The message from the U.S. Department of Justice on controversial settlement-cost "markups" is blunt: We may have lost two straight fights on this issue in federal courts, and we may be wounded, but we are not giving up. We plan to fight markups in courts all over the country to ensure that home buyers and refinancers are protected from unearned "junk fees" and add-ons when they go to settlement.

The Justice department--working hand in hand with the Department of Housing and Urban Development (HUD)--has in recent weeks submitted three friend-of-the-court briefs in private lawsuits involving alleged markups of title, credit and appraisal charges. The cases involve suits by consumers against the Bank of America, Chase Manhattan Mortgage Corp.and Republic Title Corp.

The federal government is not a direct party to any of the suits, but HUD's and Justice's interpretations of federal law are front and center in all three. In a nutshell, HUD has for years interpreted the federal Real Estate Settlement Procedures Act (RESPA) as prohibiting all markups or add-ons of charges to settlement fees without additional services rendered to justify the add-ons.

For instance, HUD believes it illegal for a mortgage lender to charge a homebuyer $300 for an appraisal that the lender purchased electroncially for $35. That $265 markup, HUD insists, is a violation of federal law. Ditto for markups of credit charges, courier fees, title work, recordations, etc.

However, HUD's interpretation of the law was rejected in mid-2001 by an appellate court in Chicago, which ruled that RESPA is ambiguous on the question of markups, and that HUD has overstepped its authority in banning them. Since the appellate court's ruling has the force of law within its circuit--in this case, Illinois, Indiana and Wisconsin--home buyers in those states have no legal recourse against unlimited markeups, absent a successful appeal to the U.S. Supreme Court.

In May of this year, the Chicago decision was cited as precedent in a credit fee markup case argued in Richmond, Va. before the 4th U.S. Circuit Court of Appeals. As a result of the court's ruling in Richmond, borrowers in Maryland, Virginia, West Virginia and North and South Carolina may now be charged markups on their settlement fees.

To try to stem the tide of negative decisions against HUD's ban, the Justice department recently filed new briefs in cases pending in Florida, Missouri and Illinois, arguing in effect that HUD's interpretation of RESPA requires judicial "deference" by the courts.

All the government needs is a single favorable decision by an appellate court and the door will be open to a U.S. Supreme Court hearing on the issue. Lawyers representing the mortgage industry--who generally oppose the government's ban--say HUD and Justice could be in for a shock if the markup question does go to the Supreme Court.

"The ( Supreme Court) may read the law strictly and see the ambiguity," said one lawyer. "(RESPA) simply does not contain any direct, explicit language prohibiting markups"of settlement costs. The Supremes may end up in agreement with the appellate courts who read the law this way."

Justice and HUD lawyers strongly disagree. They also point to recent Supreme Court decisions that require lower courts to give wide latitude to the regulatory judgments of federal departments empowered by Congress to interpret and enforce the laws it passes.

Stay tuned.

Published: September 16, 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, consumer 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.