Don't fall for illegal mortgage fees
By Holden Lewis • Bankrate.com

You 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.

No mark-ups
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:

• appraisals,
  
  
• settlement fees,
  
  
• credit reports,
  
  
• flood certifications,
  
  
• pest inspections,
  
  
• postage and courier costs,
  
  
• surveys,
  
  
• 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 they perform.

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.