In the wake of a decision by a federal appellate court, home buyers and refinancers in five states can now have their settlement charges marked up — padded without limit — by lenders, title companies and others looking to squeeze more money out of real estate transactions.
Home buyers in Maryland, Virginia, West Virginia and North and South Carolina late last month lost their former federal protections against undisclosed settlement-cost surcharges on everything from appraisals to credit reports, courier fees, recordation fees and others.
That means, for example, that a lender or settlement agent in those states can now charge:
– $350 for an appraisal that actually was performed electronically at a cost of a few dollars;
– $65 for a credit file that actually cost $9;
– $75 for document delivery charges that actually cost a fraction of that amount; and
– Hundreds of dollars of other, under-the-table add-ons that were formerly illegal.
In a stunning rebuke to federal housing officials and the Department of Justice, the 4th U.S. Circuit Court of Appeals ruled that a mortgage company that marked up credit report charges to a consumer violated no federal law.
Absent a successful appeal to the U.S. Supreme Court or congressional action, the decision is now law in the states covered by the 4th Circuit. A similar situation already prevails in Illinois, Wisconsin and Indiana, where an appellate court sanctioned unlimited settlement-cost markups last summer. Similar cases are under way around the country, opening up the possibility of rapid-fire reversals of home buyers’ traditional legal protections as courts cite the appellate decisions as precedents.
“This is a disaster for consumers,” said one lawyer familiar with the case. “It’s going to be open season for rip-offs.”
The 4th Circuit decision in Boulware v. Crossland Mortgage Corp. involved a challenge by a Maryland homeowner to a $65 credit report fee at settlement. Tyna L. Boulware disputed the fee, alleging that Crossland Mortgage actually paid its credit information vendor $15 or less. The $50 markup was a violation of a long-standing federal prohibition, Boulware said.
Crossland Mortgage never denied the markup in court. But its lawyers argued that federal law does not specifically ban surcharges unless they are split with a third party.
In a terse ruling written by Chief Judge J. Harvie Wilkinson III, the appellate court agreed with that defense, rejecting what it said was Boulware’s contention that federal real estate settlement law is “a broad price-control statute prohibiting any overcharges for real estate settlement services.”
Boulware’s lawyer, James E. Felman of Tampa, said he may request a rehearing of the case, and possibly an appeal to the Supreme Court.
For years, the U.S. Department of Housing has prohibited “upcharges,” or markups of settlement-related fees that are not accompanied by additional services that justify the add-ons. Though never prosecuted, one large Midwestern mortgage lender allegedly marks up credit report fees by 300 to 400 percent.
By coincidence, the Boulware decision came down the same week that a bill was introduced in Congress to clarify and bolster federal prohibitions against markups. That bill, the Mortgage Loan Consumer Protection Act, was authored by Rep. John J. LaFalce (D-N.Y.).
The proposal expressly bans “markups of the cost of services performed or goods provided by another service provider, and fees charged or collected by one settlement service provider where no, nominal or duplicative work is done.”
It also requires that all fees collected by a lender be disclosed clearly on the settlement sheet as being collected by the lender. LaFalce says “this provides additional protections against the practice of disguising markups by rolling them into one single disclosure item.”
Though generally enthusiastic about the Boulware decision, lenders and title industry experts are worried about LaFalce’s bill. Washington attorney Sheldon Hochberg, who represents title insurance companies, said the bill could open lenders and others to new legal attacks on the fairness of their fees.
“No one can be on the side of abusive markups,” Hochberg said, but some fees, such as courier charges and certain title expenses, “are not known precisely on the date of settlement,” forcing settlement agents to make estimates that may prove high or low.
The upshot of all this for consumers? Whether you live in the eight states where markups are now legally sanctioned or not, be aware that the federal protections that you once assumed you had may now be evaporating in federal court.
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You can contact Kenneth Harney by email at realestate@tribune.com or send letters to: Kenneth R. Harney, Chicago Tribune, Real Estate section, 435 N. Michigan Ave., Chicago, IL 60611.
