In a controversial move, the Bush administration is taking an aggressive, hardball approach to real estate transaction cost "markups" nationwide. Despite appellate court defeats in three federal court districts covering 15 states, the government says it plans to investigate and prosecute real estate-related markups in all 50 states.

To underline its point, the department of Housing & Urban Development (HUD) announced a $370,000 settlement with Allied Home Mortgage Capital Corporation, a Texas-based brokerage with branch offices nationwide. Though Allied admitted no wrongdoing as part of the settlement agreement, HUD alleged that the company charged home buyers more for credit reports at settlement than the company actually paid third-party credit data vendors.

Any "upcharge," or markup, according to federal Housing Commissioner John C. Weicher, "is a violation of the law if no additional services have been performed" to justify the added charge to the consumer. That includes all third-party fees involved in a home purchase or mortgage financing, from appraisals to couriers to flood certifications to credit reports and recording fees, among others.

A commonly-observed credit markup works like this: The broker or loan officer orders online reports for an applicant and gets a three-bureau merged "infile" report at a cost of $15. On the borrower's HUD-1 settlement sheet, however, the credit charge is for $65 -- a $50 markup that ends up in the lender's or broker's pocket.

HUD argues that the Real Estate Settlement Procedures Act bans such markups. Some settlement industry groups strongly disagree. For example, the American Land Title Association argues that while the law expressly bans referral fees that are split between two parties, it does not prohibit add-on fees that are retained solely by one service provider.

Three federal appellate courts have sided with the latter interpretation of the law, and have essentially made markups legal within their jurisdictions, absent a contrary ruling by the U.S. Supreme Court. No appellate courts have yet sided with HUD. The 15 states are Maryland, Virginia, North Carolina, South Carolina, West Virginia, Illinois, Wisconsin, Indiana, Minnesota, Missouri, Iowa, Arkansas, Nebraska, North Dakota and South Dakota.

A Washington, DC mortgage industry lawyer who is sharply critical of the federal government's stand on upcharges said he was "surprised" by the willingness of Allied to settle, rather than go to court and fight.

"Given the strong precedent in the appellate courts," said Phillip Schulman of Kirkpatrick & Lockhard LLP, the odds of prevailing over HUD would appear to have been strong. However, Allied said in its agreement that it chose to settle "in order to avoid further expense and proceedings" -- that is, pay the $370,000, admit no wrongdoing, and close the matter quickly rather than dragging it through the courts with much higher legal bills.

Washington real estate industry experts said the Bush administration's hardline approach to the issue -- essentially thumbing its nose at the appellate courts and vowing more prosecutions -- should put lenders, realty brokers and title and settlement companies on notice.

"There is apparently no appellate court umbrella protection on this anywhere," said one trade group official. "If they come after you because you've marked up fees, then you'll have to decide like Allied did: Do you want to spend a whole bunch of money on lawyers to defend yourself in federal court, or do you add up the costs and tell HUD, okay, we'll settle?"

Either way, realty agents, mortgage brokers, lenders and settlement agents need to know: Mark up fees at your own peril, whether you agree with the government's legal interpretations or not. With HUD's beefed up investigatory staff, they are on the hunt for new cases in every region of the U.S.

Published: October 20, 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, 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.