There's a shootout brewing in Pennsylvania and community bankers aren't supporting their local sheriff.
Bankers and county officials are going head-to-head over a costly reinterpretation of state law that has sheriffs charging Keystone State banks millions of dollars in higher foreclosure fees.
The new fees are based on the total debt owed to the bank, not just the legal costs of the proceedings.
"It's something we've learned to live with," said Charles H. Meacham, president of $1.25-billion-asset Commonwealth Federal Savings, Valley Forge, whose bank paid almost $34,000 in fees for 12 foreclosures in the last 12 months. "We think they're unjustified. [It's] one of the ever-increasing number of hidden taxes that seem to exist in our economy."
"It's not the way it should be," said lawyer Leon Haller, of Purcell, Krug & Haller in Harrisburg, whose clients include the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. "The sheriff's offices who started it were just stealing the mortgage companies' money."
Forrest Sebring, secretary and treasurer of the Pennsylvania Sheriffs Association, said, "The banks and the attorneys have misconstrued this for many years and have not been paying what they should be paying."
Legislation to prohibit using the total debt as the commission base is pending in the state House of Representatives, but county officials oppose it.
"It has a significant fiscal impact on the counties," said Douglas Hill, executive director of the County Commissioners Association of Pennsylvania. For some of the smallest counties, he said, the fees raise $300,000 to $500,000 a year, which "is a pretty sizable amount."
Under Pennsylvania law, sheriffs charge a commission, called poundage, for every foreclosure sale.
The law states that the sheriff gets 2% of the first $250,000 of the total bid for the property, "whether paid to the sheriff or credited to the purchaser," and 0.5% of the rest.
The bid price usually equals the sheriff's costs, such as advertising and legal expenses.
The interpretation of the law never came into question until 1991, When Pike County Sheriff Harry Geiger charged $830-million-asset York Federal Savings & Loan Association $1,826 for assisting in a foreclosure sale on a mortgage of about $96,000, with costs of $304.
Mr. Geiger contended that since the bank bought back the property as credit against the debt, the bid price was actually the full debt value, not just costs..
That "makes a big difference in the amount paid by the financial institutions or other creditors having properties foreclosed," said Robert Angelo, general counsel for York.
Under the old interpretation, York would have paid only about $6.
"They just figured it was a good way to raise money for the county," Mr. Haller said. "They believe they had a fight to get it based on their interpretation of the statute. Most of us foreclosure hacks thought they were out of their minds."
York sued, but lost in the Court of Common Pleas of Pike County and on appeal to the Commonwealth Court of Pennsylvania in 1992. The state Supreme Court has refused to hear the case, effectively writing the new interpretation into state law.
Michael Fina, an attorney with Quakertown National Bank in Quakertown, said some banks may now be hesitant about foreclosing in high-debt situations, especially when the property value and bid price are likely to be very low.
"That's when you're really getting beat up," he said. "You have to be more conscious of what you want to foreclose on."
"There's not a whole lot we can do about it at this point," said Raymond M. Kilargis, chief financial officer of $1.2-billion-asset MLF Bancorp in Villanova. "It's just a revenue-raiser for the county sheriff's office."
About a month ago, MLF paid a $30,000 fee for a $1.5 million foreclosure case. Mr. Kilargis said the normal cost would have been about $5,000.