The Real Estate Settlement Procedures Act
The Real Estate Settlement Procedures Act (RESPA) is a consumer protection
statute, first passed in 1974. The purposes of RESPA
- to help consumers become better shoppers for settlement services and
- to eliminate kickbacks and referral fees that unnecessarily increase the
costs of certain settlement services.
Details about RESPA
Corresponding with the above purposes:
1. RESPA requires that borrowers receive disclosures at various times. Some
disclosures spell out the costs associated with the settlement, outline lender
servicing and escrow account practices and describe business relationships
between settlement service providers.
2. RESPA also prohibits certain practices that increase the cost of
settlement services.
Section 8
of RESPA prohibits a person from giving or accepting anything of value for
referrals of settlement service business related to a federally related mortgage
loan. It also prohibits a person from giving or accepting any part of a charge
for services that are not performed.
Section 9 of
RESPA prohibits home sellers from requiring home buyers to purchase title
insurance from a particular company.
RESPA in general
RESPA covers loans secured with a mortgage placed on a one-to-four family
residential property. These include most purchase loans, assumptions,
refinances, property improvement loans, and equity lines of credit. HUD's office
of RESPA and Interstate Land Sales is responsible for enforcing RESPA.
RESPA REQUIRED DISCLOSURES:
At the time of loan application
When borrowers apply for a mortgage loan, mortgage brokers and/or lenders
must give the borrowers:
- a Special Information Booklet, which contains consumer information
regarding various real estate settlement services. (Required for purchase
transactions only) and
- a Good Faith Estimate (GFE) of settlement costs, which lists the charges
the buyer is likely to pay at settlement. This is only an estimate and the
actual charges may differ. If a lender requires the borrower to use a
particular settlement provider, then the lender must disclose this
requirement on the GFE.
- a Mortgage Servicing Disclosure Statement, which discloses to the
borrower whether the lender intends to service the loan or transfer it to
another lender. It also provides information about complaint resolution.
If the borrowers don't get these documents at the time of application,
the lender must mail them within three business days of receiving the loan
application.
If the lender turns down the loan within three days, however, then
RESPA does not require the lender to provide these documents.
The RESPA statute does not provide an explicit penalty for the failure
to provide the Special Information Booklet, Good Faith Estimate or Mortgage
Servicing Statement. However, bank regulators may choose to impose penalties on
lenders who fail to comply with federal law. Please read the section on RESPA
enforcement for more information.
Disclosures before settlement/closing occurs
The terms "settlement" and "closing" can be and are used interchangeably.
An Affiliated Business Arrangement (AfBA) Disclosure is required
whenever a settlement service provider involved in a RESPA covered transaction
refers the consumer to a provider with whom the referring party has an ownership
or other beneficial interest.
The referring party must give the AfBA disclosure to the consumer at or prior
to the time of referral. The disclosure must describe the business arrangement
that exists between the two providers and give the borrower an estimate of the
second provider's charges.
Except in cases where a lender refers a borrower to an attorney, credit
reporting agency or real estate appraiser to represent the lender's interest in
the transaction, the referring party may not require the consumer to use the
particular provider being referred.
The HUD-1 Settlement Statement is a standard form that clearly shows
all charges imposed on borrowers and sellers in connection with the settlement.
RESPA allows the borrower to request to see the HUD-1 Settlement Statement one
day before the actual settlement. The settlement agent must then provide the
borrowers with a completed HUD-1 Settlement Statement based on information known
to the agent at that time.
Disclosures at settlement
The HUD-1 Settlement Statement shows the actual settlement costs of the loan
transaction. Separate forms may be prepared for the borrower and the seller.
Where it is not the practice that the borrower and the seller both attend the
settlement, the HUD-1 should be mailed or delivered as soon as practicable after
settlement.
The Initial Escrow Statement itemizes the estimated taxes, insurance premiums
and other charges anticipated to be paid from the Escrow Account during the
first twelve months of the loan. It lists the Escrow payment amount and any
required cushion. Although the statement is usually given at settlement, the
lender has 45 days from settlement to deliver it.
Disclosures after settlement
Loan servicers must deliver to borrowers an Annual Escrow Statement
once a year. The annual Escrow account statement summarizes all escrow account
deposits and payments during the servicer's twelve month computation year. It
also notifies the borrower of any shortages or surpluses in the account and
advises the borrower about the course of action being taken.
A Servicing Transfer Statement is required if the loan servicer sells
or assigns the servicing rights to a borrower's loan to another loan servicer.
Generally, the loan servicer must notify the borrower 15 days before the
effective date of the loan transfer. As long the borrower makes a timely payment
to the old servicer within 60 days of the loan transfer, the borrower cannot be
penalized. The notice must include the name and address of the new servicer,
toll-free telephone numbers, and the date the new servicer will begin accepting
payments.
RESPA'S STATUTES EXPLAINED: CONSUMER PROTECTIONS and PROHIBITED PRACTICES
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