Is the Term "Junk Fees" Unfair?

February 22, 1999 "I recently read your description of the so called 'junk fees.' It is quite disturbing that you paint such a negative picture� Indeed, there are many brokers in today's market who simply rob their clients and somehow or another manage to sleep at night. However, these unethical practices should not be associated with the term 'junk fees,' which with certain exceptions are real costs to the broker or lender�What you ought to do is provide readers with positive benchmarks as to what they might expect to pay for different settlement charges." I agree that the term "junk fees" carries an implication that these fees are necessarily excessive or redundant, which may or may not be the case. I didn't coin the term, however.  I learned it from hanging around lenders, although they don't use it within earshot of borrowers. I don't agree with your suggestion that I "provide readers with positive benchmarks as to what they might expect to pay for different settlement charges."  Charges vary from one part of the country to another.  Furthermore, once a borrower starts to focus on individual costs, he has lost the game.  What matters is not the individual costs but the total of costs that lenders charge or know.  I explain this in How to Shop Settlement Costs. We also part company on your view that there is no connection between the fees that I have called "junk fees" and incidents of overcharging by some brokers. It is the practice of charging borrowers separately for each service rendered -- a practice encouraged by various Federal and state statutes -- that permits unscrupulous brokers to obscure the true cost of the loan until the borrower is too far along to back out. If brokers and lenders quoted one dollar fee and one percent-of-loan fee, competition would force these numbers to be quoted upfront so consumers could shop them, and cases of excessive charges would decline or disappear. Copyright Jack Guttentag 2002

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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