In 1975, the U.S. Congress approved the Real Estate Settlement Procedures Act (RESPA) to ensure buyers and sellers received full settlement cost disclosures during transactions. This law was also designed to get rid of some of the more abusive practices that occurred during the settlement process, such as kickbacks. Today, RESPA is maintained by the Consumer Financial Protection Bureau (CFPB).
While some loan types are excluded from protection, most real estate lending options are covered by RESPA. For example, it applies to everything from purchase loans to home equity lines of credit. The purpose of RESPA is to provide buyers and sellers with full transparency and ample protection. In this guide, you’ll learn about the Real Estate Settlement Procedures Act and how it benefits buyers and sellers alike.
Scope and Applicability of RESPA
The types of loans that are covered by RESPA include the following:
- Purchase loans
- Refinances
- Property improvement loans
- Home equity lines of credit (HELOCs)
To be covered by RESPA, loans must follow two criteria. For example, the loan must be secured by a lien on a piece of real estate. The types of real estate that qualify include one-to-four-family structures and manufactured homes. The loan must also fall under one of the categories listed below:
- Made by a dealer, lender, or creditor
- Created in connection with an urban development or housing program that’s administered by the federal government
- Developed or insured by any agency that’s part of the federal government
- Subject of a reverse mortgage or home equity conversion mortgage
- Made by the original creditor or lender to FHLMC, FNMA, or GNMA
There are, however, several types of loans that aren’t covered by RESPA. For example, business and agricultural loans aren’t covered. The same is true of loans that are administered to government entities.
Key RESPA Requirements
Many of the guidelines in RESPA involve disclosure requirements. Borrowers must receive disclosures at different stages of real estate transactions. These disclosures can list costs associated with the agreements or detail escrow account practices. If you apply for a conventional loan at your preferred lender, you’ll receive a Special Information Booklet that includes details about different real estate settlement services that you have access to.
One type of disclosure that your lender must provide is a good faith estimate (GFE) of the settlement costs. This document lists the various charges that you’ll likely be tasked with paying. Keep in mind that the actual charges you receive at closing can differ somewhat from the estimate. If your lender tasks you with using a specific settlement provider, they must include this requirement on the document.
You could also receive a Loan Estimate (LE). This is a three-page document that gives you comprehensive information about the loan you’re applying for. This estimate should provide the following costs:
- Monthly payment
- Total closing costs
- Interest rate
- Loan amount
- Taxes and other fees
- Loan info
You should receive a Closing Disclosure (CD) as well. This is a five-page document that goes into more detail about the loan you’ve applied for. However, you won’t obtain this document until the closing process is almost over. Lenders are required to send this document at least three days before the closing date. The document includes the following information:
- Monthly payment
- Total loan amount
- Closing costs
- Interest rate
- Summaries of transactions
- Estimated insurance payments, taxes, and other fees
The three-day window gives you enough time to review the document. If you detect a mistake, call your settlement agent or lender immediately.
Your lender may give you a Mortgage Servicing Disclosure Statement if they choose to service your loan or transfer it directly to another lender. In most cases, these documents will include details about how to resolve complaints. Once you submit your loan application, your lender will have three business days to provide this statement.
If the lender has any Affiliated Business Arrangements (AfBA) or conflicts of interest, they must be disclosed based on RESPA requirements. An AfBA is a type of arrangement that occurs when one person who’s involved with a real estate transaction and has an interest in a provider of settlement services refers this provider to the borrower.
This arrangement is allowed if you receive a disclosure before the referral takes place. Keep in mind that the disclosure must describe the arrangement and provide a cost estimate for another provider. While a referral is allowed, the lender or party that makes the recommendation can’t mandate that you use the provider.
Prohibitions and Restrictions Under RESPA
RESPA has several restrictions and prohibitions in place that all lenders and real estate entities must adhere to.
Kickbacks and Referral Fees
Kickbacks and referral fee prohibitions are detailed in Section 8 of the Real Estate Settlement Procedures Act. This act focuses on federally related mortgage loans, such as FHA, USDA, and VA loans. It prohibits kickbacks for various business referrals regarding settlement services.
While this type of referral is allowed in conventional mortgages if the lender discloses it, there are no exceptions when it comes to federally related loans. Section 8 also prohibits different types of unearned fee arrangements. For example, the fees obtained from a provider of settlement services can’t be split with the lender.
