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 charges.
The decision by the 2nd U.S. Circuit Court of Appeals in New York opens the way to possible Supreme Court consideration of controversial settlement fee markups. Three other appellate courts have sanctioned the widespread markups, arguing that federal law is ambiguous.
Markups of credit report fees, appraisals, title work, document preparation, flood zone certifications and underwriting fees can add substantially to the cost of buying a house or refinancing a mortgage.
The Department of Housing and the Justice Department have fought markups aggressively during the past three years but have had rough going in federal courts. Now they've got a solid win.
The New York ruling involves a class action suit filed by home buyers against Wells Fargo Home Mortgage Corp. The suit alleged that Wells, one of the country's highest-volume lenders, routinely marked up fees without adding services.
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 charged borrowers "flat fees of between $150 and $300" for the same documents, a markup clearly prohibited by federal law, according to the plaintiffs.
The suit also 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's 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 evaluate millions of loan applications a month, cost lenders 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 said Wells Fargo's underwriting charges were an unlawful markup of the Fannie or Freddie fees.
Wells Fargo denied the allegations in its response and said the appellate decision "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 company had not decided whether to appeal to the Supreme Court, given the sharp differences in conclusions reached by other appellate courts. 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. Those states are Maryland, Virginia, North and South Carolina, West Virginia, Illinois, Wisconsin, Indiana, Minnesota, Missouri, Iowa, Arkansas, Nebraska and the Dakotas.
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 true, absent a Supreme Court ruling.
Where does that leave you as a home buyer or refinancer who'd prefer to pay as little as possible at settlement and avoid junk fees and padded charges? For the time being, if you are buying or refinancing in any of the 15 states where appellate courts have sanctioned markups, you have no protection from federal law, though you may have recourse under state law. Check with your state attorney general's office if you suspect you are a victim.
In the three states covered by the 2nd Circuit ruling, you can challenge settlement cost markups and expect success in federal court, provided you can demonstrate that no additional services justified the extra fees. Everywhere else, consumers are left twisting in the wind until either a federal appellate court for their area hands down a ruling or the Supreme Court ends this long-running legal battle with a decision covering all 50 states.
E-mail Ken Harney at kharneywinstarmail.com.