What Is the Real Estate Settlement Procedures Act (RESPA)?

What Is the Real Estate Settlement Procedures Act (RESPA)?

Let me explain what the Real Estate Settlement Procedures Act, or RESPA, really is. Congress enacted it in 1975 to give homebuyers and sellers full disclosures on settlement costs. It aims to wipe out abusive practices in the real estate settlement process, ban kickbacks, and cap the use of escrow accounts. This is a federal law, and today it's regulated by the Consumer Financial Protection Bureau (CFPB).

Understanding the Real Estate Settlement Procedures Act (RESPA)

Congress first passed RESPA in 1974, and it took effect on June 20, 1975. Over the years, it's seen several changes and amendments. Originally, the U.S. Department of Housing and Urban Development (HUD) handled enforcement, but after the Dodd-Frank Act in 2011, that shifted to the CFPB.

From the start, RESPA has regulated mortgage loans for one- to four-family residential properties. Its main goal is to inform you about settlement costs and eliminate kickbacks and referral fees that drive up mortgage expenses. It covers most purchase loans, assumptions, refinances, property improvement loans, and HELOCs.

Keep in mind, RESPA doesn't apply to credit extensions to the government, its agencies, or instrumentalities, or when you're using property mainly for business, commercial, or agricultural purposes.

RESPA Requirements

Under RESPA, lenders, mortgage brokers, or home loan servicers must disclose all relevant information about your real estate transaction to you. This includes details on settlement services, consumer protection laws, and anything related to settlement costs. They also have to reveal business relationships between closing service providers and other parties involved in the settlement.

What Does RESPA Prohibit?

RESPA bans practices like kickbacks, referrals, and unearned fees. For instance, Section 8 forbids giving or receiving anything of value for referring settlement service business. It also regulates escrow accounts by prohibiting servicers from demanding excessively large ones and stops sellers from mandating specific title insurance companies.

There is an exception: Brokers and agents can exchange reasonable payments for goods or services from other providers, as long as it complies with the law and guidelines.

Marketing and Sponsorship

RESPA doesn't prohibit joint marketing between a real estate broker and a lender if advertising costs are tied to the value of goods or services received. But if one party pays more than their fair share, that's not allowed. Sponsoring events can also be prohibited if it's used to market services.

Real estate brokers and title agents can't enter market service agreements where one charges the other more than fair market value for marketing. Settlement providers can't rent space from each other unless it's at fair market value.

Referral Fees

Real estate brokers can't pay agents to refer clients to their affiliate mortgage company. They can't offer referral fees to other brokers for sending clients their way. These are seen as kickbacks and are prohibited. Mortgage lenders can't give incentives to real estate agents for referring homebuyers to their loans.

Affiliated Business Arrangements

Brokers can't refer business to an affiliated title company without disclosing the relationship to you. This disclosure must include the title company's charges and the broker's financial interest. You need to know you're not required to use that company. Brokers and title companies can't set up affiliates just to collect referral dividends.

Lenders can't force you to use a specific affiliate provider, but they can offer financial incentives. For example, you might get discounted rates for using affiliated services.

Enforcement Procedures for RESPA Violations

If kickbacks or improper behavior happened during settlement, you have up to one year to file a lawsuit. For grievances against your loan servicer, you must first contact them in writing about the issue. They have 20 business days to respond in writing and 60 business days to fix it or explain why the account is valid. Keep making your payments in the meantime.

You have up to three years to sue your loan servicer for certain issues. These suits can go to any federal district court in the district where the property is or where the violation occurred.

If you suspect a RESPA violation and didn't use a lawyer in your transaction, contact one right away. They'll help you through the legal steps.

Criticisms of RESPA

Critics say RESPA hasn't stopped all abusive practices, like kickbacks. For example, lenders provide captive insurance to title companies they work with—a subsidiary that only insures the parent company. This is seen as a kickback because customers often stick with associated providers, even though they sign forms saying they can choose freely.

Due to these issues, there are proposals to change RESPA, such as removing your option to pick individual providers and bundling services instead. Then, the agent or lender would pay all costs directly, using their buying power to get the lowest prices.

Who Does RESPA Protect?

RESPA protects consumers applying for mortgage loans, but not all types—loans for business or agricultural real estate aren't covered.

What Information Does RESPA Require to Be Disclosed?

RESPA mandates various disclosures at different times. Your lender or broker must give you a good-faith estimate of total settlement charges, though actual costs might differ. They also provide a written disclosure when you apply or within three business days if someone else will service your loan.

Why Was RESPA Passed?

RESPA was enacted to limit escrow account use and ban abusive practices like kickbacks and referral fees in real estate.

The Bottom Line

When you're buying a home, work with a trusted, licensed real estate agent or broker to guide you. For refinancing or home equity borrowing, choose a reputable lender. RESPA and other regulations exist to shield you from unfair practices by agents, brokers, lenders, and affiliates.