Mortgage fraud and mortgage lending practices have been in the news in the last
few weeks as the U.S. District Court of appeals ruled on two controversial mortgage
settlement charges and the FBI announced a striking increase in and a crackdown
on
mortgage related fraud.
And the bubble continues to float as the Commerce Department announces yet
another month of strong new house sales.
Court Rules "Yes" and "No" in Wells Fargo Case.
September 10, 2004
The United States Court of Appeals for the Second Circuit (New York) split a
decision regarding settlement charges in a class action suit brought on behalf
of several borrowers against the holding company and several subsidiaries of
Wells Fargo & Company.
The plaintiffs, in a suit originally decided in the United States District
Court for the Eastern District of New York, charged that Wells Fargo had levied
excessive and unreasonable fees for settlement services and that it had also
marked up fees charged the plaintiffs for services provided by third parties
as part of the mortgage settlement process.
Specifically, the plaintiffs claimed that Wells Fargo overcharged for services
required to be paid by borrowers as part of the underwriting or settlement process
at rates many times the costs incurred, most particularly charges for analysis
of the borrowers' ability to repay the loan so as to qualify it for resale
on the secondary market. Such qualification was allegedly ascertained using
software obtained from Freddie Mac and Fannie Mae at a cost of $20 per loan
underwritten. The plaintiffs claimed to have been charged up to 25 times that
amount at settlement.
A second category of charges were termed by plaintiffs as 'mark-ups'
on required services performed by third parties. This would include appraisals,
title examinations, and credit reports. It was alleged that Wells Forgo added
a premium to charges for such services even though they performed no action
that added value to those services. For example, a credit report which might
cost $50 was charged to the borrower at $150 even though Wells Fargo had done
nothing more than order such a report. The District Court found in favor of
Wells Fargo on both issues.
The court based its decision largely on whether the Department of Housing and
Urban Development (HUD), in the absence of clear guidance in the statute (Real
Estate Settlement and Procedures Act (RESPA), and in particular ' 8(b)
of that act, had authority to speak to these charges in its 'Policy Statements'
which sought to regulate such fees.
The Appeals Court upheld the District Court in the matter of 'overcharges,'
finding that nothing in the language of the statute authorized courts to divide
a 'charge' into what they or some other...'entity deems to
be its 'reasonable'' and 'unreasonable''
components.' Nor did Congress empower HUD to determine such reasonable
and unreasonable components. 'Whatever its size, such a fee is 'for'
the services rendered by the institution and received by the borrower.'
The 2nd District Appellate Court, however, reversed the District Court on the
issue of 'mark-ups.' They found that a 1992 regulation issued by
HUD stating that 'A charge by a person for which no or nominal services
are performed or for which duplicative fees are charged is an unearned fee and
violates' RESPA ' 8(b)' to be a response to an invitation by
an (earlier) court for HUD to clarify its view on the matter. For this and several
other reasons, the Court ruled that HUD's policy statements should be
deferred to.
This decision may well set the stage for an eventual hearing in the Supreme
Court about the legality of the 'overcharges' and 'mark-ups.'
In the meantime the case has been sent back to the District Court for further
review. We will try to follow this, but you can read the entire decision at
www.ca2.uscourts.gov; reference Kruse v Wells Fargo Home Mortgage, Doc. # 03-7665.
THE FBI IS ON THE CASE.
September 17, 2004
On September 17, the Federal Bureau of Investigation (FBI) announced that mortgage
fraud is running rampant in the United States, with reports of suspicious
activity up three fold since 2001. The Bureau also trumpeted its progress in
the largest nationwide crackdown in its history directed at persons and groups
engaged in mortgage and allied fraud.
FBI Criminal Investigative Division's Assistant Director Chris Swecker
stated that 'Operation Continued Action reflects the FBI's...'effort
to identify, target, disrupt, and dismantle'operations engaged in fraud
schemes that target our nation's financial institutions.' The FBI
claims that, since the operation's inception in August, 2004 (sic), it
has identified more than 245 subjects in 158 investigations resulting in more
than 151 indictments, informations, and complaints filed to date.
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Mortgage fraud is a complex issue, one that has many facets. The most costly
impact is on lending institutions, but there are many types of fraud and predatory
lending practices that victimize individuals, even whole neighborhoods and communities.
We will soon present a multi-part series of articles on mortgage fraud; what
it is, federal and state programs to combat it, and how you can recognize it
and protect your home, your finances, and your credit.
And the Beat Goes On
September 27, 2004
After a downward blip in July, new home sales resumed its seemingly endless
climb in August, rising 9.4 percent to a seasonally adjusted annual rate of
1.18 million units. The annual adjusted rate in July was 1.08 million homes
according to a monthly report issued Monday by the U.S. Department of Commerce.
The fast growing Southern and Western regions of the country led the pace with
double-digit increases (12.6% and 19.5% respectively) but sales in the Northeast
were also up by a more modest 6%. Sales in the Midwest slowed by 8.3%.
The average sales price nationwide was $267,000.
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