Feds are playing hardball against extra mortgage fees

WASHINGTON — Mortgage fee-padders beware: You may think it's safe to charge unsuspecting home buyers triple the true cost of their credit reports or other services. But a $370,000 settlement last week with a large national mortgage company suggests that the federal government takes a different view of such add-ons.

The settlement involved Allied Home Mortgage Capital Corp., a Houston-based company with more than 700 branch locations across the country. According to its settlement with the Department of Housing and Urban Development, Allied allegedly tacked extra fees onto mortgage customers' credit charges and pocketed the difference. No details on the specific amounts of padding were included in the settlement document, but industry sources say overcharges of 300 percent and higher are not uncommon among some mortgage firms.

They cite the example of one large Midwestern mortgage company that reportedly gave an annual Christmas-party award to the employee who produced the highest total volume of $65 credit fees charged to borrowers at closings — $50 higher than the $15 actual cost to the company.

As part of the settlement, Allied admitted no wrongdoing but agreed to pay $370,000 to the federal government and to cease the practice of "upcharging" on any mortgage services, whether credit-related or others. It also agreed to refund any upcharges to consumers that turn up in audits of branch office files in the future.

The company did not respond to a telephone request for additional commen

What is remarkable about the new settlement is that HUD's position on the illegality of markups has been rejected by three federal appellate courts covering 15 states. Yet the department's top officials last week announced they are continuing aggressive investigations or prosecutions of mortgage-fee markups in every region of the country — even in the 15 states where courts disagree (Maryland, Virginia, North and South Carolina, West Virginia, Illinois, Wisconsin, Indiana, Minnesota, Missouri, Iowa, Arkansas, Nebraska and North and South Dakota).

Attorneys who specialize in representing mortgage companies were puzzled by Allied's settlement. "Given the strong precedent in the (appellate) courts," said Phillip L. Schulman of the Washington law firm of Kirkpatrick & Lockhart, "it comes as a surprise" that the firm didn't fight the government in court. In the settlement document itself, however, Allied said it sought to "avoid further expenses and proceedings," and was therefore willing to accommodate the government.

The core legal issue boils down to this: While federal law prohibits charges "other than for services actually performed," critics argue that it does not address the practice of markups, where surcharges are not split between service providers as kickbacks.

Federal investigators say markups are frequently added by lenders to third-party services such as appraisals, courier fees and credit reports. Title-insurance companies have admitted marking up county-courthouse recording fees.

Department of Justice lawyers say the legal fight over these practices may ultimately have to be resolved by the U.S. Supreme Court or Congress.

The broader questions about markups, however, get to the integrity of the American home-buying and mortgage-settlement process. Can consumers believe that the hundreds or thousands of dollars of fees they are being asked to cough up at settlements are for actual services rendered?

Or are they part real and part undisclosed extra revenue for the mortgage company, the title or escrow agency, or the attorney orchestrating the settlement?

The costs of buying a home can be staggering in and of themselves. Should undisclosed add-ons push your bills even higher?