Escrow Accounts
RESPA also places limits on escrow account amounts. Loan servicers are prohibited from demanding escrow accounts that are much larger than normal.
Title Insurance
In many states, borrowers must obtain title insurance before they can be approved for a loan. However, sellers are restricted from mandating specific title insurance companies during the transaction.
RESPA and Marketing/Sponsorship
RESPA has created some restrictions and limitations when it comes to marketing and sponsorship situations.
Joint Marketing and Advertising Costs
Lenders and real estate brokers aren’t prohibited from joint market efforts. However, the advertising costs that each party pays must be related to the value of the services or goods that will be received in return. If one party pays an amount that’s higher than the pro rata share of the total advertising costs, RESPA will consider this arrangement to be prohibited.
Sponsorship and Event Marketing
Let’s say that a real estate agent decides to sponsor an open house that other agents can attend. If a title agency makes a payment to cover some of the costs without marketing its services, the agency and real estate agent could be in violation of RESPA. On the other hand, joint event marketing is allowed if each party pays its share of the costs.
Market Service Agreements
Title agents and real estate brokers can’t create a market service agreement that involves one party charging the other party for various marketing materials at a value that’s higher than the service calls for. It’s crucial that the party that offers marketing services charges the fair market value.
Referral Fees and Affiliated Business Arrangements
Real estate brokers aren’t allowed to refer customers to affiliate mortgage companies. They are also prohibited from offering referral fees for directing customers to other brokers. If these fees are paid, they will be viewed as kickbacks. This restriction also applies to lenders. A lender can’t offer an incentive to a local real estate agent to refer buyers.
As touched upon previously, Affiliated Business Arrangements are limited. When an arrangement is made between a broker and a title company, the relationship must be disclosed to the customer.
This document needs to include the fees that the title company charges for its services. The broker’s interest in the company must also be detailed. Borrowers can’t be required to use a specific service provider. On the other hand, financial incentives can be given to sway borrowers to specific providers.
Enforcement and Legal Recourse
If a borrower believes that kickbacks or other RESPA violations occurred, they have one year to file a lawsuit. Keep in mind, however, that other steps must take place before filing a lawsuit. If you want to make a legal complaint, you must contact your loan servicer and describe the nature of your issue. The servicer must respond within 20 days in writing. They’ll have another 60 days to correct the problem.
If the issue occurs with a loan servicer, the plaintiff has three years to file a lawsuit. You can file this type of complaint in a federal district court. To properly resolve your grievance with a loan servicer, consider hiring a lawyer. They may be able to obtain a settlement before the case goes to trial. Real estate lawyers have the expertise required to enforce RESPA.
Criticisms and Proposed Changes to RESPA
While RESPA has been highly effective for nearly four decades, there are a few criticisms of the law as well as some proposed changes.
Persistent Abusive Practices Despite RESPA
Even though RESPA guidelines are in place, some abusive practices still occur, such as kickbacks. Lenders can bypass RESPA restrictions by providing title insurance companies with captive insurance. Captive insurance companies are wholly owned subsidiaries of larger firms, which allows them to write insurance policies on behalf of the firms that own them. Many people believe that this is a kickback because most borrowers choose to do business with the service providers that are associated with their lenders.
Proposed Amendments to RESPA
Several proposed amendments to RESPA might eventually be passed. For example, one proposal eliminates the ability for customers to select any provider for different services. Instead, the various services would be bundled. The lender or agent would also be tasked with paying the costs. The main benefit of this setup is that lenders would have more incentive to obtain the lowest prices for real estate settlement services.
The Impact of RESPA on Consumers
The purpose of the Real Estate Settlement Procedures Act (RESPA) is to protect buyers and sellers who are taking part in the real estate market. Buyers who are eligible for mortgage loans gain a considerable amount of protection from RESPA. If you make an offer on a home, you’ll receive multiple disclosures because of RESPA.
For example, your mortgage broker or lender must provide you with an estimate of their settlement service fees. RESPA helps ensure fair practices by requiring lenders, brokers, and title companies to behave responsibly and provide the necessary disclosures. When navigating a real estate transaction, it’s highly recommended that you work with reputable professionals you can trust.
Conclusion
RESPA has been regulating the real estate agency for decades. It protects consumers and sellers by making sure that every party has access to relevant disclosures, which include everything from closing disclosures to affiliated business relationships. Before you make an offer on a home, study the RESPA guidelines and restrictions to ensure you take full advantage of RESPA protections.