Don't fall for illegal mortgage fees
can save money by knowing the difference between a legal and an
illegal mortgage fee.
Here's a simple little quiz to
show how even well-meaning mortgage lenders and brokers can fall
afoul of the law. See if you can guess which of the following practices
are legal and which aren't:
- A broker charges a $200 application fee. You pay
the fee, apply for the mortgage and get the paperwork rolling,
but keep looking. You find a better deal elsewhere and ask for
your money back. The broker refuses your request and keeps the
money, explaining that the fee was nonrefundable.
- A lender pays a total of $24 to pull credit reports
on you from each of the big three credit bureaus. The lender charges
you a $45 credit report fee.
- You buy your house from a builder who happens to
own a title agency. You want to use another title agency, one
of your choosing, and the builder charges a $300 fee for the privilege.
Answer: The first case, in which the broker charges
an application fee, is legal. The other two cases constitute violations
of the Real Estate Settlement Procedures Act, or RESPA. They're
the sorts of practices that you should watch out for.
"Settlement service providers have a right to
be reasonably compensated for their services," says Mel Martinez,
secretary of the Department of Housing and Urban Development. "They
don't have a right to collect illegal kickbacks and unearned fees."
As a consumer, you would have a hard time detecting
illegal kickbacks because they usually take the form of hidden business
relationships. Unearned fees are easier to spot. If you're vigilant
and ask questions, you might be able to ferret out unearned fees
and avoid them.
Remember: Under RESPA, it's illegal to charge for
a service that is not provided, or to mark up a fee charged by a
third party, such as a pest inspector or credit bureau. If a company
charges illegal fees, you can negotiate a better deal or report
the company to HUD. Or both.
This autumn, HUD settled with a number of companies that had been
accused of violating RESPA. Among them were Central Pacific Mortgage
Corp., which overcharged some customers for credit reports, and
Arvida, a Florida builder and real-estate services conglomerate
that charged $300 to home buyers who chose their own title agencies.
Arvida also was accused of overcharging some buyers
for closing costs by charging them a percentage of the price of
a house. Some of the money paid for closing costs. The rest was
retained by Arvida without being specifically accounted for, HUD
says, and that's a no-no.
The companies agreed to pay fines but did not admit
to wrongdoing. Although they didn't admit to doing anything wrong,
they agreed to stop doing what HUD objected to.
Even well-meaning businesses get in trouble. According
to HUD, Central Pacific Mortgage overcharged some customers for
credit reports and undercharged others. It wasn't company policy
to overcharge, but managers in some offices did so, apparently because
they didn't know any better and the parent company wasn't aware
of the practice.
Businesses and even courts sometimes have trouble
understanding what's legal and what isn't under RESPA. In July,
a federal appeals court ruled that it was OK for a title company
in Chicago to mark up county recorder fees as long as it didn't
split the fees with anyone. The appeals court said that it would
change its ruling if HUD issued a formal opinion to the contrary,
which is what HUD did.
What HUD said was this: Don't mark up third-party
charges such as:
- settlement fees,
- credit reports,
- flood certifications,
- pest inspections,
- postage and courier costs,
- title insurance and
- title work, such as title searches, plat drawings
and name searches.
Better shop around
You always should comparison-shop for a mortgage, and one of the
reasons is to detect improper charges. If two lenders say they'll
charge $25 for credit reports and $45 for a flood certification,
and another lender wants to charge $50 for the credit reports and
$75 for the flood certification, ask why.
Similarly, if a company wants to charge you for not
performing a service, try to get the fee eliminated. HUD sent a
clear message when it told Arvida to stop charging $300 for choosing
a non-Arvida-affiliated title agency.
Builders, lenders, mortgage brokers and title agencies
are entitled to a profit for the valuable work they do. Under federal
law, they can't engage in kickbacks or mark up third-party fees,
but they have a lot of leeway in what they charge for the services
Lenders and brokers charge myriad fees, including
administration fees, application fees, commitment fees, document
preparation fees, processing fees, underwriting fees and wire-transfer
fees. This is where they're supposed to make their profits -- not
by charging you double what they pay to see your credit report.