What Is the Real Estate Settlement Procedures Act (RESPA)?
The Real Estate Settlement Procedures Act (RESPA) was enacted by Congress in 1975 to provide homebuyers and sellers with complete settlement cost disclosures. RESPA was also introduced to eliminate abusive practices in the real estate settlement process, prohibit kickbacks, and limit the use of escrow accounts. RESPA is a federal statute now regulated by the Consumer Financial Protection Bureau (CFPB).
- 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.
Understanding the Real Estate Settlement Procedures Act (RESPA)
Initially passed by Congress in 1974, RESPA became 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 CFPB because of the Dodd-Frank Wall Street Reform and Consumer Protection legislation.
From its inception, RESPA has regulated mortgage loans attached to one-to-four family residential properties. The objective of RESPA 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.
RESPA prohibits specific practices, such as kickbacks, referrals, and unearned fees. It also regulates the use of escrow accounts—such as prohibiting loan servicers to demand excessively large escrow accounts—and 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.
If you don’t use a lawyer throughout your real estate transaction, it’s best to get in touch with one immediately if you believe a RESPA violation has occurred. A real estate lawyer will be able to help you navigate the legal process.
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.
Criticisms of the Real Estate Settlement Procedures Act (RESPA)
Critics of RESPA say that some of the abusive practices that the Act is designed to eliminate still occur, including kickbacks. One example of this is lenders that provide captive insurance to the title insurance companies they work with. (A captive insurance company is a wholly-owned subsidiary of a larger firm that is tasked with writing insurance policies for the parent, and also does not insure any other company.)
Critics say this is essentially a kickback mechanism because customers usually elect to use the service providers already associated with their lender or real estate agent (although customers are required to sign documents that say they are free to choose any service provider they want to).
Because of these criticisms, there have been many attempts to make changes to RESPA. One proposal involves removing the option for customers to choose to use any service provider for each service. In place of this would be a system where services are bundled, but the real estate agent or lender is responsible for directly paying for all other costs. The advantage of this system is that lenders (who always have more buying power) would be forced to seek out the lowest prices for all real estate settlement services.
Who Does RESPA Protect?
RESPA is intended to protect consumers who are seeking to become eligible for a mortgage loan. However, RESPA does not protect types of loans. Loans secured by real estate for a business or agricultural purpose are not covered by RESPA.
What Information Does RESPA Require to Be Disclosed?
RESPA requires that borrowers receive various disclosures at different times. First, the lender or mortgage broker must give you an estimate of the total settlement service charges you will likely have to pay. (This estimate is a good faith estimate; however, actual costs may vary.) The lender or mortgage broker must also provide a written disclosure when you apply for a loan or within the next three business days if they expect that someone else will be collecting your mortgage payments (also referred to as servicing a loan).
If necessary, your lender or mortgage broker must provide an Affiliated Business Arrangement Disclosure. This disclosure indicates that the lender, real estate broker, or other participants in your settlement has referred you to an affiliate for a settlement service. (An affiliate is a business that is controlled by a common corporate parent.) One business day before you settle your loan, you have the right to inspect your HUD-1 Settlement Statement. A HUD-1 Settlement includes an itemized list of all charges and credits to the buyer and to the seller in a consumer credit mortgage transaction.
Why Was RESPA Passed?
RESPA was passed as part of an effort to limit the use of escrow accounts and to prohibit abusive practices in the real estate industry, such as kickbacks and referral fees.