Doc Prep Fee - The Huntington Case
by BOL Guru Mary Beth Guard
Huntington Mortgage Company faced a class action suit challenging a document preparation fee routinely charged by Huntington that was not disclosed as part of the finance charge. The 6th Circuit Court of Appeals ruled 4/29/02 on an appeal from the district court's summary judgment in favor of Huntington on the issue of whether Huntington's actions violate the Truth in Lending Act and state law.
Background, Issues, and Decision
Huntington charges a document preparation fee of $250 on mortgage loans. In rare cases, it waives or reduces that fee. Plaintiffs claim that charging the fee without disclosing it as a finance charge violates the Truth in Lending Act and Regulation Z. Reg Z allows a lender to exclude from the finance charge fees for the preparation of certain "loan-related documents" as long as the fees are "bona fide and reasonable in amount." Plaintiffs raised two arguments:
The TILA exclusion should apply only to documents related to the transfer of title, not to all documents connected with a mortgage loan. [They based this argument primarily on an interpretation of RESPA and HUD's Reg X.]
Huntington's document preparation fee was not "bona fide and reasonable" because it covers loan origination costs and because document preparation services are available on the Internet for substantially less than $250.
Essentially, plaintiffs asserted that Huntington's doc prep fee is not "exactly what it purports to be". Under plaintiffs' view, Huntington can only charge its costs of preparing title-related documents, such as notes, mortgages, and deeds. Their reasoning is that on the Good Faith Estimate prepared to comply with RESPA, the entered the $250 doc prep fee on Line 1105 -- and that's the line for costs of preparing title-related documents.
The district court below had described this as "a strained effort by plaintiffs to bootstrap an arguable violation of Regulation X, for which there is no private right of action, into a TILA violation." The 6th Circuit Court says that
HUD's Regulation X is simply not germane to plaintiffs' TILA claim.
The plain language of Reg Z permits the exclusion of fees for the preparation of not only mortgages and deeds, but also "settlement documents" -- a broad term "that would seem to encompass any other documents necessary for the closing of a mortgage loan."
The appendix to Regulation X states that Line 1005 is for the entry of "charges for preparation of deeds, mortgages, notes, etc." The inclusion of the term "etc." in the Regulation X, Line 1005 definition leaves room for fees for the preparation of settlement docs other than title-transferring documents. Even if it didn't, that doesn't establish a violation of Regulation Z, which contains a different definition.
Plaintiffs made another argument about the bona fide nature of the fee that related to statements made by a manager. Those arguments, which also didn't help the plaintiff, aren't detailed here because they are fact-specific and relate to the interplay between related companies.
The final argument was that the fee charged is not "reasonable in amount" as required by Reg Z. Plaintiffs tried to get the court to rule that mortgage lenders may only charge as a doc prep fee the amount of the lender's actual costs for preparing loan related documents. In this case, Huntington had its own employees prepare the relevant documents, rather than a third-party service, making it difficult to determine the actual preparation costs on individual loans. Huntington argued instead that the fee should be considered reasonable it it was:
for a service actually performed; and
reasonable in comparison to prevailing practices of the industry in the relevant market.
In a previous case, In re Grigsby, the court said:
"To be excluded from the finance charge, the fees must not only be the right types, but they must also be 'bona fide and reasonable in amount.' They are bona fide even if the services for which the fees are imposed are performed by employees of the creditor rather than a third party . . . Charges must be reasonable in amount so as not to allow inflated costs to indirectly augment the creditor's yield. Reasonableness should be determined by comparing the charges imposed by a particular creditor with the prevailing practices of the industry in the locality."
Huntington had produced evidence that suggested $250 is a reasonable fee for document preparation in Western Michigan. The plaintiffs did not produce any evidence to the contrary. The appellate court therefore found there is no genuine issue of material fact as to whether the fee was "reasonable" under Regulation Z. The fact that doc prep services are offered for substantially less on the Internet does not create an issue of fact as to reasonableness. The issue is not whether Hungtington has used the cheapest third-party service available to it anywhere, but whether the fee is reasonable given the prevailing practices in the relevant market.
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