It's a white-hot legal issue in the real estate business, but for consumers it basically boils down to this: Should you as a home buyer or refinancer be charged $450 for an appraisal that cost your lender $175?
Should you pay $45 for a credit check that cost the lender less than $10, or be asked to fork over $65 for overnight document shipments that actually cost just $18?
After a decision by a large mortgage lender, those questions will continue to generate opposite answers for consumers around the country, depending on where they live. For example, if you are buying or refinancing a house in Maryland, Virginia, North Carolina or South Carolina, a lender or title agency can mark up your loan charges without limit, surprise you at the closing with padded junk fees, and not violate federal law.
But if you are buying property in New York or Connecticut, federal law prohibits markups unless the lender or settlement company can demonstrate that it performed additional, valuable services to justify the higher charge. And if you are buying in a number of other states or in the District of Columbia, the answer is up in the air.
That sharp divergence in the interpretation of federal law is the result of conflicting federal appellate court decisions about markups, which can add hundreds of dollars of extra costs to a home purchase. Late last year, the issue appeared to be headed for final resolution by the Supreme Court after an appellate court in New York ruled against giant Wells Fargo Home Mortgage Inc. in a class-action case.
But now Wells Fargo has decided not to appeal to the highest court, and intends instead to fight the plaintiffs in lower courts. A spokesman, Alejandro Hernandez, declined to discuss why the company chose not to seek a nationwide resolution.
The plaintiffs in the New York case, homeowners in Brooklyn, alleged that Wells Fargo, one of the country's highest-volume lenders, routinely marked up fees to its customers without adding services to justify the surcharges. For example, according to the lawsuit, Wells Fargo contracted for loan origination documents from outside vendors that cost the company $20 to $50, then charged $150 to $300 at settlements.
The plaintiffs also alleged that Wells Fargo marked up "automated underwriting" fees charged by mortgage investors Fannie Mae and Freddie Mac. Rather than simply passing along Fannie's or Freddie's $20 underwriting fees, according to the suit, Wells Fargo charged borrowers as much as $300 for underwriting.
Wells Fargo denied all the allegations, and won a favorable decision on its interpretation of the underlying federal law governing markups from a U.S. District Court in New York. The homeowners then took the case to U.S. Circuit Court of Appeals for the 2nd District, which overturned the lower court decision and opened the door to an appeal to the Supreme Court.
Legal experts thought the court would be likely to accept the case, given the disagreements among the various appellate courts. But now, with Wells Fargo's tactical decision not to appeal, the issue could remain unresolved indefinitely.
Here's the current lineup of the federal court circuits on markups, and where that leaves you as a consumer: If the property you are buying or refinancing is within the 4th, 7th or 8th circuits, lenders and other settlement service providers are free to mark up your fees with no fear of federal constraints. The states within those circuits include these 15: Maryland, Virginia, North Carolina, South Carolina, West Virginia, Illinois, Iowa, Wisconsin, Indiana, Minnesota, Missouri, Arkansas, Nebraska, North Dakota and South Dakota. There may be state consumer protection statutes that protect you against fee-gouging or deceptive marketing practices, but no federal law.
If you are buying or refinancing in the 11th or 2nd circuits, lenders and other service providers are prohibited from markups that are not accompanied by additional, valuable services. The states within those circuits are Florida, Georgia, Alabama, New York, Connecticut and Vermont.
What if you are buying or refinancing a house in any of the states not yet covered by an appellate court decision, or in the District of Columbia, also not covered? The Bush administration, which for three years has fought markups through the Justice and Housing and Urban Development department, thinks that in all those places, markups without additional services violate federal law.
Lenders, title companies and other settlement services groups passionately disagree. Ultimately, either Congress or the Supreme Court is going to have to weigh in on the issue. But don't hold your breath. Instead, ask about fees upfront when you shop for a mortgage. If you spot suspiciously bloated items later on your settlement sheet, challenge them.
In many parts of the country, you may well have federal law on your side.
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.