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Real Estate Settlement Procedures Act (RESPA)

By: Staff Editor
Date: July 08, 2009

Real Estate Settlement Procedures Act (RESPA)

This Act was originally passed by U.S Congress in 1974. The latest RESPA regulations were published on November 17, 2008 and are scheduled to go into effect on January 1, 2010. Before this Act was created, it was a common practice for a lender to advertise a loan at a certain rate of interest provided the borrower use the lender's title insurance company or other affiliate at a greatly inflated price. The affiliate would then pay the lender a portion of the inflated fee as a kickback.

RESPA is a HUD consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD (Housing and Urban Development). It 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.

Features of the Act

This Act was designed to protect potential homeowners and enable them to become more intelligent consumers.
RESPA requires that lenders provide greater amounts of information to prospective borrowers at certain points in the loan settlement process.
It ensures that consumers throughout the nation are provided with more helpful information about the cost of the mortgage settlement and protected from unnecessarily high settlement charges caused by certain abusive practices.
It also prohibits the various parties involved from paying kickbacks to each other.
The most recent RESPA Rule makes obtaining mortgage financing clearer and, ultimately, cheaper for consumers.
The new Rule includes a required, standardized Good Faith Estimate (GFE) to facilitate shopping among settlement service providers and to improve disclosure of settlement costs and interest rate related terms.
The HUD-1 was improved to help consumers determine if their actual closing costs were within established tolerance requirements.

Restrictions

The Act prohibits kickbacks between lenders and third-party settlement service agents in the real estate settlement process (Section 8 of RESPA). Even reciprocal referrals among these types of professions could be construed in court as a violation of the law of RESPA.
It requires lenders to provide a good faith estimate (GFE) for all the approximate costs of a particular loan and finally a HUD-1 (for purchase real estate loans) or a HUD-1A (for refinances of real estate loans) at the closing of the real estate loan. The final HUD-1 or HUD-1A allows the borrower to know specifically the costs of the loan and to whom the fees are being allotted. Beginning January 1, 2010, amendments to RESPA restrict the amount that fees can increase between the GFE and HUD-1 or HUD-1A.
Origination charges are not allowed to increase, while certain third party service providers' fees can increase by no more than 10%.

Provisions Under the Act

Provisions	Content
Loan Servicing Complaints (Section 6)	Under Section 6 of RESPA, borrowers unhappy with the servicing of their loan should contact their loan servicer in writing, outlining the nature of their complaint. The servicer must acknowledge the written complaint within 20 business days. Within 60 business days the servicer must resolve the complaint by correcting the account or giving a statement of the reasons for its position. Until the complaint is resolved, borrowers should continue to make the servicer's required payment. Borrowers may bring a lawsuit for violations of Section 6 within three years and may obtain actual and additional damages, if there is a pattern of noncompliance.
Kickbacks, Fee-Splitting, Unearned Fees (Section 8)	Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. It also prohibits fee splitting and receiving unearned fees for services not actually performed. Violation of Section 8 is subject to criminal and civil penalties. In a criminal case, a person who violates Section 8 may be fined up to USD 10,000 and imprisoned up to one year. In a private law suit, a person who violates Section 8 may be liable to the person charged for the settlement service, an amount three times the original service charge.
Seller Required Title Insurance (Section 9)	Section 9 of RESPA prohibits a seller from requiring the home buyer to use a particular title insurance company, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance.
Limits on Escrow Accounts (Section 10)	Section 10 of RESPA sets limits on the amounts that a lender may require a borrower to put into an escrow account for purposes of paying taxes, hazard insurance and other charges related to the property. During the course of the loan, RESPA prohibits a lender from charging excessive amounts for the escrow account. Each month the lender may require a borrower to pay into the escrow account no more than 1/12 of the total of all disbursements payable during the year, plus an amount necessary to pay for any shortage in the account. In addition, the lender may require a cushion, not to exceed an amount equal to 1/6 of the total disbursements for the year. The lender must perform an escrow account analysis once during the year and notify borrowers of any shortage. Any excess of USD 50 or more must be returned to the borrower.
RESPA Complaints and Enforcement	Persons who believe a settlement service provider has violated RESPA may wish to file a complaint. HUD, a State Attorney General or State insurance commissioner may bring an injunctive action to enforce violations of Section 6, 8 or 9 of RESPA within three (3) years. Under Section 10, HUD has authority to impose a civil penalty on loan servicers who do not submit initial or annual escrow account statements to borrowers. Individuals have one (1) year to bring a private lawsuit to enforce violations of Section 8 or 9. A borrower may bring a private lawsuit, or a group of borrowers may bring a class action suit, within three years, against a servicer who fails to comply with Section 6's provisions. Lawsuits for violations of Section 6, 8, or 9 may be brought in any federal district court in the district in which the property is located or where the violation has occurred.