HUD finally goes after firms tied to settlement overcharges


IN A MOVE clearly designed to shake up the real estate and mortgage financing fields, the nation's top housing official has reached a series of settlements with major companies accused of paying illegal kickbacks and padding the closing costs of consumers buying homes.

Mel Martinez, secretary of housing and urban development (HUD), warned the housing and finance industries a month ago that he is serious about cleaning up shoddy practices in real estate settlements. Last week he started the cleanup: HUD collected $2.25 million in settlement agreements with homebuilders, mortgage lenders and realty service firms alleged to have violated federal anti-kickback and closing-cost-markup rules.

The settlements involved several well-known national companies, including Transamerica Corp., Conseco Finance Corp., First American Corp. and Arvida/JMB homebuilders, as well as 38 commercial banks, credit unions and thrift institutions.

HUD officials emphasized in interviews that the settlement agreements are just the beginning of what will be a series of legal actions in the coming months against companies found to be overcharging consumers and paying or receiving kickbacks for business referrals.

As part of the settlements, all the companies agreed to cease the practices HUD investigators identified as violations of federal law, but admitted no wrongdoing. The bulk of the settlement money will go to housing counseling and educational organizations.

From his earliest weeks in office, Martinez, a lawyer by profession, has targeted excessive closing costs in mortgage and home-buying settlements as top priorities for reform. In mid-October, he outlined federal policies designed to foster better disclosure and consumer understanding of financing fees charged by mortgage brokers.

A warning to lenders

At the same time, he also warned lenders and others to stop their widespread practice of overcharging consumers for credit report fees, appraisals, loan processing fees, courier expenses and other settlement costs. Under federal law, consumers can be asked to pay only the actual costs of credit reports, appraisals and other closing-related expenses incurred by lenders. The fees cannot be marked up to provide an additional profit for the lender or title company.

If an appraiser charges a home mortgage lender $275, in other words, the lender cannot bill you $350 at closing. Similarly, if a lender pays $15 to check your credit, the lender is not permitted to bill you for $60.

In one of the settlement agreements, a mortgage lender was alleged to have padded the credit report fees of hundreds of customers during the past three years. The alleged overcharges by Central Pacific Mortgage Corp. ranged from a few dollars per report to $50 per report, according to HUD lawyers. The alleged violations emerged after a federal audit of 21 of the company's branch offices.

Other companies targeted by HUD were accused of providing free or reduced-cost services to induce illegal referrals of business. First American Corp., a diversified title and real estate closing services company, was alleged to have provided low- or no-cost flood and tax certifications to lenders on their portfolios of existing mortgages in exchange for exclusive referrals on new loans.

Though the company denied any wrongdoing, it agreed to pay $1 million to nonprofit housing counseling organizations approved by HUD, plus another $200,000 to the Treasury as part of the settlement with the government.

Transamerica Corp. and a group of its affiliates were alleged to have engaged in similar practices from the mid-1990s. Though the company denied wrongdoing, it agreed to pay $500,000 to consumer counseling groups and $113,000 to federal authorities for costs associated with the investigation.

Referral-fee arrangements such as those alleged to have been conducted by Transamerica and First American are almost impossible for consumers to detect, HUD lawyers said. Yet homebuyers and mortgage borrowers ultimately pay for the kickbacks through unnecessarily high closing expenses.

A fee for declining

The allegations against homebuilder Arvida/JMB were different from the others. Arvida, a Florida company, was accused of pocketing excess closing fees charged to its customers. It also was cited for requiring new buyers who declined to use Arvida's affiliated title company to pay an extra $300 fee.

Federal law specifically guarantees consumers free choice of settlement service providers. Arvida agreed to cease its disputed practices and to refund nearly $50,000 to consumers, according to the settlement documents.

This crackdown represents the first significant federal enforcement action against home-settlement abuses in more than a decade.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington D.C., 20071. Or e-mail him at

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