianapolis and Milwaukee now have fewer protections against under-the-table “markups” of settlement fees than mortgage borrowers elsewhere. Absent congressional action or a U.S. Supreme Court decision to the contrary, they can be charged $55 for a credit report that cost the lender $15. They can be charged $450 for an appraisal that cost the lender just $275.

Home buyers in other parts of the country, by contrast, cannot be marked up behind their backs. That would be a violation of federal law.

How can that be? Aren’t federal laws supposed to treat everyone the same, no matter who they are or where they live? Yes, but the system doesn’t always work that way.

In a recent policy memorandum to banking agency examiners nationwide, the U.S. Comptroller of the Currency, a unit of the Treasury Department, said that in three states--Illinois, Indiana and Wisconsin--examiners should no longer flag cases of home settlement fee markups as violations of federal law. Examiners should now essentially ignore them when they spot them on financial institutions’ books, rather than reporting them to federal authorities.

That’s because federal consumer-protection law in those three states effectively diverged from the rest of the country last year. A decision by a federal appellate court now takes precedence over a federal agency’s longtime interpretation of the law, and will continue to do so indefinitely, according to the new policy guidance to bank examiners.

In its decision in Echevarria vs. Chicago Title & Trust Co., the 7th U.S. Circuit Court of Appeals ruled that overcharges on real estate recordations by the title company were not violations of the federal settlement procedures law administered by the Department of Housing and Urban Development. Chicago Title was found to have marked up recordation fees it paid to the county recorder’s office on borrowers’ settlement sheets.

Such markups are widespread--but go undetected--in home real estate settlements in many parts of the country. They can occur in virtually any settlement fee category, from appraisals to courier fees. Though often relatively small on a case-by-case basis, mortgage and settlement firms that close hundreds of loans per month can pocket substantial profits from the markups. In one recent settlement with HUD, a California lender was alleged to have made more than $92,000 worth of markups on consumer credit reports alone.

Under long-standing HUD policy, such markups are illegal nationwide. But under the latest guidance to financial institution examiners, they are now permissible in Illinois, Indiana and Wisconsin. As long as no split or kickback of the overcharge occurs with another party in the transaction--that is, the lender or title company pockets the entire overcharge and shares it with no one else--the markup conforms to the appellate court’s standard.

Underlying the settlement fee controversy is a legal dispute over the consumer protections created by the federal Real Estate Settlement Procedures Act. That law expressly prohibits referral-fee kickbacks among real estate brokers, lenders, title agencies and others. It also prohibits collection of fees when no services or goods are rendered to the consumer.

For more than a decade, HUD has maintained that the law also prohibits markups of settlement services, where a bank or title agency provides no extra service to justify the added charge to the buyer. HUD Secretary Mel Martinez reemphasized that legal position late last year, warning lenders and others that they risk stiff fines and prosecution when marking up charges on settlement sheets. That prohibition includes situations such as Chicago Title’s, where the firm shared the markup with no one, according to Martinez.

The title and escrow industries have challenged HUD’s interpretation of the statute, arguing that only when a markup is split with another party does it violate the law. Those industries also have challenged Martinez’s interpretation of “unearned fees” in general. The law bans kickbacks, they maintain, but it does not empower HUD to regulate fees or review the prices that settlement companies charge their customers.

The appellate court in the Echevarria case accepted the title industry’s point of view. The new financial regulatory guidelines from the Comptroller of the Currency essentially tell bank examiners and auditors: Until this issue gets resolved, treat markups differently depending on location. In Illinois, Indiana and Wisconsin, follow the rule set by the appellate court. Everywhere else, listen to HUD.

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Ken Harney’s e-mail address is ken harney@aol.com. Distributed by Washington Post Writers Group.