The real estate title industry has made its position clear on the controversial practice of "upcharging" home buyers and refinancers at mortgage settlements: it strongly opposes the practice.
Upcharges -- markups of the actual costs of goods and services -- are widespread and expensive to unsuspecting home buyers and refinancers. For example, while a credit report may cost a lender $15 or less, the lender may charge loan customers $55 at settlement, pocketing the difference. Or the courier charges in connection with a mortgage closing may actually cost $18, but on the settlement sheet the charge is $50.
The mark-ups may seem relatively modest on a case-by-case basis, but multiplied by hundreds or thousands of real estate settlements, they can represent significant income to the firms involved.
Upcharges have assumed new prominence recently in the wake of a federal court decision upholding their legality. The 7th U.S. Circuit Court of Appeals, in the case Echevarria v. Chicago Title and Trust Co., said the title company's upcharge to consumers of title and mortgage recordations did not constitute a violation of the 1974 Real Estate Settlement and Procedures Act, known generally as RESPA.
The decision flew in the face of long-time legal policy statements and regulations from the department of Housing and Urban Development (HUD), holding such mark-ups as illegal. HUD is the government's principal regulator and rule-writer for the RESPA law. Lawyers for the title industry, led by the American Land Title Association, had disagreed with HUD's opinions on this issue for most of the past decade, arguing that RESPA does not explicitly ban the practice.
Now the head of that association, James R. Maher, has made the title industry's position on upcharges crystal clear: "We do not condone markups of third party charges when additional services are not provided," he said in a letter to this columnist posted on the association's website.
"Moreover, we support full disclosure on the HUD-1 (real estate settlement) form (when such disclosure is meaningful to the consumer)..."
Maher charged that HUD's prohibition of upcharges by title and settlement companies represented a "stretch" of the federal law, albeit with the "laudatory" purpose of fighting "clear consumer abuses."
"We believe the court was correct," said Maher. But, he added, consumers are not "without remedy" when they find themselves asked to pay unjustifiable mark-ups at the settlement table.
Consumers can "register their concerns and complaints to appropriate state regulatory authorities" -- a strategy far more productive than hitting the title or settlement company with a class action suit, as in the case of the Echevarrias.
"Mortgage bankers and title/settlement agents are almost always licensed individuals and entities. If they have acted in an inappropriate manner their regulatory authority gets their attention most quickly and a more tailored remedy can be provided," said Maher.
How do you know if you're being upcharged?
For starters, be aware of the most common areas of abuse -- credit reports, appraisals, courier fees, and title-related fees. For example, if you know your credit files are straightforward and your credit history is uncomplicated, it would be reasonable for you to ask: why am I being charged $55 or $60 for information that is readily available electronically to lenders for a small fraction of that amount? Credit industry officials estimate only about 15 percent of mortgage applicants have such complicated credit files that they require the extra manual work that justifies a $55 or $65 credit charge.
If you have questions on any settlement-related charges, ask for documentation and proof of the actual costs from the lender or settlement personnel. Bear in mind, too, that the 7th Circuit Court of Appeals' ruling is only federal law within its own jurisdiction -- the states of Illinois, Indiana and Wisconsin. Everywhere else HUD's long-time ban is still the law: lenders, title companies and settlement firms cannot charge you more than the actual costs, in the absence of additional services to justify the mark-ups.