Calling out loan underwriting fees

Law of the Land

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Apr. 28, 2010

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Law of the Land

Tara-Nicholle Nelson
Inman News

Alinda and Armando Martinez refinanced their home loan, obtaining a new loan from Wells Fargo. Wells charged the Martinezes an $800 underwriting fee, which the Martinezes alleged was excessive and not reasonably related to Wells Fargo's actual costs of underwriting their new loan.

The Martinezes filed suit against Wells Fargo on their own behalf and for a class of others, alleging that Wells Fargo violated the prohibition of unearned fees in Section 8 of the U.S. Real Estate Settlement Procedures Act (RESPA), and was also "unfair," "fraudulent" and "illegal," all in violation of California’s Unfair Competition Law.

The trial court dismissed the Martinezes' RESPA claim, on grounds that even if the $800 fee was an overcharge, Wells Fargo had, in fact, performed a service to earn the fee, so that the fee did not violate RESPA's unearned fee provision.

Additionally, the trial court ruled that the Martinezes' claims that the underwriting fee was unfair and fraudulent under California law were preempted by the National Bank Act and other federal laws, and that their argument that the fee was "illegal" under California's Unfair Competition Law (UCL) simply did not state a valid claim, in that the Martinezes failed to identify an underlying predicate act by Wells Fargo that was illegal.

On appeal to the Ninth Circuit Court of Appeals, the trial court's dismissal of the Martinezes claims was upheld.

The appellate court explained that the Department of Housing and Urban Development (HUD) interprets the RESPA language barring unearned closing fees on real estate loans to prohibit overcharges, quoting a HUD policy document for the rule: "If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided."

However, the court opined, the express language of RESPA's unearned fee provision "prohibits only the practice of giving or accepting money where no service whatsoever is performed in exchange for that money."

Additionally, three other federal circuits had ruled that excessive lender fees imposed where a service was actually provided did not violate RESPA's unearned fee provision -- one circuit having actually decided this precise issue on an identical case against Wells Fargo.

Given that Wells Fargo did, in fact, perform an underwriting service in exchange for the $800 fee, and given the unambiguity of the RESPA language at issue, the Ninth Circuit ruled that even if the fee was excessive, the overcharge was not a violation of RESPA's unearned fee provision.

The Court of Appeals then turned its attention to the Martinezes' arguments that Wells Fargo's conduct violated California's UCL. The Martinezes claimed that Wells engaged in unfair competition by overcharging and marking up underwriting and tax service fees, and engaged in fraudulent conduct by failing to disclose the actual costs to Wells of these line items.

The Court of Appeals pointed out that specific fee-setting and real estate lending provisions of the federal National Bank Act and regulations of the Office of the Comptroller of the Currency expressly preempt state law from governing the exact actions about which the Martinezes complained were unfair and fraudulent.

Because these claimed, but preempted, state law violations constituted the predicate unlawful behavior to the Martinezes claim that Wells' conduct was also "unlawful" under California's UCL, the Martinezes could not meet the requirements for showing Wells' conduct was unlawful.

Accordingly, the trial court's dismissal of the Martinezes claims against Wells Fargo was upheld.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

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