New legislation on Capitol Hill would ban all forms of "markups" on home real estate and mortgage closing fees nationwide. It would clarify that federal policy prohibits charging consumers any add-ons or surcharges on appraisals, credit reports, courier fees, title recordation fees and other settlement-related expenses.

The new bill, the Real Estate Settlement Fairness Act (H.R. 4627), is sponsored by Reps. Thomas Barrett (D-Wis.), Janice D. Schakowsky (D-Ill.) and Bobby Rush (D-Ill.). Though nominally aimed at reversing a controversial federal appellate court ruling on markups last year, the bill would go far beyond that. It could, say legal experts, even touch appraisal management and "bundled services" companies that provide packages of credit, appraisal, flood certification and tax services to lenders nationwide.

In last year year’s decision, "Echeverria v. Chicago Title & Trust Co.," an appellate court ruled that a title company could mark up a mortgage recordation charge to a home buyer as long as it did not split the markup with another party. By extension, the court sanctioned markups--without limit-- on consumers’ credit reports, appraisals, courier fees and other closing expenses. The decision by the U.S. 7th Circuit Court of Appeals is now the law in the states covered by that circuit--Illinois, Wisconsin and Indiana.

The U.S. Department of Housing and Urban Development (HUD) has strongly criticized the Echeverria decision, arguing that it cast aside the department’s long-standing interpretation of the federal real estate settlement law banning markups. But some federal officials concede privately that the Real Estate Settlement Procedures Act (RESPA) is not explicit in its ban, and that the law may need further clarification on Capitol Hill.

The new bill would do precisely that. It says unequivocably: "No person shall...make or receive a charge for a real estate settlement service rendered by another person in an amount that exceeds the amount paid for such service to the person actually rendering such service."

In practical terms, that means that a loan broker or mortgage lender could not charge borrowers $55 for a credit report that the lender or broker purchased from a credit report vendor for $15. Nor could a title agency charge a home buyer $40 for a note recordation at the country courthouse that had cost just $25. Ditto for appraisal surcharges and courier fee markups. Since the bill would amend RESPA, the penalties for infractions could be substantial--heavy fines, restitutions and even jail time.

In recent months, HUD has collected or caused refunds to be made to consumers totalling more than $2.25 million, including settlements with companies accused of marking up services.

The new bill appears to be timed to coincide with congressional hearings on RESPA reforms expected to be held by the House Financial Services committee this spring. Both Reps. Barrett and Schakowsky are members of the committee. The senior Democrat on the committee, Rep. John LaFalce (D-N.Y.) also is working on a comprehensive settlement-services reform bill and plans to introduce it shortly.

The markup prohibition bill, if enacted into law in its proposed form, could complicate business for large settlement-service management companies that provide appraisal, credit report and other services to lenders nationwide. Such firms typically add markups or surcharges to each of their services. For example, they often pay appraisers a set fee--lower than the prevailing retail charge for the area--and then add a surcharge, which is paid by the home buyer or borrower at closing. The markup is virtually never disclosed to the consumer.

Lenders frequently buy packages or "bundles" of such marked-up services as a convenient and rapid way to move a loan application to closing. Lawyers who represent firms in the settlement-services industry say the new legislative proposal could be troublesome if regulators strictly applied the no-markup language to their current mode of operations.