Avoiding Excessive Fees
From Lenders at Closing

March 24, 2004 -- Most lender mortgage-processing fees are a crock. There, I've said it. Lenders, bring on the hate mail.

Don't get me wrong, there are a host of legitimate, third-party charges that consumers need to pay to buy a home, such as fees to cover the title search and title insurance, flood certification, home appraisal and survey, credit report and pest inspection.

But mortgage-processing fees? In my book, it's simply lenders double-dipping on loan transactions. In addition to the interest rates consumers pay lenders to borrow their money, homeowners also are asked to pony up what can amount to several hundreds of dollars for paperwork processing.

An application fee? Charges for document preparation? An "administration" fee? They even want you to pay their postage. I'm surprised lenders aren't charging for in-office backrubs for overworked loan officers. Today, I review moves borrowers can make to help curb some of the most egregious costs.

Paying Through the Nose for Paperwork

Charging a borrower to become your customer seems like a bad business practice – particularly in the current environment, when industry competition is fierce and lenders are struggling to attract new customers thanks to opt-out mailing lists and do-not-call registries. Still, lenders keep charging borrowers exorbitant loan-processing fees. A 2003 survey by financial publishers Bankrate.com found total loan fees as high as $11,395. And borrowers continue to pay, often oblivious to exactly what it is they're paying.

Industry watchers generally disagree with me, saying initial mortgage and mortgage-refinancing fees are a legitimate cost of business that should be passed on to consumers.

"Because first mortgages typically are so much larger than secondary mortgages like home-equity loans, lenders are taking on considerably more risk, so the loans require very thorough documentation," says Keith Gumbinger, mortgage-information provider HSH Associates in Pompton Plains, N.J.

While it's unlikely lenders will stop charging mortgage-processing fees any time soon, possible changes in the way lenders disclose fees may soon make it easier for borrowers to comparison shop.

The U.S. Department of Housing and Urban Development in June 2002 proposed reforming the Real Estate Settlement Procedures Act, which guides fee disclosures for home mortgages and prohibits kickbacks in real-estate transactions, among other provisions. One proposed change: to require lenders to price all loan fees up front in one firm lump sum, with only a little bit of wiggle room for last-minute changes.

The rules have been under review by the federal Office of Management and Budget, which recently agreed to extend its review period by 30 more days. (See sidebar.)

What To Do Until Then

But until changes are made to the current fee-disclosure rules, consumers are on their own in trying to figure out exactly what they'll be charged for the loan before their paperwork hits the settlement table. Getting as much information upfront, and sticking to your guns at the closing, can help you avoid paying more than you should.

Clean Up Your Own Mess. Loan-processing costs often depend on how you've managed your finances in the past. Borrowers with low credit scores – justified or not -- typically pay more in fees than those with higher scores.

"If the borrower's initial credit report came in at a certain level of risk – say 620, right on the border of the subprime cutoff – the lender might audit the application much more closely than someone who comes in with a score of 750," says Terry Clemans, executive director of the National Credit Reporting Association in Bloomingdale, Ill.

An example of how this plays out concerns a little-known process called credit re-scoring. If there's erroneous information in your report that's keeping your score down, lenders may work with credit-reporting agencies to expedite changes in your report to boost your score and qualify you for a better loan rate, Mr. Clemans says. But it can cost between $30 to $50 to fix each erroneous entry, in each of your three credit reports.

How to avoid paying these costs? Get copies of your credit reports and get to work clearing up any mistakes well before you apply for a loan. Indeed, even if you believe you should have a stellar credit rating, it's a good idea to check your reports before you begin loan shopping to be sure there are no errors.

Set Your Terms Early. Deciding right off the bat what fees you don't want to pay is one way to let your lender know you mean business. Before getting the loan process started, tell your mortgage broker or lender you absolutely won't do a deal unless the lender waives certain charges. Fees related to administration of your loan are good candidates, including processing fees, documentation fees and overnight-delivery costs.

Another fee to target is the credit-report fee, particularly if you're working with a large lender. "Large corporate accounts will pay a greatly reduced amount for credit data compared to what consumers pay," Mr. Clemans says.

Indeed, one estimate from a credit-industry insider put the amount large creditors pay to pull individual credit reports at between 30 and 40 cents apiece, compared with the $12.95 consumers pay when buying through any of the Big Three credit-reporting firms. Yet some lenders charge consumers up to $55 in credit-report fees. (For other fees that may be easily negotiated, see the sidebar.

Dispute Questionable Fees Upfront. Another good time to focus on fees is immediately after you've received a good-faith estimate.

Immediately is the key. A lender or broker may be less willing to budge on pricing as the loan approaches settlement, particularly on closing day. They're betting borrowers won't walk away from the transaction once they've become invested in the process.

Also, balk at paying "waiver" fees, which some lenders charge if you opt to use your own title insurer or appraisal firm instead of their preferred vendor.

Fees to "waive escrow" can be especially egregious. Lenders often set up escrow accounts to pay for property taxes, fire- and hazard-insurance premiums, and private mortgage insurance. But if you'd prefer to pay these costs yourself, why should the lender get a fee for not doing the work?

If the lender agrees to make fee reductions, ask for a revised good-faith estimate to reflect the changes and ensure that the lender didn't raise other fees to make up the shortfall. Compare total fees on both estimates to be sure. For more guidance on negotiating fees, see this helpful primer from the American Bar Association.

Don't Wait Until Closing Day. Your lender is required to give you a copy of your finalized HUD-1 form, the summary of your total loan-settlement fees, at your request least 24 hours before closing, says HUD's Mr. Sullivan.

Ask for it, but be prepared: Your lender or broker may balk, sheepishly citing last-minute delays. Don't take no for an answer. It's your right by law. Leave yourself enough time to read through the HUD-1 and compare the costs quoted in your good-faith estimate. If you see any additional administrative charges or other questionable fees that don't appear on your good-faith estimate, contact the loan officer before the closing date and inquire about the charge.

Consider Home-Equity Debt Instead. If you're thinking about doing a cash-out refinance, where you take out a larger mortgage to tap home equity, or if you'd like to refinance a small-ish mortgage to get a better interest rate than you currently have, consider doing what Journal columnist Jonathan Clements recently did and swap your mortgage for a home-equity line of credit. Fees on these loans are considerably lower.

"Home-equity loans and lines-of-credit take less time in terms of loan origination," says Doreen Woo Ho, head of Wells Fargo's consumer-credit group in San Francisco. "We have lower costs than a first mortgage, and we absorb a lot of that cost because rates tend to be slightly higher than traditional mortgage rates."

Indeed, fees on the average annual home-equity loan/line of credit were just $22, according to a survey by the Consumer Bankers Association.

-- Ms. Cullen writes the Fiscally Fit column for The Wall Street Journal Online. WSJ.com subscribers can view past columns in the Fiscally Fit archives.

Email your comments to rjeditor@dowjones.com.