Will it be three strikes and you’re out for the Bush administration on home mortgage settlement fees?

That’s the question left twisting in the wind following a third straight appellate court defeat for the administration over its nationwide ban on markups of closing costs by lenders, title companies and others.

Under secretary Mel Martinez, the department of Housing and Urban Development (HUD)--backed up by lawyers from the Justice department--have aggressively prohibited add-ons to home loan settlement fees that are not accompanied by additional services to the consumer.

For example, under the department’s policy, a mortgage lender may not pay an appraiser $200 for an appraisal on a property, then turn around and charge the home buyer $350 for it at settlement. Nor can a lender mark up credit report charges, courier fees or other third-party services beyond what it actually paid.

But HUD and the Justice department have had a tough time convincing courts that such a sweeping prohibition is legally enforceable. Federal appellate courts in three judicial circuits have now ruled against the government’s ban--most recently in the 8th circut, covering the states of Missouri, Minnesota, North and South Dakota, Iowa, Nebraska and Arkansas.

In a case involving alleged markups of credit and appraisal charges by the Bank of America, the court ruled that the federal settlement procedures law does not prohibit markups by lenders or other service providers, but does prohibit “kickback” arrangements where markups are shared by two or more service providers.

Similar rulings were handed down last year by appellate courts in the 4th and 7th circuits, covering Virginia, Maryland, the Carolinas, West Virginia, Indiana, Wisconsin and Illinois. The Justice department had hoped the latest court test would open the door to an appeal to the U.S. Supreme Court for final resolution. But the high court normally won’t accept cases where there is unanimity among multiple appellate courts.

“This essentially cuts their legs off,” said a Washington attorney sympathetic to HUD’s efforts to control markups. “Now they’ve got nowhere to go but Congress--and who knows what might happen up there?”

Neither HUD nor Justice would comment on the new court decision last week when contacted by Realty Times. Lawyers for the title industry and mortgage lenders were not reticent, however. Washington lawyer Sheldon Hochberg, who represents title insurers, said the latest court ruling “merely confirms what we have been saying all along”--that HUD has exceeded its statutory authority in attempting to control pr Neither HUD nor Justice would comment on the new court decision last week when contacted by Realty Times. Lawyers for the title industry and mortgage lenders were not reticent, however. Washington lawyer Sheldon Hochberg, who represents title insurers, said the latest court ruling “merely confirms what we have been saying all along”--that HUD has exceeded its statutory authority in attempting to control pricing of services.

As a result of the latest decision, home buyers and mortgage borrowers in the 15 states listed above have no federal protections under HUD’s rules for settlement-cost markups, no matter how large the markups may be. Consumers in other states technically are still covered by the ban, but most industry lawyers question whether HUD can now win in any appellate court, given the strong precedent established by the three straight losses.

Ironically, one possible remedy to the issue is contained in Martinez’s proposed settlement cost reform proposal, currently awaiting final release by HUD: Lenders who offer “guaranteed” settlement cost packages to applicants--with a bottom-line closing cost number plus a guaranteed interest rate--will be free of any markup prohibitions, anywhere in the country. The final version of that proposal is expected from HUD by late spring.

Published: February 3, 2003

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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.