What Is the Real Estate Settlement Procedures Act (RESPA)?
The Real Estate Settlement Procedures Act, or RESPA, was enacted by Congress to provide homebuyers and sellers with complete settlement cost disclosures. The Act was also introduced to eliminate abusive practices in the real estate settlement process, to prohibit kickbacks, and to limit the use of escrow accounts. RESPA is a federal statute now regulated by the Consumer Financial Protection Bureau (CFPB).
Initially passed by Congress in 1974, RESPA effective on June 20, 1975. RESPA has been impacted over the years by several changes and amendments. Enforcement initially fell under the jurisdiction of the U.S. Department of Housing & Urban Development (HUD). After 2011, those responsibilities were assumed by the Consumer Financial Protection Bureau (CFPB) due to the Dodd-Frank Wall Street Reform and Consumer Protection legislation.
- RESPA applies to the majority of purchase loans, refinances, property improvement loans, and equity lines of credit.
- RESPA requires lenders, mortgage brokers, or servicers of home loans to provide disclosures to borrowers concerning real estate transactions, settlement services, and consumer protection laws.
- RESPA prohibits loan servicers from demanding excessively large escrow accounts and restricts sellers from mandating title insurance companies.
- A plaintiff has up to one year to bring a lawsuit to enforce violations where kickbacks or other improper behavior occurred during the settlement process.
- A plaintiff has up to three years to bring a suit against their loan servicer.
From its inception, RESPA has regulated mortgage loans attached to one-to-four family residential properties. The objective of the Act is to educate borrowers regarding their settlement costs and to eliminate kickback practices and referral fees that can inflate the cost of obtaining a mortgage. The types of loans covered by RESPA include the majority of purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit.
RESPA requires lenders, mortgage brokers, or servicers of home loans to disclose to borrowers any information about the real estate transaction. The information disclosure should include settlement services, relevant consumer protection laws, and any other information connected to the cost of the real estate settlement process. Business relationships between closing service providers and other parties connected to the settlement process should also be disclosed to the borrower.
The Act prohibits specific practices such as kickbacks, referrals, and unearned fees. RESPA regulates the use of escrow accounts—such as prohibiting loan servicers to demand excessively large escrow accounts. RESPA also restricts sellers from mandating title insurance companies.
Enforcement Procedures for RESPA Violations
A plaintiff has up to one year to bring a lawsuit to enforce violations where kickbacks or other improper behavior occurred during the settlement process.
If the borrower has a grievance against their loan servicer, there are specific steps they must follow before any suit can be filed. The borrower must contact their loan servicer in writing, detailing the nature of their issue. The servicer is required to respond to the borrower’s complaint in writing within 20 business days of receipt of the complaint. The servicer has 60 business days to correct the issue or give its reasons for the validity of the account's current status. Borrowers should continue to make the required payments until the issue is resolved.
A plaintiff has up to three years to bring a suit for specific improprieties against their loan servicer. Any of these suits can be brought in any federal district court if the court is either in the district where the property is located or if it is in the district where the RESPA violation occurred.