What is the Real Estate Settlement Procedures Act (RESPA)?
Buying a home and getting a mortgage is a huge step in many people’s lives. Mortgage loans are without a doubt the largest investment made by the average person, after all. Borrowing such a large sum of money is made particularly sobering when your home is on the line should you fail to repay it.
Getting a mortgage can be a notoriously difficult task, considering the scale of money being loaned. Many lenders impose strict eligibility requirements just to ensure that home buyers will be able to repay the loans in full by the end of the loan term. Fortunately, mortgage products have grown so diverse that any given home buyer can usually find a home loan product that best suits their specific financial situation and needs.
In the world of consumer lending, there will always be institutions that are less than honest and work only to benefit themselves. Whether simply dishonest or just downright predatory, there are definitely some mortgage brokers and lenders of home loans that do not have a borrower’s best interests at heart.
Predatory lending, particularly when it comes to mortgage loans, has the power to completely destroy lives. Borrowers who fall victim to these underhanded and dishonest practices can be left with ruined credit, go bankrupt, or can even be left without a home. This is why it is important to have regulations in place to help prevent unfair and underhanded lending practices from occurring.
Luckily, the government is mindful of these practices and has introduced a number of regulations focused on consumer protection over the years in an effort to put a stop to the persistent problems. Among them is the Real Estate Settlement Procedures Act or “RESPA”. The RESPA is a federal law that was introduced through regulations set forth by the United States Department of Housing and Urban Development. The Real Estate Settlement and Procedures Act was created for the purposes of ensuring transparency in mortgage transactions by requiring accurate cost disclosures and to put a stop to inflated settlement costs.
What is the Real Estate Settlement Procedures Act?
Brought forth through the United States Department of Housing and Urban Development’s so-called “Regulation X”, The Real Estate Settlement and Procedures Act was created in an effort to protect home buyers from abusive mortgage lending practices that unfairly inflate settlement costs and to ensure accurate information is disclosed to borrowers so they can make informed decisions and shop around for loan products. Unlike the similar Truth in Lending Act (TILA), the RESPA is geared solely towards mortgage transactions. Still, like the TILA, the Real Estate Settlement Procedures Act is overseen and enforced by the Consumer Finance Protection Bureau (CFPB).
The Real Estate Settlement Procedures Act is of great importance to the home buying process we see today. The RESPA has countered unethical mortgage lending practices by requiring that all mortgage brokers, home loan lenders, and mortgage loan originators provide their borrowers with full and accurate disclosure documentation of any fees and costs, as well as any of their affiliated business arrangements that pertain to the loan arrangement. The Real Estate Procedures Act also strictly prohibits any practices that could be deemed unsavory, such as kickbacks, referral fees, and unpaid fees, and it also limits the use of escrow accounts.
History of the Real Estate Settlement Procedures Act
The Real Estate Settlement Procedures Act was signed into law in 1974 by the United States Congress before finally becoming effective on June 20, 1975, and was originally administered by the United States Department of Housing and Urban Development. After the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, enforcement and rule making authority over RESPA was then assumed by the Consumer Finance Protection Bureau in 2011. Currently, the CFPB still oversees the Real Estate Settlement Procedures Act and the regulations that stem from it.
Consumer protections under the Real Estate Settlement Procedures Act
RESPA has long been one of the most well-known laws for the regulation of the mortgage lending industry. Mortgage loans for 1 to 4 unit properties all fall under the regulations of the act, in an attempt to educate borrowers about accurate mortgage settlement costs so that they can be better informed and make better borrowing decisions. The Real Estate Settlement Procedures Act is the reason behind the incredibly detailed mortgage cost disclosures that borrowers are provided with today.
As part of the TILA-RESPA integrated disclosures, mortgage lenders are required by law to provide borrowers of all projected costs associated with their home loan, as well as disclosing the final costs before the loan is to be closed. Through RESPA, borrowers must be made aware of any real estate transactions, settlement services, applicable consumer protection laws and all other relevant information connected to the cost of the mortgage loan settlement process. Lenders must also disclose any business relationships between closing service providers and any other third parties connected to the settlement process of the mortgage.
