A Price Tag Like Any Other

By Professor Lauren Willis

This appeared on the Huffington Post.

The official question presented in the Supreme Court case Freeman v. Quicken Loans is whether the Real Estate Settlement Procedures Act (RESPA) "prohibits a real estate settlement services provider from charging an unearned fee only if the fee is divided between two or more parties." The real question presented is whether the price people pay for obtaining a mortgage must be transparent, a price tag like any other.

RESPA says: "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."

Some courts have held that this only prohibits kickbacks, such as when a broker (or loan officer, if the borrower is dealing directly with the lender) selects a title company for the borrower, the borrower pays the title company a $2,000 fee at closing, and the title company gives the broker or lender a $500 cut of that fee. Other courts have held that it also outlaws (1) bogus fees, such as when a broker or lender charges a $500 "loan discount fee" but then does not give the borrower any discount on his loan's interest rate, and (2) hidden overcharges, such as when a broker or lender tells the borrower that the "title inspection fee" is $2000 but the title company only charges $1,500 and the broker or lender pockets the difference.

When Congress enacted RESPA, the kickback scenario was a major concern. Therefore, in the subsection of the statute preceding the one quoted above, Congress prohibited giving or receiving "any fee, kickback, or thing of value" in exchange for referring business to a real estate settlement service provider. Having already prohibited kickbacks, Congress clearly intended the subsection prohibiting charges for services that were not actually performed to prohibit something other than kickbacks.

Bogus fees and hidden overcharges are charges the borrower is directed to pay even though no service was provided in exchange. In the bogus fee example above, 100 percent of the $500 loan discount fee is a charge for which no service was received; in the hidden overcharge example, $500 of the $1,500 title fee is a charge for which no service was received.

As a practical matter, the kickback, the bogus fee and the hidden overcharge all leave the borrower $500 poorer, and all do so by shrouding the true price of settlement services. By calling the $500 a "loan discount fee" or part of a "title inspection fee," the borrower is led to believe he is receiving a reduction in his interest rate or $1,500 worth of title services, but he is not. The borrower may have agreed to pay the broker $2,000 for her services, but the broker is paying herself another $500.

Congress explained in enacting RESPA that it sought to protect consumers "from unnecessarily high settlement charges caused by certain abusive practices..." Bogus fees, hidden overcharges, and kickbacks are all abusive practices that produce unnecessarily high settlement charges. If a broker wants to charge $2,500 for her services, she should negotiate that rate up front, competing fairly with other brokers for the borrower's business.

Once the broker and borrower have agreed on a fee, the broker's job is to obtain reputable settlement services at the best price she can find. That is what most borrowers believe they have hired a broker to do - to shop for the best loan price and for appropriate competitively-priced settlement services, so that the borrower does not need to engage in this comparison shopping himself.

Even those consumers who deal directly with a lender believe that the interest rate they are offered is based entirely on objective criteria (such as the borrower's credit score), meaning that every consumer with the same characteristics is offered the same interest rate. Borrowers who pay a "discount fee" believe that they are paying to reduce the interest rate they would otherwise be charged. Borrowers do not expect their broker or lender to pad the settlement sheet with added bogus fees. They expect that when the settlement sheet says that the amount of the "title inspection" is $1,500, that is the amount the title company is charging. They do not expect $1,000 to go to the title company and $500 to go to the broker.

The lack of transparency mortgage pricing impairs the operation of competitive market forces, leading to unnecessarily high settlement charges. People who are unfamiliar with broker and lender price shrouding schemes are particularly vulnerable to being overcharged. For reasons of both fairness and efficiency, a home loan should have a transparent price tag.