After more than a year of dormancy, the issue of home real estate settlement cost "markups" just got red hot again. In a major victory for HUD and the Justice department, the U.S. 2nd Court of Appeals in New York ruled that markups of loan origination and closing fees violate federal law if they are not accompanied by additional services to justify the extra costs.
The decision in Kruse v. Wells Fargo Mortgage Inc. runs counter to appellate court decisions on markups reached in three other circuits, and may ultimately stimulate an appeal to the U.S. Supreme Court to resolve the differences among the circuits. The 2nd circuit sent the case back to a district court for a rehearing on the facts, but Wells Fargo has the option of appealing to the Supreme Court if it chooses. A spokesman said last week that the firm has not reached a decision on whether to appeal or to try the case at the district court level.
The markups issue came to prominence three years ago when consumers and trial attorneys challenged credit report fees charged by lenders at settlements. Some lenders, title companies and mortgage brokers use third-party vendors for credit, appraisal, document preparation, tax services and flood certifications in connection with loan originations and closings. They frequently charge the home buyer more for the services than they actually paid the third-party vendors.
For example, say a lender orders credit reports on an applicant from a national data vendor. The lender purchases the information for a minimal amount -- say $10 or less. But at settlement, the lender lists credit services as a $55 charge.
Under the new appellate court decision, that markup is illegal if the lender provided no additional services to the consumer in connection with the credit reports. That has been HUD's position for over a decade, but the department has lost in court on several occasions. Those courts ruled that federal law is ambiguous on the issue of markups, and that HUD has overreached its legal authority by issuing rules prohibiting markups.
The latest decision involves a class action suit filed by several home buyers against Wells Fargo Home Mortgage Inc. The borrowers claimed that Wells Fargo marked up a variety of fees -- document preparation, automated underwriting, tax and flood certifications -- without rendering additional services of its own to justify the surcharges.
The allegations concerning Fannie Mae/Freddie Mac fees potentially could have widespread impact in the home mortgage field because many lenders and mortgage brokers use the two firms' automated underwriting systems online to underwrite applications. Typically the charge for running an application through Fannie's Desktop Underwriter (DU) and Freddie's Loan Prospector (LP) systems is about $20 to the lender. Yet many lenders charge borrowers $250 to $300 for "underwriting" at settlement.
If borrowers or their lawyers believe they can demonstrate to courts that no additional services were rendered by a lender to justify the markup from $20 to $250-$300, lenders may be vulnerable to a new wave of class action attacks using the 2nd Circuit's ruling as precedent.
Currently markups -- without limit and without the requirement of additional services -- are legal in the Fourth, Seventh and Eighth appellate circuits, covering the following states: Illinois, Wisconsin, Indiana, Maryland, Virginia, North and South Dakota, North and South Carolina, West Virginia, Arkansas, Minnesota, Missouri, Iowa, and Nebraska.
Everywhere else, according to HUD, so-called "naked" markups are violations of federal law until courts rule otherwise.