Fishy mortgage fees should be questioned

WASHINGTON — A new legal settlement over home-loan fees sends an important message to mortgage lenders and consumers alike: If a lender routinely charges homebuyers for services it did not perform — or cannot document — it could find itself in the crosshairs of state law-enforcement authorities, if not the federal government.

That point was made resoundingly in a settlement agreement between the Pennsylvania attorney general and a mortgage-lending firm, Home American Credit. The issue was the lender's charge of $150 per loan for an "attorney review fee." After an investigation, the attorney general concluded that lawyers for the firm "did not review each individual loan file prior to the closings," while the $150 fee "represented to borrowers" that such a legal review had indeed been performed.

As a result, said Attorney General D. Michael Fisher, the fee constituted an "unfair and deceptive act or practice." As part of the settlement, the lender agreed to refund all $220,849.74 worth of "attorney review fees" it collected from borrowers between Jan. 1, 1999, and February 2001. It also agreed to pay $50,000 to the state government for investigative costs and for "future public protection purposes."

As part of the agreement, Home American Credit, which also does business as Upland Mortgage, denied any wrongdoing. An attorney for the lender did not respond to a telephone request for comment. The Home American Credit agreement has set off reverberations far beyond Pennsylvania's borders. That's because it symbolizes the increasing activity of state agencies and law-enforcement personnel in the burgeoning arena of settlement-sheet "junk fees" imposed on consumers.

At the federal level, Housing Secretary Mel Martinez has declared war on closing-fee ripoffs — especially charges imposed where no actual services are rendered. In recent months, his agency has collected or caused refunds to be made of more than $2 million from firms accused of real-estate settlement overcharges or kickbacks.

But federal investigators are short-handed. They have limited resources to check out the large number of allegations made about bogus fees around the country. Investigative resources can stretch much further, however, when consumers or others tip off state authorities to the existence of dubious fees or settlement practices. Although the Pennsylvania attorney general would not disclose what drew the department's attention to Home American Credit, the firm's "attorney review fee" is not an uncommon charge on consumers' settlement sheets around the country.

Ditto for a variety of other fees that have come under federal and state scrutiny, including marked-up credit-report charges, appraisals, recordation fees, courier expenses, "processing" and administrative fees, among others. Under federal law, homebuyers and mortgage borrowers may not be charged fees for services not performed, nor may they be forced to pay "markups" on services where the lender or settlement agent performs nothing additional to justify the higher charge.

However, title-insurance companies, escrow agencies and lenders dispute the federal government's interpretations of the law on these issues and are challenging them in court. They charge that the federal real-estate settlement law does not specifically ban inflated fees and markups. But even if the courts side with lenders and title companies on the specifics of federal law, the industry will still have to deal with challenges to settlement-cost padding at the state level, as the new settlement in Pennsylvania suggests.

Many states have what are known as "unfair and deceptive trade practices" statutes on their books. Many of the laws, like Pennsylvania's, seek to protect consumers from deceptive labels on fees, or business practices that are likely to cause "confusion or misunderstanding" about the charges consumers are asked to pay.

What's the significance here for buyers looking for home mortgages or getting ready to complete a real-estate settlement? A couple of thoughts: For starters, don't be passive about the mortgage-settlement process or the fees you're asked to pay. The era when mortgage customers walked meekly to the closing table and paid every fee without murmur or question — even to the tune of hundreds of dollars in inflated fees — is over.

Homebuyers and borrowers in 2002 have to be smarter. They have to know the law prohibits fees where little or no services are performed to correspond to the dollar amount demanded. They have to demand to see their HUD-1 settlement sheets at least a day in advance of the scheduled closing, go over every proposed charge and ask questions about anything that looks dubious. If you have evidence that a charge is bogus, contact state regulators or law-enforcement authorities and tell them about it. You may — as will nearly 1,500 borrowers in Pennsylvania — get the money refunded.