Office of the Commissioner of Financial Regulation


Padded Closing Cost Advisory 02-02 - Advisory Notices


Download this advisory in Word format (Word document, 151KB, download Word viewer for free)


August 26, 2002

Mortgage Lender Licensees - Padded closing costs: Fee Overcharges, Kickbacks & Unearned Fees

A recent ruling by the United States Court of Appeals for the Fourth Circuit that certain padded closing costs are legal under federal law may have prompted misunderstanding in the mortgage industry in Maryland. The decision should not be interpreted as a permit or greenlight for mortgage lenders to overcharge Maryland residents for third party fees.

In brief, a consumer filed an action against Crossland Mortgage Corporation alleging a violation under Section 8(b) of the Real Estate Settlement Procedures Act ("RESPA"). The lender allegedly overcharged the consumer for the credit report and retained the excess amount for itself. The court rejected the consumer’s argument and ruled that the RESPA anti-kickback provision was not violated. The decision might have been different had the consumer not filed for relief under this anti-kickback provision. Nevertheless, the final ruling has no impact on Maryland laws or regulations. The decision does not preempt Maryland regulations, which specifically prohibit the retention of any portion of fees over and above the actual charge to be paid to a third party. Under Maryland regulations, all fees collected for third party services must be actual and verifiable. No other charges may be added.

COMAR provides:

"A licensee may not retain a fee, or any portion of a fee, collected from the borrower if the fee is represented as a charge to be paid to a third party for services in connection with the loan."

The Commissioner will continue to investigate allegations of padded closing costs involving Maryland licensed mortgage lenders and Maryland residents. Compliance examinations will continue to review pass through charges, consumer invoices, or payments to third parties. Violations of this regulation are subject to the enforcement provisions of Financial Institutions Article, Section 2-115 and Section 11-517, including the suspension or revocation of a license, imposing financial penalties, or requiring the restitution of money or property to any person aggrieved by the violation.