When entering into a mortgage transaction, the Real Estate Settlement Procedures Act requires that lenders provide you with the following information:
Adequate Documentation that provides a good-faith estimate of the loan settlement costs, and a confirmation of whether or not the lender intends to transfer the loan to another lender, along with requirements for all necessary documentation submissions.
If your lender intends to transfer loan servicing responsibilities, the borrower must be provided with a servicing transfer statement no less than 15 days before the transfer is to take place.
A new lender is not allowed to penalize borrowers for payments made to the original loan servicing company for up to 60 days after the transfer date.
A declaration from the loan originator that clearly and honestly states any affiliated business arrangements relevant to the loan.
A HUD-1 settlement statement that shows all receipts, disbursements, charges, and fees; a mortgage lender must make this available to the borrower the day before closing.
A fully itemized annual escrow statement.
A list of approved homeownership counseling services, provided to the borrower no later than 3 business days after receiving the loan application form.
Prohibitions under the Real Estate Settlement Procedures Act
Under the Real Estate Settlement Procedures Act, there are some practices and activities that are expressly forbidden. Namely, the use of kickbacks, referral fees or any unearned fees that may be offered to settlement service providers such as appraisers, real estate brokers and/or title companies for any services that were not actually performed for the borrower’s benefit or disclosed to the borrower. Services rendered are required to be made transparent and consist of only actions taken relevant to the mortgage transaction as it applies to the borrower.
RESPA is also strict in regards to escrow accounts. Under the act, Lenders are prohibited from demanding exorbitant escrow accounts for the transaction. They are also not allowed to force consumers to make monthly escrow payments that are higher than one-twelfth of the annual disbursements or demand a “cushion” of more than one-sixth of the annual disbursement. Additionally, lenders must also provide an escrow statement each year to the borrower that accurately depicts all monetary transactions.
The Real Estate Settlement Procedures Act Even goes further by mandating that lenders may not elect a title insurance company that the borrower is required to use. The choice of third party services as it pertains to the mortgage transaction must be left up to the borrower’s discretion (unless otherwise stated in the loan guidelines). In addition, increasing the price of third-party settlement services is also a RESPA violation.
Revisions to the Real Estate Settlement Procedures Act
Since its inception, there have been many revisions and updates to the RESPA in order to keep it as relevant to the current practices of the mortgage industry as possible. Some notable revisions over the years include:
1990: Thanks to the National Housing Act, RESPA began to require detailed disclosures concerning the transfer, sale, or assignment of mortgage servicing, as well as disclosures for mortgage escrow accounts both at closing and each year after the fact, that include the itemized charges to be paid by the borrower in addition to any costs paid out of the account by the servicer.
1992: Congress amended RESPA to include the coverage of subordinate lien loans.
1996: RESPA was amended to clarify certain definitions, most notably “controlled business arrangement,” which was changed to “affiliated business arrangement.” as a result of the Economic Growth and Regulatory Paperwork Reduction Act
2008: HUD issued a RESPA Reform Rule that included substantive and technical changes to the existing RESPA regulations that included:
The requirement of both a standard “Good Faith Estimate” form and a revised HUD-1 Settlement Statement
More “streamlined” mortgage servicing disclosure language
The elimination of outdated escrow account provisions
Adding a provision permitting an “average charge” to be listed on the Good Faith Estimate and HUD-1 Settlement Statement
A clarification that all disclosures required by RESPA are permitted to be provided electronically, in accordance with the Electronic Signatures in Global and National Commerce Act (E-Sign).
2010: The Dodd-Frank Wall Street Reform and Consumer Protection Act lead to the transferal of the rule making authority under RESPA from the US Housing and Urban Development Department to the Consumer Finance Protection Bureau.
2013: The CFPB implemented substantive and technical changes to the existing regulations including:
Modifying the transfer of loan servicing notice requirements
Implementing new notice requirements and procedures related to borrower’s requests for error resolution and information requests
Added new provisions related to escrow payments, early intervention, continuity of contact, loss mitigation, force-placed insurance, general servicing policies, procedures, and requirements
2013: Directed the CFPB to publish what is known as the TILA-RESPA Integrated Disclosures for mortgage transactions in accordance with the Truth in Lending Act and parts 4 and 5 of the Real Estate Settlement Procedures Act