What Is the Real Estate Settlement Procedures Act (RESPA)?
The Real Estate Settlement Procedures Act (RESPA) was enacted by the U.S. 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).
- The Real Estate Settlement Procedures Act (RESPA) applies to the majority of purchase loans, refinances, property improvement loans, and home equity lines of credit (HELOCs).
- 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 and Urban Development (HUD). After 2011, those responsibilities were assumed by the CFPB because of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
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 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 home equity lines of credit (HELOCs).
RESPA does not apply to extensions of credit to the government, government agencies, or instrumentalities, or in situations where the borrower plans to use property or land primarily for business, commercial, or agricultural purposes.
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 also should be disclosed to the borrower.
What Does RESPA Prohibit?
RESPA prohibits specific practices, such as kickbacks, referrals, and unearned fees. For example, Section 8 prohibits any person from giving or receiving something of value in exchange for referrals of a settlement service business. 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.
RESPA does allow an exception in which brokers and agents can exchange reasonable payments in return for goods or services provided by other settlement service providers, as long as those arrangements are compliant with the law and regulatory guidelines.
Marketing and Sponsorship
RESPA does not prohibit joint market efforts between a real estate broker and a lender as long as advertising costs paid by each party are related to the value of any goods or services that might be received in return. But transactions in which one party pays more than a pro rata share of advertising costs are prohibited. Sponsorship of events also may be considered prohibited actions if one party uses the event to market or advertise its services.
Real estate brokers and title agents are barred from entering into market service agreements when one party charges the other an amount for marketing materials that exceeds the fair market value of marketing services performed. A settlement service provider may not rent space from another settlement service provider unless it’s paying fair market value to do so.
Real estate brokers cannot pay agents to refer clients to the broker’s affiliate mortgage company. Brokers cannot offer referral fees to other brokers for directing clients to their business. These cooperative fees are prohibited and are essentially viewed as a form of kickback. Mortgage lenders cannot offer any type of referral incentive to local real estate agents for referring homebuyers to their loan products.
Affiliated Business Arrangements
Real estate brokers cannot refer business to an affiliated title company without disclosing that relationship to their customers. This disclosure must detail the charges that the title company requires for its services and the broker’s financial interest in the title company. Customers also must be made aware that they’re not required to use the title company to which they’ve been referred. Real estate brokers and title insurance companies cannot create an affiliated company to collect dividends from referrals.
Lenders cannot require borrowers to use a particular affiliate settlement service provider. However, they can provide financial incentives to do so. For example, a homebuyer may be able to take advantage of affiliated services at a discounted rate.
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 in the district where either the property is located or the alleged RESPA violation occurred.
Criticisms of RESPA
Critics of RESPA say that some of the abusive practices that the law is designed to eliminate still occur, including kickbacks. One example of this is lenders that provide captive insurance to the title insurance companies that 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 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).
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 the Real Estate Settlement Procedures Act (RESPA) Protect?
The Real Estate Settlement Procedures Act (RESPA) is intended to protect consumers who are seeking to become eligible for a mortgage loan. However, RESPA does not protect all 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 that you likely will have to pay. (This estimate is a good-faith estimate; however, actual costs may vary.) The lender or mortgage broker also must 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 participant 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 U.S. Department of Housing and Urban Development (HUD) HUD-1 Settlement Statement. A HUD-1 Settlement Statement 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.
The Bottom Line
When buying a home, it can be helpful to work with a trust, licensed real estate agent, or broker who can guide you through the process. Likewise, if you’re refinancing an existing mortgage or borrowing against your home equity, it’s important to go through a reputable lender. RESPA, along with other regulatory guidelines, is designed to help protect homebuyers and existing homeowners from unfair practices when dealing with real estate agents, brokers, lenders and affiliated companies.