The Real Estate Settlement Procedures Act (RESPA) is an important statute that mandates transparency across a variety of areas in the mortgage-closing process. Transparency is achieved through required paperwork that helps the borrower understand fees, conflicts of interest, and more.
Learn what RESPA covers, how it protects the vast majority of today’s borrowers, and how to report RESPA violations.
Definition and Examples of RESPA
RESPA is a federal statute that increases transparency during the real estate settlement process (loan closing) by ensuring that buyers and sellers receive the appropriate disclosures. It also prohibits certain abusive practices on the part of the professionals involved in the transaction.
RESPA was passed in 1974 and went into effect the following year under the Department of Housing and Urban Development’s (HUD) enforcement. The Consumer Financial Protection Bureau (CFPB) took over enforcement in 2010.
Today, RESPA covers most residential loans on one- to four-unit properties, including:
- Purchase loans
- Property improvement loans
- Reverse mortgages
- Home equity lines of credit
It does not cover business-related commercial or agricultural loans, bridge loans, temporary loans, or assumptions (unless the assumption is approved by the lender).
How Does RESPA work?
RESPA ensures that borrowers receive informative disclosures during the mortgage process. In addition to paperwork disclosures, RESPA has several sections that prohibit unethical actions by parties involved in your mortgage closing.
Special Information Booklet
The special information booklet contains consumer information about the various settlement services you may receive during the course of the transaction. RESPA does not require the booklet for refinances and reverse mortgages.
The good-faith estimate (GFE) lists the charges that the buyer will likely need to pay at settlement. A GFE is required only for closed-end reverse mortgages.
Mortgage Servicing Disclosure Statement
This document discloses whether the lender intends to service the loan in-house or transfer it to another lender.
Affiliated Business Arrangement Disclosure
If a lender or an associated entity in the transaction has an affiliate interest with or at least 1% ownership in a settlement provider involved in the mortgage process or refers business to a provider, they must disclose that relationship to you.
HUD-1 Settlement Statement
Usually given the day prior to closing on a closed-end reverse mortgage, the HUD-1 lists all the fees associated with that settlement. The statement includes the GFE sum so you can compare the estimate to what you’ll actually pay for your reverse mortgage. The HUD-1 fees cannot exceed 10% of the sum from your GFE.
Initial Escrow Statement
The initial escrow statement itemizes the fees you’ll pay from your escrow account, and the anticipated dates when those payments will happen.
Annual Escrow Statement
Each year, the loan servicer must provide you with a statement that summarizes any payments made from the escrow account, including any overages or shortages.
Loan Transfer Statement
If the loan servicer transfers the loan to another company, it must notify you before the transfer occurs. A transfer statement includes some of the following components: the date of the transfer, contact information for the new servicer, and when the new servicer will start accepting your payments.
Section 8 of RESPA prohibits anyone from accepting a kickback, fee, or anything of value for the referral of settlement services. It also prohibits fee-splitting and accepting any fees for services that were not actually performed.
If service providers violate Section 8, they could be subject to fees up to $10,000, up to a year in prison, or both.
This section prohibits the seller from requiring that the buyer use a particular title insurance company.
Generally, Section 10 of RESPA prohibits the lender from charging you excessive fees for managing your escrow account. Your monthly escrow charges should equal the sum of any insurance and property taxes due each year divided by 12.
Also, Section 10 notes that the loan servicer must conduct an audit of each escrow account on a yearly basis. The servicer must return to the borrower any overages of at least $50.
How to Report RESPA Violations
- RESPA was passed in 1974, enacted in 1975, and has gone through many changes since its inception
- RESPA made disclosures about the settlement process much clearer and readily accessible for borrowers.
- RESPA prohibits certain types of unlawful behavior on the part of settlement providers
- Those concerned about a RESPA violation should contact the Office of RESPA and Interstate Land Sales and file a complaint with the CFPB.