Legal Update

HOME MORTGAGE LENDER MAY BE LIABLE TO BORROWER FOR MARK-UP OF LOAN TRANSACTION COSTS

  • June 26th, 2010
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The California Court of Appeal for the Second District ruled that when home mortgage lenders charged borrowers a marked-up price for the cost of services provided by others, such as underwriting services, tax services and wire transfer fees, then the lenders can be liable for violations of state and federal statutory protections. McKell v. Washington Mutual Inc.  142 Cal.App. 4th 1457 (2006).

FACTS: Borrowers filed a class action lawsuit against Washington Mutual Bank and its affiliates for violation of numerous state and federal statutes prohibiting deceptive loan practices.  Plaintiffs alleged that as a condition to obtaining a home loan, the bank required plaintiffs to pay an automatic underwriting fee, tax service fee and wire transfer fee.  Although the costs charged to plaintiffs were disclosed on the HUD-1 Settlement Statement, it was not disclosed that the bank marked-up these charges.  For example, the charge for automatic underwriting services was $400 when the actual cost was $20.  Plaintiffs alleged Washington Mutual intentionally concealed these practices from borrowers by listing the inflated underwriting charge on the HUD-1 Settlement Statement while failing to disclose that this is not the actual cost incurred.  Defendants argued that the lending statutes do not require defendants to limit their charges to pass-through costs only and the HUD-1 Statement need only disclose the charge to the borrower, not what the lender pays for those services.  The trial court agreed and dismissed the case.  The Court of Appeal disagreed and reversed, thereby allowing the case to go forward.

DECISION: The Court of Appeal ruled that the plaintiffs’ complaint adequately alleged violations of the Unfair Competition Law for fraudulent and unfair business practices.  Plaintiffs reasonably would conclude that the fees charged were the costs Washington Mutual incurred in providing these services. However, the fees charged were substantially above Washington Mutual’s costs. Washington Mutual’s practice of charging its customers more for services than the actual cost of those services, with no indication to the customers that they were doing so, may constitute a deceptive business practice within the meaning of the UCL as a reasonable consumer likely would believe that fees charged in connection with a home mortgage loan bore some correlation to services rendered.  The Court ejected Washington Mutual’s claim that its business practices cannot be considered deceptive or fraudulent, in that federal law only requires that the HUD-1 statement itemize the charges imposed on the buyer and seller. That the statement merely lists the charge imposed does not preclude a finding it is deceptive.

The Court ruled that the bank’s conduct may also violate RESPA.  Congress enacted RESPA in 1974 “in order to reduce the costs consumers pay to settle their real estate transactions.” Congress found “that significant reforms in the real estate settlement process are needed to insure that consumers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country….” Through RESPA, Congress sought “to effect certain changes in the settlement process for residential real estate that will result– (1) in more effective advance disclosure to home buyers and sellers of settlement costs; and (2) in the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services….” RESPA also prohibits kickbacks and unearned fees. Section 8(b) of RESPA specifically provides: “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”   The Court stated that “if the lender pays a third party for services and, though performing no additional services itself, charges an additional amount to the borrower, it receives that additional amount ‘other than for services actually performed,’ in violation of the statute.” Accordingly, a settlement service provider may not mark-up the cost of another provider’s services without providing additional settlement services; such payment must be for services that are actual, necessary and distinct services provided to justify the charge.

ANALYSIS: This decision is important because it interprets state and federal laws to prohibit lenders from marking-up charges from other service providers where the lender does not add any value to the service.  This is likely a wide spread practice of lenders which must now be curtailed and should result in lower transaction costs for home borrowers.