The Real Estate Settlement Procedures Act (RESPA) was enacted by the U.S. Congress in 1975 to provide homebuyers and sellers with comprehensive settlement cost disclosures. RESPA was introduced to eliminate abusive practices in the real estate settlement process, prohibit kickbacks, and limit the use of escrow accounts. This federal statute is currently regulated by the Consumer Financial Protection Bureau (CFPB).
Key Takeaways
- Broad Applicability: RESPA applies to most purchase loans, refinances, property improvement loans, and home equity lines of credit (HELOCs).
- Mandatory Disclosures: Lenders, mortgage brokers, or servicers of home loans must provide clear disclosures to borrowers about real estate transactions, settlement services, and consumer protection laws.
- Prohibits Abusive Practices: RESPA bans loan servicers from demanding excessively large escrow accounts and restricts sellers from requiring specific title insurance companies.
- Legal Recourse: Borrowers have up to one year to sue for violations involving kickbacks or other misconduct during the settlement process and up to three years against their loan servicer.
Understanding RESPA’s Origins and Objectives
Initially passed by Congress in 1974, RESPA became effective on June 20, 1975. Over the years, it has undergone several amendments and updates. Initially, the U.S. Department of Housing and Urban Development (HUD) was responsible for enforcement. After 2011, following the Dodd-Frank Wall Street Reform and Consumer Protection Act, those responsibilities were transferred to the CFPB.
From its inception, RESPA has governed mortgage loans tied to one- to four-family residential properties. The law’s primary goal is to educate borrowers about their settlement costs and eliminate kickbacks and referral fees, which can inflate the cost of purchasing a home. 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).
Important
RESPA does not apply to government credit extensions, government agencies, or in cases where the borrower plans to use the property primarily for business, commercial, or agricultural purposes.
RESPA’s Disclosure Requirements
RESPA mandates that lenders, mortgage brokers, or servicers of home loans disclose all information related to the real estate transaction. This includes settlement services, pertinent consumer protection laws, and any other associated costs. Additionally, business relationships between closing service providers and other entities involved in the settlement process must also be disclosed to the borrower.
Prohibited Practices Under RESPA
RESPA specifically prohibits practices such as kickbacks, referrals, and unearned fees. For instance, Section 8 prohibits any person from giving or receiving anything of value in exchange for referrals of a settlement service business. The act also regulates escrow accounts to prevent loan servicers from demanding overly large ones and restricts sellers from forcing buyers to use specific title insurance companies.
Marketing and Sponsorship
Joint marketing efforts between real estate brokers and lenders are permitted, provided that each party’s advertising costs reflect the actual value of goods or services received. However, transactions where one party pays more than their share of advertising costs are prohibited. Furthermore, sponsoring events may also be considered a prohibited action if an event is used to market or advertise one party’s services disproportionately.
Real estate brokers and title agents are barred from engaging in marketing service agreements where one party charges the other excessively for marketing materials. Additionally, business space rental agreements between settlement service providers must adhere to fair market value standards.
Enforcing RESPA Violations
Borrowers have up to one year to file a lawsuit for violations related to kickbacks or other improper behavior during the settlement process. If the borrower has a grievance against their loan servicer, they must first raise the issue in writing. The servicer must respond within 20 business days and has 60 business days to resolve the matter or explain why the account’s status is valid. Borrowers must continue making payments until the issue is resolved.
Any lawsuit for specific improprieties against the loan servicer can be filed within three years. Such suits may be brought in any federal district court in the district where the property is located or where the alleged RESPA violation occurred.
Tip
If you encounter a potential RESPA violation, it’s advisable to consult with a real estate lawyer who can guide you through the legal process and offer expert advice.
Challenges and Criticisms of RESPA
Despite its objectives, critics argue that some abusive practices still exist, including kickbacks through captive insurance arrangements. Captive insurance companies are wholly owned subsidiaries that provide insurance policies to their parent companies, creating a potential conflict of interest.
Continuous efforts have been made to improve RESPA, with proposals such as bundling settlement services and making the lender responsible for all related costs. This would compel lenders, who have greater buying power, to seek out the lowest prices for real estate settlement services.
Protecting Homebuyers Under RESPA
RESPA aims to shield consumers looking to qualify for a mortgage loan, though it does not cover loans for business or agricultural purposes. Borrowers must receive various disclosures at different stages of the process, including a good-faith estimate of settlement service charges and information on who will be collecting mortgage payments, if applicable.
Conclusion
Navigating the home buying or refinancing process is complex. Working with a trustworthy, licensed real estate agent or broker, as well as a reputable lender, can make it smoother. RESPA and other regulatory guidelines exist to protect homebuyers and homeowners from unfair practices, ensuring a fair and transparent real estate market.
Related Terms: mortgage, escrow accounts, kickbacks, home equity lines of credit, title insurance, loan servicers.
References
- Consumer Financial Protection Bureau. “CFPB Consumer Laws and Regulations”, Page 3-4.
- Consumer Financial Protection Bureau. “CFPB Consumer Laws and Regulations”, Page 1-2.
- Consumer Financial Protection Bureau. “CFPB Consumer Laws and Regulations”, Page 6.
- Consumer Financial Protection Bureau. “Real Estate Settlement Procedures Act FAQs”, Page 1-3.
- Consumer Financial Protection Bureau. “Real Estate Settlement Procedures Act FAQs”, Page 4.
- Consumer Financial Protection Bureau. “Real Estate Settlement Procedures Act FAQs”, Page 1-5.
- Consumer Financial Protection Bureau. “Real Estate Settlement Procedures Act FAQs”, Page 10-14.
- NAR. “National Association of REALTORS Reaches Agreement to Resolve Nationwide Claims Brought by Home Sellers”.
- U.S. Department of Housing and Urban Development. “Where Can I Find Servicing Related Information About a Lenders Responsibility Under RESPA?”
- Consumer Financial Protection Bureau. "§ 1024.14 Prohibition Against Kickbacks and Unearned Fees".
- Consumer Financial Protection Bureau. “Real Estate Settlement Procedures Act (RESPA)”.
