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Industry Commentary


Junk Fees Should be Shifted to Points


By DAVE HERSHMAN

December 11, 2002


There has been no greater controversy within the mortgage industry than the issue of charging miscellaneous or "junk" fees. The practice of charging fees that are in addition to the "normal" points (sometimes referred to the origination fee and discount points) has been assailed from the media to the halls of Congress.

No doubt this practice has contributed to a poor reputation for the industry. It is associated with such terms as "bait and switch" and "predatory lending." There is no doubt that the practice is not understood and should undergo significant revision. Before we go into the reasons for change, first let's delineate the types of fees associated with a mortgage:
  • The origination fee. This fee, generally one point or one percent of the loan amount, is traditionally charged to cover the cost of originating the loan. These costs include overhead and sales commissions.
  • Discount points. Discount points are charged to lower the interest rate on the mortgage. For example, a 6.5% mortgage may have no points -- including no origination fee-- and a 6.0% mortgage may carry two points.
  • Third-party fees. These are charges paid directly to third-party vendors as part of the process. These vendors include appraisers, credit reporting companies, and tax service providers.
  • Miscellaneous fees. These are fees charged by the mortgage company for work accomplished during aspects of the loan process. The names and charges vary, but frequently one will see processing fees, underwriting fees, lender fees, document preparation fees, and more. Some miscellaneous fees may be charged directly by the mortgage broker, and others by lenders to which the mortgage broker is selling the loan. Sometimes these fees are for third-party vendors such as contract underwriters.

It is the last category, miscellaneous fees, that carries the greatest negative stigma. In many ways this stigma is justified. Applicants shopping for a mortgage (and mortgage companies advertising their rates) both have a goal of disclosing the lowest rate and points. Many shoppers will ask the question, "What is the rate on your 30-year fixed mortgage?"

Many of them are not educated to ask about points, let alone additional fees that may increase the cost of the loan. If they are surprised during the loan application process when the Good Faith Estimate of Settlement Costs and Truth-in-Lending Statement are issued, the charge of "bait and switch" can be levied. It can be justified if these fees were not disclosed when the shopping occurred.

The presence of these fees not only makes rate comparison a difficult process, it makes settlement especially tedious. A HUD-1 form is difficult enough for a layman to decipher without the mortgage broker, mortgage lender, and the settlement company all adding a list of miscellaneous charges. By the time it is finished, the HUD-1 looks like an aerial photo of the Swiss Alps. Buying a home is supposed to be a pleasant process and this practice adds stress in all the wrong places.

Finally, there is an additional financial consequence of junk fees. The IRS allows charges that are levied as a percentage of the loan amount (points) to be tax deductible. Fees are not. Theref