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Regulators Probe Upfront Estimates, Upcharges And Low-Balling

By Kenneth R. Harney
Saturday, April 2, 2005; Page F01

Federal investigators are looking at real estate closings nationwide and turning up practices that might disturb home buyers.

In settlements announced March 21, regulators broke up what they alleged to be a sophisticated kickback scheme in which realty agents, home builders, and title and escrow executives shared portions of consumers' closing fees illegally.

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According to the Department of Housing and Urban Development, real estate agents in Tulsa created a shell corporation that bought a part interest in a local title insurance and escrow agency at a below-market price. A group of builders created a separate corporation that allegedly did the same.

The agents and builders sent their clients' title and settlement work to the title agencies in which they had interests. Those agencies then recycled portions of the title and settlement fees to individual agents and builders, based on the amount of business they referred. In some cases, according to the agreement, the title agencies also illegally marked up consumers' fees -- charging home buyers more for certain services than the actual cost.

The participants admitted no wrongdoing but agreed to pay nearly half a million dollars to the government to close the case.

Are kickback and referral fee schemes like this unusual? Not unusual enough, in the view of federal regulators such as Ivy M. Jackson, who heads the government's real estate settlement oversight unit at HUD. Jackson's investigators receive information on hundreds of alleged kickback schemes every year and have investigations or negotiations underway nationwide on more than 60 cases. More agreements "are on the way," Jackson said. "We are anticipating a busy year."

A central thread running through many of the kickback arrangements that HUD investigates is title insurance. Though most consumers are unaware, a substantial portion of the title premium they pay at closing does not go to the national insurance company underwriting the actual title policy. Frequently, 80 percent or more goes to the local title agent or lawyer who ordered the policy and may well be running the closing.

If you paid title charges of $1,500, for example, just $300 of that might pay for the actual insurance policy; $1,200 might go to the closing or title agent. When a title agent kicks back a portion of the premium to realty agents or loan officers solely for referring your business, that violates federal law.

Other problems HUD's settlement police are turning up in investigations around the country, according to Jackson:

• Nondisclosures of settlement costs. Federal law requires a settlement agent to provide a copy of the home purchaser's settlement sheet -- a form known as the HUD-1 -- one business day in advance of the closing, if requested by the purchaser. While some closing agents routinely deliver the HUD-1 in advance, others fail to provide it even when asked.

• Low-balling settlement fees on the good-faith estimates. This can be especially harmful to consumers who diligently shop the mortgage marketplace for the best deals -- the lowest interest rates combined with the lowest closing fees. When loan officers intentionally low-ball estimates of fees to get business in the door, that is a deceptive and fraudulent trade practice. Yet HUD gets complaints from many home buyers and refinancers alleging wide disparities between upfront estimates and the final charges on the settlement sheet.

• "Upcharges" and markups. HUD's rules prohibit lenders and settlement agents from charging more for appraisals, credit reports and other third-party services they order, unless they provide additional services to justify the higher costs. For instance, a lender cannot simply contract for a $250 appraisal and then charge the buyer $450 at closing without performing additional, valuable work or services.

Though several federal appellate courts have ruled against HUD's position regarding markups, HUD continues to pursue the issue nationwide, as it did in the just-announced Oklahoma settlement.

How can you avoid being ripped off by settlement swindles? First, make sure you ask for guaranteed fees upfront. After all, loan officers are in the business and should know what fees to expect. If your lender or broker won't stand by the good-faith estimates with a guarantee, maybe there is less good faith in those estimates than you want.

Next, always ask to see the HUD-1 settlement sheet in advance. If necessary, remind the settlement agent about the federal requirement and insist on timely performance.

Finally, question fees that you don't understand or didn't expect. And if you have evidence or a suspicion of hanky-panky, let HUD's settlement sleuths know about it. To contact them, write to RESPA Unit, HUD, 451 Seventh St. SW, Washington, D.C. 20410, or visit www.hud.gov.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.

© 2005 The Washington Post Company