Class-Action Suits Test Loan Payoff Charges

WASHINGTON — Get ready for the next big legal brouhaha in the home mortgage field, one that could lead to millions of dollars in refunds to consumers.

Attorneys representing borrowers in several states are readying a series of class-action suits challenging the fees lenders routinely charge borrowers who pay off their loans early to sell their homes or to refinance. The fees carry various designations--”satisfaction” charges, “payoff statement fee,” “demand statement fee,” document preparation, legal and fax charges.

What makes them particularly troublesome, say attorneys, is that unlike most loan settlement-related charges, they are often not seen or scrutinized by borrowers. Worse yet, the charges may well be illegal, since they are not specifically authorized by the mortgage loan documents.

The loan payoff fees tend to be relatively small--ranging anywhere from $15 for fax charges to $50 or $75 for payoff document preparation. In combination they can sometimes add up to $100 or more. On an aggregate national basis, say class-action attorneys, they mean millions of dollars of income each year for large loan-servicing firms handling the payoffs on thousands of loans.

Edward K. O’Brien, a Boston attorney preparing class-action suits against what he calls “several of the largest mortgage companies in the country,” says loan payoff charges of any type “are not authorized by anything in most loan documents--in fact they’re prohibited.”

He cites the standard mortgage contract used in Massachusetts, for example. It provides that “upon payment of all sums secured by this security instrument [the mortgage], the lender shall discharge this security instrument without charge to the borrower.” The Massachusetts document--essentially similar to the standard forms used nationwide--does direct the borrower to pay any governmental record-keeping charges in connection with discharge of the mortgage lien against the property.

A real estate settlement attorney in Bethesda, Md., Richard L. Fritts of Rothstein & Associates, says loan payoff charges for faxes and document preparation are routinely tacked onto the amount the borrower is required to send to the lender to terminate the lien.

“I was wondering when someone would put together a class-action suit to challenge these fees,” said Fritts, “because I’ve never seen a loan document that specifically allows them. There’s no legal basis for them, but a lot of [lenders] seem to use them.”

Fritts confirmed that home sellers or refinancers often aren’t aware of the fees because they’re sent directly from the lender or loan servicer to the escrow agent or settlement attorney handling the closing. They get rolled into a lump-sum payoff figure due from the seller’s or refinancer’s proceeds, to be sent to the lender.

“Unless your [settlement agent or] attorney walks you through the payoff-computation figures separately, as we do,” said Fritts, “then you’d never know that you were paying these fees at all. The typical seller just says, ‘OK, what’s my bottom line?’ ”

Daniel Edelman, a Chicago class-action attorney, says consumers need to focus more attention on payoff computations. Not only are consumers being hit with unauthorized “junk” fees behind their backs, he says, but sometimes aren’t being refunded money that legally is theirs.

For example, says Edelman, many borrowers who buy credit life insurance with lump-sum premiums up front are owed pro rata refunds of the premiums when they pay off the loan early.

“When you buy a 15-year credit life policy and then pay off the loan in five years, you are owed a credit” for the prepaid premiums attributable to the final 10 years, he said. Yet many borrowers never receive a cent or any disclosure of what’s due--another loan payoff computation “abuse” that Edelman says will be the target of litigation.

O’Brien would not disclose the identities of the major lenders he plans to sue, but he said the first complaints will be filed this month.

Asked for comment about the issue, mortgage executives had cautious responses. A spokesman for giant Norwest Mortgage Corp., based in Des Moines, Iowa, said that because of the potential for litigation, the firm is reviewing even the one fee it frequently charges on payoff statements, a fax fee. Illinois-based PNC Mortgage Corp. said it charges no payoff fees, other than the recording fee required by local governments.

What’s the bottom line for you? First, if you’re paying off a loan through a home sale or refinance, ask the settlement agent to explain the figures sent by the lender.

And check your mortgage contract: If it prohibits charges at payoff, demand that they be eliminated before you settle.

Distributed by the Washington Post Writers Group.