What Is The Real Estate Settlement Procedures Act (RESPA)?

When buying a home, you want to feel that the entire process is fair from start to finish – fair for you, and fair for everyone else you interact with during the mortgage loan process. The Real Estate Settlement Procedure Act (RESPA) federal law protects both buyers and sellers during real estate transactions.

But what is RESPA exactly, how does RESPA real estate work and what are the RESPA requirements for mortgage brokers and lenders? Let's take a look.

What Is RESPA?

The Real Estate Settlement Procedures Act (RESPA) protects borrowers when buying a house with certain mortgage loans by guaranteeing that lenders and mortgage brokers will disclose all closing costs. RESPA prevents unearned referral fees and kickbacks, and under RESPA, buyers and sellers must receive complete disclosures on their real estate settlement costs.

The History Of RESPA In Real Estate

In 1974, Congress passed RESPA to reduce settlement fees, including illegal or unearned fees to drive up the costs. The Department of Housing and Urban Development (HUD) originally enforced this law, which became effective on June 20, 1975.

The law has changed and been amended several times but became the responsibility of the Consumer Financial Protection Bureau (CFPB) in 2011, a government agency that protects and educates consumers about financial services and products.

How Does RESPA Regulate The Real Estate Industry?

RESPA regulates the real estate industry by protecting buyers and sellers from hidden fees from referral fees, kickbacks, regulates escrow accounts, bans title insurance mandates and limits marketing service agreements.

Prohibits Referral Fees And Kickbacks

Section 8 of RESPA prohibits kickbacks for business referrals related to or part of settlement services for mortgage loans. What is a kickback, exactly? It is when a real estate agent receives benefits for referring certain businesses or services, such as cash or another type of gift, also considered bribes. RESPA also does not allow unearned fee arrangements and fee-splitting agreements.

Real estate agents may not make recommendations about any type of service if it comes in the form of a bribe. If caught, they could face severe consequences.

As a buyer, these referral fees and kickbacks could make it more expensive to close your loan.

Regulates Escrow Accounts

Section 10 of RESPA regulates escrow accounts, meaning that loan servicers cannot require overly large escrow accounts – they can only contain just the right amount of funds necessary to pay for property taxes and homeowners insurance.

What exactly is escrow? It is a legal arrangement whereby a natural third party holds funds until the funds will go to their intended recipient. In this case, the funds go toward paying taxes and homeowners insurance.

Your servicer can calculate the right amount by adding the prior annual property tax and your insurance premium amount, then divide that by 12 to get your monthly escrow payment amount, which you'll pay as part of your monthly mortgage payment.

Section 10 also requires lenders to provide initial and annual account statements, helping buyers understand what they're on the hook for in terms of property taxes and homeowners insurance.

Bans Title Insurance Mandates

In Section 9, RESPA also bans title insurance mandates, meaning that home sellers or their attorneys cannot require that borrowers buy title insurance from specific companies as a condition of the sale of the property.

Title insurance protects home buyers and mortgage lenders from financial loss when there are title defects on a property, such as back taxes, conflicting wills and existing liens.

Limits Marketing Service Agreements (MSAs)

Marketing service agreements (MSAs) are agreements that involve an arrangement whereby an entity agrees to market or promote the services of another entity, receiving money in return. For example, a mortgage broker cannot promote the services of one particular real estate agent for a referral fee.

RESPA Requirements: What Information Must Be Disclosed And When?

Lenders must disclose certain information during the mortgage process, including the following:

1. Mortgage application process: Your mortgage application is a document that you fill out when you apply for a mortgage. Once you submit the application, you should receive a special information booklet, a Loan Estimate and a mortgage servicing disclosure. The Loan Estimate contains information about mortgage terms the lender quoted, and you should receive that within 3 days of submitting your application. The special information booklet published by the CFPB helps you understand real estate settlement costs after you fill out the application.

