RESPA
Real Estate
Settlement Procedures Act (RESPA)
This law protects consumers from abuses
during the residential real estate purchase and loan process and
enables them to be better informed shoppers by requiring disclosure
of costs of settlement services.
The U.S. Department of Housing and
Urban Development’s (HUD) Federal Housing
Administration (FHA) administers several regulatory programs to
ensure equity and efficiency in the sale of housing. One of these
programs, under the Real Estate Settlement Procedures Act (RESPA),
applies to almost all mortgage loans and mortgage companies, not
just FHA-insured mortgages. RESPA’s purposes are (1) to help consumers
get fair settlement services by requiring that key service costs
be disclosed in advance, (2) to protect consumers by eliminating
kickbacks and referral fees that would unnecessarily increase the
costs of settlement services, and (3) to further protect consumers
by prohibiting certain practices that increase the cost of settlement
services.
RESPA protects consumers by mandating
a series of disclosures that prevent unethical practices by mortgage companies and that provide consumers with the information to choose
the real estate settlement services most suited to their needs.
The disclosures must take place at various times throughout the
settlement process:
Disclosures at the time of loan application.
When a potential home buyer applies for a mortgage loan, the buyer
must receive (1) a Special Information Booklet, which contains consumer
information on various real estate settlement services; (2) a Good
Faith Estimate of settlement costs, which lists the charges the buyer
is likely to pay at settlement and states whether the buyer is required
to use a particular settlement service; and (3) a Mortgage Servicing
Disclosure Statement, which tells the buyer whether the loan will
be kept or transferred for servicing, and also gives information about
how the buyer can resolve complaints. RESPA does not specify penalties
when these three items are not provided, but bank regulators can impose
penalties.
Disclosures before settlement (closing)
occurs. (1) An Affiliated Business Arrangement Disclosure is required
whenever a settlement service refers a buyer to a firm with which
the service has any kind of business connection, such as common ownership.
The service usually cannot require the buyer to use a connected firm.
(2) A preliminary copy of a HUD-1 Settlement Statement is required
if the borrower requests it 24 hours before closing. This form gives
estimates of all settlement charges that will need to be paid, both
by buyer and seller.
Disclosures at settlement. (1) The HUD-1
Settlement Statement is required to show the actual charges at settlement.
(2) An Initial Escrow Statement is required at closing or within 45
days of closing. This itemizes the estimated taxes, insurance premiums,
and other charges that will need to be paid from the escrow account
during the first year of the loan.
Disclosures after settlement. (1) An
Annual Escrow Loan Statement must be delivered by the servicer to
the borrower. This statement summarizes all escrow account deposits
and payments during the past year. It also notifies the borrower
of any shortages or surpluses in the account and tells the borrower
how these can be paid or refunded. (2) A Servicing Transfer Statement
is required if the servicer transfers the servicing rights for a
loan to another servicer.
Along with these disclosures, RESPA
protects consumers by prohibiting several other practices: (1) Kickbacks,
fee-splitting, and unearned fees: Anyone is prohibited from giving
or accepting a fee, kickback, or any thing of value in exchange
for referrals of settlement service business involving a federally
related mortgage loan, which covers almost every loan made for residential
property. RESPA also prohibits fee-splitting and receiving unearned
fees for services not actually performed. Violations of these RESPA
provisions can be punished with criminal and civil penalties. (2)
Seller-required title insurance: A seller is prohibited from requiring
a home buyer to use a particular title insurance company. A buyer
can sue a seller who violates this provision. (3) Limits on escrow
accounts: A limit is set on the amount that a borrower is required
to put into an escrow account to pay taxes, hazard insurance, and
other property charges. RESPA does not require an escrow account
on borrowers, but some government loan programs or mortgage companies
may require an escrow account. During the course of the loan, RESPA
prohibits charging excessive amounts for the escrow account. And
each year, the borrower must be notified of any escrow account shortage
and return any excess of $50 or more.
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