Realty Times June 18, 2003

'Normal' Fees Under Legal Attack
by Lew Sichelman

Although the mortgage business has won most of the court room battles to date concerning their fees and other matters, the plaintiffs' bar continues to fight the war.

"One of the consequences of kicking butt on yield spread premium cases is that there's now a whole gang of plaintiffs' attorney looking around for things to do," said Robert Pratte, a director in the Minneapolis law firm of Briggs and Morgan.

In a recent presentation at the Mortgage Bankers Associations' Legal Issues and Regulatory Compliance Conference in Coral Gables, Fla.., Pratte outlined several normal, everyday activities that are coming under fire in courtrooms around the land:

  • Document Preparation Fees – This charge for a non-lawyer's completion of standardized mortgage papers "invites scrutiny" because it can be seen as the unauthorized practice of law, Pratte said.

    "Any 14-year-old can fill out these documents; they're administrative at best," he told the conference. "The question is, do you need to be a lawyer?" So far, the results on this question have been mixed, but litigation is ongoing in several states.

  • Prepayment Penalties – The issue of whether a prepayment penalty is governed by the loan documents is "a new and creative area" that is being attacked on "a number of different fronts," said Pratte, who chairs his firm's mortgage banking practice group.

    Statutory provisions on such sanctions run the gamut from absolute prohibitions to limits on the amount, but there are cases pending in several states in which borrowers contend that the rules as set forth in their loan documents have been breached.

    "Safeguards and due diligence procedures need to be in place to insure that proper checks and balances are in place to determine whether prepayment penalties are part of the loan," the Minneapolis attorney cautioned lenders.

  • Bi-Weekly Payments – In an "unusual twist," some borrowers' are challenging their lenders' fees for setting up bi-weekly payment schedules and charges for automatic withdrawals of their payments as "defacto" prepayment penalties.

    Two such cases are pending in Minnesota, which allows early payment of home mortgages without penalty.

    Though "there is very little case law of this as yet," Pratte said the cases strike him as "kinda silly." Nevertheless, he warned lenders that the issue illustrates the new and creative ways in which lawyers for the other side are to attack them.

    While almost any charge is susceptible to scrutiny, he added, "any fee for ending a loan" is particularly vulnerable in states that prohibit prepay fines.

  • Bankruptcy Fees – In what he called "another nasty area" for potential litigation, the attorney said several cases in Alabama are challenging the charging of attorney's fees incurred for the preparation of proofs of claims filed in Chapter 13 bankruptcy cases.

    The issue, he said, is whether the fees are disclosed to the debtor. In two cases in which they were not, the bankruptcy judge levied rather severe financial sanctions against the lenders involved. But in another case, the judge granted summary judgement because the charges had been revealed.

    "If you don't disclose," Pratte advised the lenders, "it could get ugly."


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