Real Estate Settlement Procedures Act (RESPA)

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A consumer protection statute referred to as the The Real Estate Settlement Procedures Act or otherwise known as RESPA, was passed in the year of 1974. This Act was designed to help consumers become better shoppers for settlement services and to eliminate referral fees and kickbacks that increase the costs of certain settlement services unnecessarily.


The Real Estate Settlement Procedures Act requires that borrowers, at various times, receive disclosures. Some of these disclosures explain the costs that are associated with the settlement, outline the escrow account practices and lender servicing, and also describes the business relationships between settlement service providers. The Real Estate Settlement Procedures Act also disallow certain types of practices that raise the settlement services costs. Section eight of this act forbids someone from accepting or giving anything of value for referrals of settlement service business that are related to a mortgage loan that is associated to the Federal Government. It also disallows anyone from accepting or giving any part of a charge for services that are not performed. Section Nine of the Act does not allow a seller of home to require a buyer of a home to purchase title insurance from a certain company. The Real Estate Settlement Procedures Act covers loans secured with a mortgage placed on residential property that are one to a four family. These include most refinances, assumptions, purchase loans, equity lines of credit, and property improvement loans. The Housing and Urban Development Office (HUD) of Interstate Land Sales and RESPA is responsible for enforcing The Real Estate Settlement Procedures Act.

When a borrower applies for a mortgage loan, lenders and/or mortgage brokers must give the borrowers a Special Information Booklet, which contains information for consumers about various real estate settlement services(Required for purchase transactions only) and a Good Faith Estimate (GFE) of settlement costs, which lists the charges the buyer is likely to pay at settlement. The actual charges may be different because this is only a estimate. If a lender requires the borrower to use a certain settlement provider, then the lender must disclose this requirement on the Good Faith Estimate. They also must provide a consumer with a Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to transfer it to another lender or service the loan, and also provides information about complaint resolution.

At the time of application, if the borrowers don't receive these documents, then within 3 business days of receiving the loan application, the lender must mail them. If the lender turns down the loan within 3 days, however, then the Real Estate Settlement Procedures Act does not require the lender to provide these documents. The Real Estate Settlement Procedures Act statute doesn't provide an explicit penalty for the failure to provide the Special Information Booklet, Mortgage Servicing Statement or Good Faith Estimate. Bank regulators, however, may choose to apply penalties on lenders who fail to comply with the law of the Federal Government.

Disclosures before closing/settlement occurs

The terms "closing" and "settlement" can be and are used interchangeably. An Affiliated Business Arrangement (AfBA) Disclosure is required when a settlement service provider involved in transaction covered by RESPA refers the consumer to a provider with whom the referring party has a beneficial interest or ownership. The referring party must give the Affiliated Business Arrangement Disclosure to the consumer prior or at to the time of referral. The disclosure must give the borrower an estimate of the second provider's charges and describe the business arrangement that exists between the two providers. Except in cases where a lender refers a borrower to a real estate appraiser, credit reporting agency, or lawyer to represent the lender's interest in the transaction, the referring party may not require the consumer to use the particular provider being referred. The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on sellers and borrowers in connection with the settlement. The Real Estate Settlement Procedures Act allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. Based on information known to the agent at that time, the settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement.

Disclosures at settlement

The actual settlement costs of the loan transaction is shown on the HUD-1 Settlement Statement. Separate forms may be prepared for the seller and the borrower. Where it is not the practice that the seller and the borrower both attend the settlement, the HUD-1 should be delivered or mailed as soon as practicable after settlement. The Initial Escrow Statement itemizes the insurance premiums, estimated taxes and other charges anticipated to be paid from the Escrow Account during the first 12 months of the loan. It lists the Escrow payment amount and any required cushion. Although the statement is usually given at settlement, the lender has forty-five days from settlement to deliver it.

