In a major victory for proponents of real estate settlement cost reform, a federal appellate court has ruled that “marking up” mortgage fees charging home buyers hundreds of dollars for services or documents that cost the lender less than $50, for example violates federal law if the lender performs no additional services that justify the increased charge.
The decision by the 2nd U.S. Circuit Court of Appeals in New York opens the way for possible Supreme Court consideration of the highly controversial settlement fee markup issue. Three other appellate courts already have sanctioned the widespread practice of marking up fees, arguing that federal law is ambiguous on the subject.
Markups of credit report fees, appraisals, title work, document preparation, flood zone certifications and underwriting fees can be significant revenue sources for some mortgage lenders and settlement agents, but can also add substantially to the cost of buying a house or refinancing a mortgage. The U.S. Department of Housing and the Justice Department have fought markups aggressively during the past three years, but have had a rough time in federal courts. Now they have a solid win under their belt.
The New York ruling involves a class action suit filed by home buyers against Wells Fargo Home Mortgage Corp. The suit alleged that Wells Fargo, one of the country’s highest-volume lenders, routinely marked up fees for its customers without adding any valuable services of its own.
For instance, according to the complaint, Wells Fargo contracted for loan origination documents from third-party vendors that cost the company $20 to $50. Wells then allegedly charged borrowers “flat fees of between $150 and $300” for the same documents a markup clearly prohibited by federal law, according to the plaintiffs.
In a potentially farther-reaching charge, the suit challenged Wells Fargo’s alleged markups of Fannie Mae and Freddie Mac automated underwriting fees. When lenders take home loan applications, they frequently run the applicants’ credit and property information through Fannie or Freddie’s electronic underwriting systems online. The systems render quick, low-cost underwriting decisions indicating whether, and on what terms, Fannie or Freddie might purchase the applicants’ mortgages.
The online systems, which now evaluate millions of loan applications a month, cost lenders trivial amounts typically about $20 per application.
Yet many lenders charge borrowers substantially more at settlement for “underwriting” often $250 or $300. In their class action complaint, the buyers alleged that Wells Fargo’s charges of up to $300 for underwriting constitute an unlawful markup of the $20 Fannie or Freddie fees.
Wells Fargo denied the allegations in its response, and noted in a statement to this reporter on Sept. 17 that the decision by the appellate court “does not in any way address the specific claims of the plaintiffs,” but instead sent the case back to a lower court for reconsideration.
A Wells Fargo spokesman said the firm has not yet decided whether to appeal directly to the U.S. Supreme Court, given the sharp differences in conclusions reached by other appellate courts. Currently lenders, title agencies and other settlement service providers in 15 states are free to mark up fees charged to home buyers without limit as the result of three federal appellate court decisions.
In the states covered by the 2nd Circuit decision New York, Connecticut and Vermont lenders and settlement service providers are now prohibited from marking up fees without providing additional services. In the rest of the states, federal housing officials say closing cost markups are illegal, but lenders and title industry lawyers argue that that’s not necessarily the case, absent a Supreme Court ruling.
Where does that leave home buyers or refinancers who’d prefer to pay as little as possible at settlement and avoid junk fees and padded charges? For the time being, if they are buying or refinancing in any of the 15 states where appellate courts have sanctioned markups, they have no protection from federal law, though they may have recourse under state law.
In the three states covered by the 2nd Circuit ruling, home buyers or refinancers can challenge settlement cost markups and expect success in federal court, provided they can demonstrate that no additional services were rendered to justify the extra fees.
Ken Harney is a real estate columnist for The Washington Post