IN AN UNUSUAL series of legal moves, the Bush administration has quietly intervened recently in private lawsuits in an effort to establish a single, critical point of consumer law: Mortgage lenders, title agencies and other companies are not allowed to "mark up" the costs of any services that are part of a home real estate settlement.
Like firefighters scrambling to fight new flare-ups, teams of lawyers from the Department of Justice and the Department of Housing and Urban Development have filed "friend of the court" briefs in class action suits pending in three far-flung federal appellate courts. In each case, homeowners have alleged that they were charged "unearned" and "marked up" fees at their mortgage settlements.
Normally the federal government pays little attention to private lawsuits in which the government is not a direct party. But the three rapid-fire interventions in markup cases in recent weeks are special: Though federal housing officials are adamant that their longtime policy banning all markups is correct, the government's position has been flatly rejected by two successive federal appellate courts.
As a result of those rejections, home mortgage borrowers in eight states have no legal protections against marked-up settlement fees - no matter how high or blatant the excess fees may be.
Homebuyers and refinancers in Maryland, Virginia, West Virginia and the Carolinas (the federal judicial 4th Circuit) and in Illinois, Wisconsin and Indiana (the 7th Circuit) can be hit with markups without limit in the wake of appellate court decisions that rejected the federal government's ban.
Put in practical terms, a lender or settlement agent in those states can legally charge mortgage clients $450 for an appraisal that costs the lender $20 or less in electronic form, or can charge $65 for a credit report that costs $12. The same applies to most other settlement-sheet line items.
HUD has prohibited markups nationwide for more than a decade. But in a decision last year involving markups of title fees on Chicago homebuyers, the 7th U.S. Circuit Court of Appeals ruled that HUD's ban was not sufficiently supported by the language of the federal Real Estate Settlement Procedures Act, a consumer protection law for homebuyers enacted in 1974.
HUD Secretary Mel R. Martinez, a lawyer and recent homebuyer, disagreed sharply with the appellate court's interpretation in October, and announced an intensified crackdown on markups for this year. The agency has "over 100" active investigations under way against alleged settlement fee markup schemes, according to federal officials.
Despite the strong policy statement from the HUD secretary, a second appellate court rejected the agency's ban on markups in May. In that case, a Maryland homeowner was charged $65 for a credit report she alleged cost the lender, Crossland Mortgage Corp., $15 or less.
Two straight defeats
Faced with two straight defeats, lawyers at HUD and the Justice Department decided to intervene in markup cases in other judicial circuits around the country.
Part of their intent is to defeat their mortgage and title industry opponents in at least one appellate court, thereby clearing the way for a final resolution of the dispute by the Supreme Court. The high court virtually always reviews issues where appellate courts have disagreed among themselves - leaving the application of federal law starkly different for citizens who happen to live in different jurisdictions.
"It is simply not tolerable," said a Washington lawyer knowledgeable about the markups dispute, "to have homebuyers in one state subject to unlimited, unearned markups, while homebuyers a few miles away in another [judicial circuit] are protected from markups by federal law."
On Sept. 3, Justice Department and HUD lawyers intervened as a "friend of the court" in a case in the Midwest (8th Circuit) involving alleged credit report and appraisal fee markups by Bank of America.
In this case, a lower court had earlier supported the government's position that HUD's policy statement on the settlement law should be given deference by federal courts.
Intervention in Florida
Justice and HUD also intervened recently in a Florida lawsuit (11th Circuit) where homebuyers alleged that Chase Manhattan Mortgage Corp. illegally overcharged them on courier fees at settlements; and in a Chicago case (7th Circuit) involving alleged markups by a title agency.
In the latter case the government is asking the appellate court to rethink its decision of last year that opened the floodgates to unlimited markups at real estate closings.
The upshot for consumers?
At the moment, the federal government says markups are illegal in all states except the eight mentioned above. However, many lenders, title agencies and settlement firms continue to lard markups onto settlement sheets around the country, according to federal investigators - convinced that no federal court, or Congress, will tell them the practice violates federal law.
Kenneth R. Harney is a syndicated columnist. His e-mail address is kenharney@ aol.com. Send letters care of The Washington Post Writers Group, 1150 15th St. N.W., Washington 20071.