RESPA'S statutes explained: prohibited practices and consumer protections

Section 8: fee-splitting, kickbacks, unearned fees

Section eight of the Real Estate Settlement Procedures Act prohibits anyone from accepting or giving a kickback, fee or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, this Act prohibits receiving unearned fees for services not actually performed and fee splitting. Violations of Section Eight's anti-kickback, unearned fees and referral fees provisions of RESPA are subject to civil and criminal penalties. In a criminal case a person who violates Section Eight may be imprisoned up to one year and fined up to $10,000. In a private law suit a person who violates Section Eight may be liable to the person charged for the settlement service an amount equal to 3 times the amount of the charge paid for the service.

Section 9: Seller required title insurance

Section Nine of the Real Estate Settlement Procedures Act prohibits a seller, as a condition of sale, from requiring the home buyer to use a certain title insurance company, either indirectly or directly. A seller who violates this provision may be sued by the borrower for an amount equal to 3 times all charges made for the title insurance.

Section 10: Escrow accounts limits

Section Ten of the Real Estate Settlement Procedures Act has limits set on the amounts that a lender may require a borrower to put into an escrow account for purposes of hazard insurance, paying taxes and other charges related to the property. The Real Estate Settlement Procedures Act doesn't require lenders to impose an escrow account on borrowers; however, as a condition of the loan, certain lenders or government loan programs may require escrow accounts.

During the course of the loan, the Real Estate Settlement Procedures Act prohibits a lender from charging excessive amounts for the escrow account. Each month the lender may require a borrower to pay into the escrow account no more than one-twelfth of the total of all disbursements payable during the year, plus an amount necessary to pay for any shortage in the account. In addition, the lender may require a cushion, not to exceed an amount equal to one-sixth of the disbursements in total for the year.

The lender must perform an escrow account analysis once during the year and notify borrowers of any shortage. Any excess of fifty-dollars or more must be returned to the borrower.

RESPA enforcement

Civil law suits

Individuals have up to one year to bring a private law suit to enforce violations of Section Eight or Nine. A person may bring an action for violations of Section Six within 3 years. Lawsuits for violations of Section Six, Eight, or Nine may be brought in any federal district court in the district where the violation is alleged to have occurred or in which the property is located. HUD, a State insurance commissioner or State Attorney General may bring an injunctive action to enforce violations of Section Six, Eight or Nine of the Real Estate Settlement Procedures Act within 3 years.

Loan servicing complaints

Section Six provides borrowers with important consumer protections relating to the servicing of their loans. Under Section Six of the Real Estate Settlement Procedures Act, borrowers who have a problem with the servicing of their loan (including escrow account questions), should contact their loan servicer in writing, outlining the nature of their complaint. Within twenty business days of receipt of the complaint, the servicer must acknowledge the complaint in writing. Within sixty business days the servicer must resolve the complaint by giving a statement of the reasons for its position or by correcting the account. Borrowers should continue to make the servicer's required payment until the complaint is resolved.

Within three years, a group of borrowers may bring a class action suit, or a borrower may bring a private law suit, against a servicer who fails to comply with Section Six's provisions. Borrowers may obtain actual damages, as well as additional damages if there is a pattern of noncompliance.

Other enforcement actions

Under Section Ten, HUD has authority to impose a civil penalty on loan servicers who do not submit annual or initial escrow account statements to borrowers. To report servicers who fail to provide the required escrow account statements, borrowers should contact HUD's Office of RESPA and Interstate Land Sales.

Filing a RESPA complaint

Persons who believe a settlement service provider has violated the Real Estate Settlement Procedures Act in an area in which the Department has enforcement authority (primarily sections six, eight and nine), may wish to file a complaint. The complaint should identify the violators by address, name and telephone number and outline the violation. For follow up questions from HUD, complainants should also provide their own phone number and name. Requests for confidentiality will be honored. Complaints should be sent to:

Director, Office of RESPA and Interstate Land Sales
U.S. Department of Housing and Urban Development
Room 9154
451 7th Street, SW
Washington, DC 20410