WASHINGTON — They're called "garbage fees" and "junk charges" inside the mortgage industry, and they're the focus of a fast-moving wave of class-action suits on behalf of home buyers and re-financers.
They've also triggered demands that the federal government toughen up "truth-in-lending" rules to protect borrowers nationwide from being hit with unexpected, undisclosed fees at settlement.
As a consumer, you ought to know about them, so here's a quick overview.
Earlier this month, the Federal Reserve Board was asked to draw up new regulations that effectively ban the imposition of last-minute junk charges in home mortgage transactions. What are these fees? In the words of Chicago attorney Daniel A. Edelman, they carry a wide range of creative terminology on settlement sheets, including "underwriting" fees, loan disbursement charges, tax service fees, amortization schedule charges, truth-in-lending disclosure preparation fees, processing fees, loan assignment fees, flood-plain determination fees, document transportation or courier fees, to name just a handful.
Their common thread, says Edelman, is that they should be included in the federally mandated "finance charge" computation provided to borrowers three days after application, but in fact are not disclosed until settlement. The finance charge covers all the interest and other attendant costs or fees that are necessary to obtain the loan.
Edelman, whose firm has filed several class-action suits against mortgage lenders in the Midwest and South, says the use of junk charges has grown sharply in recent years so that some lenders "can appear to offer more competitive (annual percentage) rates (APRs)" to potential applicants by not disclosing all the fees they plan to charge at closing. One side effect of this practice, Edelman says, is "to shift overhead costs (some real, some fictitious and representing pure profit to the lender) onto borrowers."
Even though certain of the fees seem relatively small--typically ranging from $30 to $250--they can amount to substantial aggregate sums on the annual bottom line for lending institutions. Whatever the dollar size of the garbage charges, Edelman argues, "they violate federal law." Under the Truth-in-Lending Act they are supposed to be included in the "finance charge" advance disclosure.
Recent court decisions around the country appear to lend support to Edelman's position. According to a memorandum sent to clients by Brownstein Zeidman & Lore, a Washington law firm that represents large numbers of banks and mortgage companies, a federal appeals court ruling in a Florida case this spring held that courier charges and a state "intangibles tax" are indeed "finance charges" under the Truth-in-Lending Act when they're passed onto borrowers at settlement.
The memorandum warned that eight class-action suits on behalf of borrowers had been filed in the past several weeks alone, and urged clients to "review carefully (your Truth-in-Lending) compliance procedures, forms and closing instruments to ensure . . . that (your) charges are properly characterized."
Elsewhere, a federal court decision this year cited by Edelman in Maryland held that a $290 "origination fee" that was excluded from the finance charge violated the Truth-in-Lending Act. In a Pennsylvania case, a lender was found by a federal court to have violated the law by "marking up" document recording fees and imposing a charge for preparing Truth-in-Lending disclosures.
Asked for comment about junk fees, executives of several large mortgage firms had contrasting responses. For example, David Hershman, a regional vice president for American Residential Mortgage Corp. in northern Virginia, expressed surprise that such fees were being excluded from finance charge disclosures.
"I thought everybody understood that you have to include (routine financing-related fees) as part of the Truth-in-Lending disclosure," he said.
But another lender who spoke only on the condition of anonymity put it differently: "Of course some people out there are doing it (padding on junk fees at settlement). But it stinks in my opinion. You can't hand the borrower a \o7 fait accompli \f7 at settlement: You gotta pay these extra charges, chump, or you don't get the loan."
A spokeswoman for the Federal Reserve Board confirmed that staff members in the consumer affairs division are reviewing the subject of junk fees, prompted by a set of proposals for rule clarification submitted by Edelman. No decisions have been reached yet, however, she said.
What's the bottom line of all this for you?
Be aware that garbage fee practices exist, and may in some cases constitute violations of federal law. Ask your lender at application what fees typically are included in the finance charge computation, and what fees may be charged separately at closing.