By the Division of Banks
February 28, 2012
SUBJECT: Industry Letter on Unearned Fees in Mortgage Loan Transactions
To All Interested Parties:
The purpose of this letter is to bring to your attention a matter of serious concern regarding the assessment of certain duplicate or unearned fees to Massachusetts consumers and to raise awareness of the importance of lender oversight of third-party service providers.
One of the primary responsibilities of the Division of Banks (Division) is to ensure that the banks, credit unions and licensees under its supervision establish appropriate controls to ensure they operate fairly and in compliance with applicable state and federal consumer protection laws and regulations. An institution’s compliance responsibility extends to providing adequate oversight of third parties who perform services on behalf of the institution. One such third party service provider is a settlement agent, generally a closing attorney, who performs settlement services on behalf of a lender in a mortgage loan transaction. Division staff has identified issues with the assessment of fees by settlement agents in mortgage loan transactions. In particular, concerns have been raised in connection with the improper or duplicate assessment of mortgage discharge or release recording fees, specifically involving refinance mortgage transactions.
As the industry is aware, the Real Estate Settlement Procedures Act, 24 CFR 3500, (RESPA), now subject to the administration and enforcement by the Consumer Financial Protection Bureau (CFPB), contains disclosure and procedural requirements and restrictions applicable to providers of real estate settlement services. A major focus of this law is to ensure the accurate itemization of the costs for services performed and fees charged in connection with a mortgage transaction, and to prevent overcharges to borrowers in connection with these transactions. In the Commonwealth, chapter 93A of the General Laws also protects consumers from unfair and deceptive practices.
RESPA at 24 CFR 3500.14(c) states that:
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 settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. 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 this section.
Violations of RESPA are subject to substantial penalties.
After the origination of a mortgage loan transaction, there is the requirement to discharge the prior lien(s) and the settlement agent has a responsibility to the lender to ensure there is clear title to the subject property. As such, it is often appropriate for a settlement agent to collect a discharge recording fee from the borrower (or seller) at closing; however, this recording fee should not duplicate a similar fee already charged by a prior lien holder as part of the loan payoff amount and included and itemized on the payoff statement. Although not exhaustive, the following example is representative:
Example: A borrower has an existing mortgage loan at Institution A and applies for a refinance of this loan at Institution B. Institution A sends Institution B’s attorney a payoff statement which includes an itemized payoff and shows the $75 recording fee to the Registry of Deeds for the discharge of Institution A’s lien included in the total payoff amount. Institution B’s attorney charges an additional $75 fee, identified as a discharge or release recording fee, which is itemized on the Settlement Statement.
Comment: The assessment of the additional $75 fee for recording the discharge of the prior lien is duplicative on its face. If the intention was to refund the fee in the event the service was performed by the prior lien holder, there should be some indication to the borrower. The Division’s review showed that the settlement agent in some cases did refund this fee after closing after confirming the recording of the discharge was performed by the prior lienholder. However, in a number of cases the settlement agent did not file the discharge and, therefore, no recording fee was required. By retaining the $75 recording fee which was not used for its stated purpose, a violation of the cited provision of RESPA occurred.
Adequate oversight of third party service providers is a vital component in the Division’s evaluation of an institution’s compliance management system. Failure to monitor these relationships for adherence to consumer protection statutes, regulations and best practices may expose the institution to significant financial and reputational risk.
As part of an institution’s monitoring and oversight of a third party, including settlement agents, it should review activities to determine that they were completed in a timely manner. Failure to act timely may present significant risk to the institution as well as a consumer who is relying on others to perform.
Financial institutions are strongly encouraged to establish procedures for the monitoring and oversight of all third party service providers, including settlement agents. The scope of compliance audits should be expanded to include testing of services provided by these third parties. With specific reference to the above-described RESPA requirements, lenders must ensure fees charged by third parties are reasonable and reflect actual services performed. When such alleged violations are noted in the course of an examination, the Division may require, at a minimum, a complete file review and will require reimbursement to consumers in those cases where the fee assessed was unearned or not used for its stated purpose. The purpose of issuing this letter is to assist the industry in ensuring that such violations do not occur.
If you have any questions, please contact Mayte Rivera, Deputy Commissioner at (617) 956-1557 or firstname.lastname@example.org.
David J. Cotney
Commissioner of Banks