2. Closing process: During the closing process, you finalize details on your loan and new home. However, at least 3 days before you reach the closing table, the lender should provide final mortgage details on a Closing Disclosure. The lender should also include the affiliated business arrangement disclosure and the initial escrow statement. It's common for lenders to sell loans upon closing, so your lender will also reveal whether the lender will service your loan or transfer it to another lender for servicing. You will also learn about your avenues for complaint resolution.

3. Real estate settlement: Since property taxes change annually and homeowners insurance costs may also change, your loan servicer must give you an annual escrow statement once per year to make you aware of any changes to the amount you pay into your escrow account. The document will break down the payments you make into the account and the payments you take out of the account during the previous year. It also lets you know if you have an escrow surplus or shortage. If you have a surplus, you pay more into your account than you need, and you may get money back. If you have a shortage, you may not have paid enough into the account and must pay the difference.

RESPA FAQs

Still have questions about RESPA? Let's work through a few frequently asked questions about RESPA.

What types of loans are covered under RESPA?

The types of home loans covered under RESPA include most loans secured by a lien, including residential property, home purchase loans, lender-approved assumptions of a property, refinance loans, property improvement loans, home equity lines of credit (HELOCs) and reverse mortgages.

What doesn’t RESPA regulate?

RESPA doesn't cover certain loans. For example, it doesn't cover business, commercial or agricultural purposes, a temporary loan (such as construction loans), a loan secured by vacant or unimproved property where no loan proceeds will go toward constructing a one- to four-family residential structure, an assumption, loan term conversion and a transfer of a loan obligation in the secondary market.

What is an example of a RESPA violation?

RESPA violations are actions or inactions that go against RESPA requirements. For example:

• Using payments in exchange for referrals: This RESPA violation happens when a person makes or receives a payment in exchange for a referral of a settlement service.
• Inflating costs: If a company charges more for a service than they normally do, that's a RESPA violation. Examples of this are if a mortgage broker charges buyers more for a credit report than they paid to pull it.
• Setting up shell entities to receive kickbacks: This often hides the fact that the business is collecting kickbacks or referral fees. Shell entities are incorporated companies with no significant assets or business operations.

How are RESPA violations enforced?

The CFPB enforces RESPA, which was born under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Anyone who believes their service provider violated RESPA should file a complaint with HUD or their servicer (depending on the violation). Keep in mind that some of these incidents have timelines. For example, those with kickback violation complaints may have one year to file suit.

Servicing complaints must be given to the loan servicer in writing and the servicer must provide written acknowledgment of the complaint within 20 business days of receiving it. The servicer then has 60 business days to correct the issue or validate the state of the account.

What can result from violations of RESPA?

Violating RESPA can come with severe penalties, including lawsuits, fines and imprisonment. For example, the liabilities for violating Section 8 kickback rules include a fine of up to $10,000 and/or up to one year in prison. Violating Section 9 bans on title mandates means a violator may have to pay up to 3 times the cost of the insurance paid by the borrower. HUD may impose a civil penalty on the servicer in the case of escrow account violations.

What is TILA-RESPA?

The Truth in Lending Act (TILA) legally mandates that loan lenders and credit card providers provide transparency to consumers. For example, TILA requires consumers to receive easy-to-understand loan details, including terms and fees, protection against deceitful lending practices and outlines and more.

TILA-RESPA Integrated Disclosures (TRID) protects consumers by implementing the following:

• Eliminating application fees before getting a Loan Estimate
• Delivery of the Loan Estimate within 3 business days of receiving the application
• Estimates and disclosure maintenance
• Closing Disclosure within 3 business days of signing on a loan
• Lender contact information in the Loan Estimate

The Bottom Line

All the different buzzwords related to becoming a homeowner can be a challenge to master. From words like "origination" to "Loan Estimate," it's important to know as much as you can. However, rest easy knowing that the law is on your side in the form of RESPA. If you suspect a violation, file a complaint with HUD or your servicer.

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