For the second time in less than a year, a federal appellate court has sternly rebuked the Department of Housing and Urban Development (HUD) over its policies prohibiting settlement cost markups.
The decision by the U.S. Circuit Court of Appeals in the case of Boulware vs. Crossland Mortgage Cporp. will either send the markup issue directly to the U.S.Supreme Court or spur Congress to revise the Real Estate Settlement Procedures Act (RESPA). The latter is considered the more likely outcome, since at the federal appellate level no courts have disagreed. The new ruling covers all home real estate transactions and refinancings in the states of Virginia, Maryland, North and South Carolina and West Virginia.
The 4th circuit’s decision essentially nullifies long-standing HUD policies banning all surcharges on settlement costs. A similar decision was handed down last summer in the 7th Circuit, covering Illinois, Wisconsin and Indiana. In all other states, HUD policy remains in effect, absent new legal rulings to the contrary.
In the Boulware case, a Maryland homeowner claimed that her mortgage company illegally “upcharged” her on her credit report fees. Ms. Boulware was charged $65 at closing for a credit report she says cost the lender $15 or less. Crossland Mortgage never denied the markup in court.
At a hearing in April, lawyers representing Crossland attacked HUD’s outright ban of all surcharges or markups on settlement fees. RESPA does not specifically prohibit markups of fees by settlement service providers, they argued, although it does prohibit splits of fees between multiple service providers.
Crossland’s lawyers also warned the court that HUD’s policies amount to price controls, and are part of an illegal attempt by the agency to assert the authority to review the “reasonableness” of all home settlement charges in the United States.
Markups occur on credit report fees, title or recordation charges, courier fees, and appraisals, among others. Credit industry experts say, for example, that although many consumers are charged $45 to $55 on their HUD-1 settlement sheets, the lender or broker ordering the credit file typically pays a vendor only a fraction of that amount.
Can brokers or lenders legally retain these extra dollars? HUD emphatically says no--unless some additional service or thing of value is added by the broker or lender to justify the higher charge. HUD’s regulations have reflected this point of view for two decades.
But last summer, in the case of Echevarria vs. Chicago Title and Trust Co., lawyers for the defendants argued successfully that HUD’s interpretation of RESPA is overly aggressive. Only if two parties collude to split the excess is the federal statute violated, they said. A markup by a single settlement service perovider--in this case, a title insurance company adding a surcharge to a title recordation bill--does not violate the law.
The 7th Circuit Court of Appeals agreed with the title company’s argument last July, setting the stage for the 4th circuit’s new decision. James E. Felman, the lawyer who argued the case for Boulware, told Real Estate-Realtor Times that he is considering asking for a rehearing, or may ask the U.S. Supreme Court to hear the case. But legal observers in Washington say Congress is likely to jump into the fray by passing legislation that expressly bans markups.
Lawyers representing the mortgage, title, and other settlement service industries are aware of Capitol Hill’s interest--two bills already are pending in the House. But industry lobbyists hope to either stall legislation indefinitely or limit its coverage to what one lawyer called “abusive markups” only. Abusive markups, he said, are those that are obviously intended to squeeze money out of innocent consumers, for example, charging $400 for an appraisal that cost only $75. On the other hand, he said, small overcharges related to last-minute estimates of the final costs of credit or courier fees--bills that may not have been received at the time of settlement--should not be prohibited.