The Real Estate Settlement Procedures Act ( RESPA) is a consumer protection statute that was first passed in 1974. One of its main objectives is to help consumers become better shoppers for real estate settlement ( closing) services. Another aim is to eliminate kickbacks and referral fees that add unnecessary costs to settlement services.
RESPA requires that certain disclosures be made to borrowers at various points in time. Some of these disclosures specify the costs associated with the settlement, delineate lender servicing and escrow account policies and details, and explain business relationships between settlement service providers.
The Act also prohibits certain practices that increase settlement services costs. For example, section 8 of RESPA prohibits individuals from giving or accepting any item of value in exchange for referrals of settlement service business related to a federally related mortgage. It likewise prohibits individuals from providing or accepting any part of a charge for services that are not actually performed. Section 9 of RESPA forbids home sellers from requiring home buyers to purchase title insurance from a particular company.
In general, RESPA covers loans secured with a mortgage placed on one-to-four family residential properties. These consist of most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. The Housing and Urban Development (HUD)’s Office of Consumer and Regulatory Affairs, Interstate Land Sales/RESPA Division enforces RESPA.
Disclosures at the Time of Loan Application When borrowers apply for a mortgage, mortgage brokers and/or lenders must provide the borrowers:
A Special Information Booklet, which includes consumer information concerning various real estate settlement services (for purchase transactions only).
A Good Faith Estimate (GFE) of settlement costs listing the charges the buyer is likely to pay at the settlement. If a lender requires the borrower to use a particular settlement provider, he or she must disclose this condition on the GFE.
A Mortgage Servicing Disclosure Statement, which notifies the borrower whether the lender intends to service the loan or transfer it to another lender. It also gives the buyer information about complaint resolution.
If the borrowers do not receive these documents at the time of application, the lender must mail them within three business days of receiving the loan application. However, if the lender turns down the loan within three days, then the lender need not provide these documents. RESPA does not explicitly provide for a penalty for the failure to provide the above described documents. Bank regulators may nevertheless penalize lenders who fail to comply with federal law.
If the borrowers do not receive these documents at the time of application, the lender must mail them within three business days of receiving the application. If the loan is denied, however, the lender is not required to provide these documents.
Disclosures Before Settlement Occurs The Controlled Business Arrangement (CBA) disclosure is required whenever a settlement service provider involved in a real estate transaction covered by RESPA refers the consumer to an affiliate for a settlement service. The referring party must give the CBA disclosure to the consumer at or before the time of referral. The disclosure must explain the business arrangement that exists between the two providers and provide the borrower with an estimate of the affiliate’s charges. The disclosure will remind the consumer that he or she is generally not required (with the exception of cases in which a lender refers a borrower to an attorney, credit reporting agency, or real estate appraiser to represent the lender’s interest in the transaction) to use the particular affiliate being referred and is free to seek another provider.
Disclosures at Settlement The HUD-1 Settlement statement indicates the actual settlement costs of the loan transaction. Separate forms may be provided to the borrower and the seller. The borrower and seller need not attend settlement, but the statement should be mailed or delivered as soon as possible after closing.
The Initial Escrow Statement itemizes the estimated taxes, insurance premiums, and other charges expected to be paid from the escrow account during the first twelve months of the loan. The statement lists the escrow payment amount and any required “cushion.” The statement is usually provided at settlement; however, the lender has 45 days from settlement to deliver it.
Disclosures After Settlement Borrowers must be provided with an Annual Escrow Statement by loan servicers once per year. This statement summarizes all escrow account payments made during the servicer’s year (twelve months computed). It also informs the borrower of any shortages or surpluses in the account and notifies the borrower about the course of action being pursued.
A Servicing Transfer Statement must be provided if the loan servicer sells or assigns the servicing rights to a borrower’s loan to another loan servicer. In general, the loan servicer must inform the borrower of the loan transfer 15 days before its effective date. The borrower cannot be penalized as long as he or she makes a timely payment to the old servicer within 60 days of the transfer. The notice must contain the name and address of the new servicer, relevant toll-free telephone numbers, and the date the new servicer will begin accepting payments.