One of the hottest unanswered questions in the home real estate market has just been restoked by a new federal court decision: Can lenders and other settlement service providers "mark up" fees to home buyers without limit?

Put another way, if a lender spends $5 to check your credit using an electronic database, can the lender later hit you with a $55 charge on your settlement sheet for the credit check? Or if a title company pays the county recorder of deeds a standard $25 per recordation, can that company then turn around and charge you $45 on your settlement sheet?

Controversy over this question has simmered for years as lenders, title agencies and others routinely marked up consumer closing cost items without providing additional services to justify the extra charges. One Chicago mortgage company reportedly even bestowed an annual cash award at its Christmas party to the loan officer who "upsold" -- marked up $9 credit reports and charged borrowers $55 to $60 -- during the preceding 12 months.

The federal agency with regulatory authority to oversee real estate settlements -- HUD -- has issued rules banning markups absent additional services rendered to the borrower. Industry groups have opposed HUD's position in federal courts and have won their cases in three appellate circuits covering 15 states. The industry groups have argued that HUD lacks specific statutory authorization to control prices of settlement services or to ban markups.

But HUD's position has also been upheld in several appellate courts. Earlier this month, the U.S. Court of Appeals for the 3rd Circuit ruled in HUD's favor in the case of Santiago v. GMAC Mortgage Group.

That decision, which strongly sanctioned the government's legal right to prohibit markups, became the third consecutive court to uphold the agency. That, in turn, put the federal courts in a 3-3 deadlock about whether and where markups are legal. GMAC, which had no comment after the latest decision, can now either appeal to the US Supreme Court for a final resolution of the markups controversy, or to let the Santiago case go to trial before a district court. The federal government, for its part, would like the matter to go to the Supreme Court but has no way to get it there at the moment.

That leaves the answer to the underlying question -- can you as a home buyer be marked up without limit -- to be a matter of where you live or plan to purchase property. For consumers who live in Virginia, Maryland, North and South Carolina, West Virginia, Illinois, Iowa, Wisconsin, Indiana, Minnesota, Missouri, Arkansas, Nebraska, and North and South Carolina, there is no current federal legal ban in effect against markups. Even if you are charged $500 for an appraisal that actually cost just $225, you're not likely to win in court if you sue.

On the other hand, residents of Florida, Georgia, Alabama, New York, Connecticut, Vermont, Pennsylvania, New Jersey and Delaware are explicitly protected under the Real Estate Settlement Procedures Act against fee-padding markups when no additional services have been rendered. You can haul your lender or title agency into court in those states, and expect to win.

Residents or purchasers of property in all the other states and the District of Columbia are in a legal twilight zone on markups until the Supreme Court -- or Congress -- steps in and clarifies the law. Twilight zone means that HUD insists that its ban carries full force in those states, but lenders and title companies continue to argue that they are free to mark up fees as much as they want.

So it's a standoff. But that doesn't mean consumers have to acquiesce when their mortgage company slams them with inflated fees. Some states also ban settlement cost markups without additional services. Check with your state attorney general to see whether you might have protection at that level while the federal issue twists in the wind.

Published: August 22, 2005

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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.