Lenders, title agents and other real estate industry groups are focusing attention on a case now pending in federal court in Richmond, Va. The outcome--expected within the next several months--could help determine whether federal law allows "markups" of settlement-related fees paid by consumers in home real estate closings.

The case, "Boulware vs. Crossland Mortgage Corp.," involves an alleged markup of the cost of a credit report by a lender. The plaintiff, Tyna L. Boulware, a Maryland homeowner, was charged $65 at settlement for a credit report that she says cost the lender $15 or less. Such a markup violates federal rules on settlement fees, say lawyers for Boulware.

No it doesn’t, argue lawyers for Crossland, who point to a decision last year in a similar case before a federal appellate court in Chicago. That case, "Echevarria vs. Chicago Title & Trust Co.," involved a markup of a title recordation fee by a title company. In a decision last July, the 7th U.S. Circuit Court of Appeals ruled that federal law does not prohibit markups of settlement-related fees, as long as the markup is not shared with another party to the transaction.

In other words, as long as the title company didn’t split its recordation overcharge with someone else, it did not violate the Real Estate Settlement Procedures Act (RESPA). The federal agency that writes the regulations interpreting RESPA--the U.S. Department of Housing and Urban Development (HUD)--strongly disagreed with the appellate court’s decision in the Echevarria case. In a policy statement last October, HUD reiterated its view that RESPA prohibits all "unearned" fees where no extra services are rendered to the consumer. That ban specifically applies to markups of appraisals, credit reports, courier fees and other commonplace items in settlements.

The prohibition is operative "irrespective of whether there is or is not a split" of the overcharge, according to a top HUD lawyer. "If it is unearned, the consumer should not be asked to pay for it," said the lawyer.

The basic issue involved here has huge implications for lenders, escrow and title agencies and Realtors. HUD’s interpretation of "unearned" potentially extends to a wide range of industry practices, including so-called "transaction fees" now charged by many realty brokers on top of regular commissions. HUD’s view is that if Realtors cannot justify the $250 to $500 add-on fees on the basis of specific services rendered to justify them, the fees are illegal.

HUD’s expansive view of RESPA has upset key industry groups such as the American Land Title Association and the National Association of Realtors. Its ban on markups also led to a costly financial settlement late in 2001 with a major mortgage lender that admitted overcharging on credit report fees. The practice reportedly is widespread in the mortgage industry, and is typified by the Crossland Mortgage allegations.

What makes the current case particularly significant is the entry of the U.S. Department of Justice. In a friend-of-the-court brief submitted to the U.S.4th Circuit Court of Appeals in Richmond, Justice supported HUD’s position on fees If the Richmond court ultimately accepts Justice’s argument and rules against Crossland, the issue most likely will go straight to the U.S. Supreme Court for final resolution--typical in situations where appellate courts in different circuits disagree.

But if the decision goes against HUD and the Maryland homeowner, the whole issue most likely will end up in Congress’s lap, as early as this summer. Stay tuned.

Published: April 15, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.