The message from the federal government to mortgage lenders, brokers, title companies and other real estate settlement service firms could not be clearer: No matter what you may have heard to the contrary, marking-up the costs of consumer credit reports, appraisals, title recordations and other routine mortgage closing fees is illegal.

A lender cannot order a credit report on a loan applicant for $15 and charge the applicant $60 at settlement. A mortgage broker can't order an appraisal for $200 and mark up the cost to $300 on the home buyer's settlement sheet. A title company can't record a mortgage at the county courthouse for $28 and hit the consumer for $48. And settlement and escrow firms can't pay $12 to Federal Express for courier services in connection with a mortgage transaction and bill the home buyer $30 at closing.

In a wide-ranging policy statement last week on mortgage fees, the Department of Housing and Urban Development (HUD) addressed a controversy that's been simmering since this summer: the belief by some real estate and mortgage industry professionals that there is no federal prohibition against "upcharging" clients on routine services.

In July, the Court of Appeals for the Seventh Circuit handed down a decision ( Echevarria v. Chicago Title and Trust Co.) declaring mark-ups of home real estate services legal, without limit. That decision, which has not yet been appealed to the U.S.Supreme Court, has the force of law in the three states comprising the 7th circuit -- Illinois, Indiana and Wisconsin.

But HUD sought last week not only to dispute the conclusion of that court, but to quash any belief elsewhere in the country that upcharges are now permissible.

"HUD guidance and regulations have consistently...prohibit(ed) all unearned fees," said the department. "HUD was not a partly to the (Echevarria) case and disagrees"...with the 7th circuit's ruling, the department said.

"A settlement service provider may not levy an additional charge upon a borrower...without providing additional services that...justify the increased charge."

HUD officials say they are aware that the practice of upcharging home mortgage borrowers is widespread. On a case by case basis, the mark-ups may be small -- $25 to $100 is the typical range -- but on an aggregate basis, the upcharges cost American consumers tens of millions of dollars a year in unnecessary and illegal fees.

In the Echevarria case, Chicago Title was found to have added mark ups to recordation fees charged by the Cook County Recorder. Far more commonplace, say industry experts, are upcharges on credit reports.

Though many home buyers and mortgage borrowers routinely pay $45 to $60 at settlement -- or as part of an upfront mortgage brokerage fee -- credit industry leaders say most of them are being overcharged. Only about 15 percent of loan applicants have credit reports requiring extra, manual work to sort out erroneous data and double-check facts, they say. In such cases, a $45 to $60 credit fee may be justifiable.

But for everybody else, a standard electronically merged "infile" is all that's required to underwrite a loan. The merging of data in the files of the three national credit repositories -- Equifax, Experian, and TransUnion -- is done instantaneously and at very low cost. Some large lenders pay just $1 to $2 per infile. Smaller brokers may pay $9 to $15 for credit data. Yet these same lenders and brokers may mark up those fees to $45 and $60, pocketing the difference as a tidy profit.

Now HUD has explicitly put upchargers on notice: Mark up consumers at your peril. It's a violation of federal law, and it could lead to fines of thousands of dollars per borrower, or a class action suit involving all your illegally upcharged customers.

For more articles by Ken Harney, please press here.