What Loan Types are Not Covered by RESPA?

Businessman looking at a modern building
Getty Images/Pinopic

RESPA, the Real Estate Settlement Procedures Act, regulates the disclosure of costs and affiliated business arrangements or AfBA's in a real estate settlement transaction.

Loan types covered by RESPA are many, but there are specifically exempt loan types. Though it may be good practice to disclose all costs and affiliated business arrangements anyway, it is not regulated by RESPA to do so for these exempted loan types.

Commercial or Business Loans - Normally, loans secured by real estate for a business or agricultural purpose are not covered by RESPA. However, if the loan is made to an individual entity to purchase or improve a rental property of 1 to 4 residential units, then it is regulated by RESPA.

Commercial business owners are generally much more savvy and knowledgeable about real estate and transactions.  If they aren't, they are hiring professionals to help them due to the large size of the transactions.  There is often a team of professionals involved, from real estate agents to attorneys and project managers.  They each have a specific job to do in evaluating a prospective commercial real estate purchase for suitability.  

This team and the higher sophistication level of the investors, buyers and sellers is in stark contrast to the first time home buyer or someone who has only purchased a couple of homes in their lifetime.

 That's why RESPA is there, to protect their interests.  The commercial owners and buyers have their protection hired.

Vacant Land - When a loan is made to purchase vacant land, and none of the proceeds of the loan will be used to construct a covered residential structure, the loan is exempt from RESPA oversight.

This is another case of the relative experience and knowledge of the participants in the transaction.  If a developer is buying the land to subdivide it, they have their subdivision plans, one or more attorneys to deal with the local laws and zoning, and construction people ready to advise in order to get the work of laying in streets and utilities.

If a parcel of vacant land is to be used as the location for an industrial or manufacturing facility, the same expertise and knowledge of the players comes into play.  If a large corporation wants a new warehouse or manufacturing facility, they already know precisely what that looks like, the parcel size they need for facility and parking and the local zoning laws.

Large Land Tracts - Land tracts of 25 or more acres, whether there is a residence or not, are not covered.  The previous section applies here, but now we can throw in land purchased for a ranch or farm where a residence will also be constructed or is already present.  The buyer is likely an experienced rancher or farmer, often adding to their adjacent ranch or farm.  There is less need for oversight to protect their interests due to their knowledge of how the land will be used.

Certain Loan Assumptions - When a loan is assumed, and the lender has no rights to approve future persons for assumption, then the loan is not covered.  There aren't many residential assumable loans anymore, but VA loans are a notable exception.

Construction Only Loans - Unless a loan is made as a construction-to-permanent loan, it is not covered.  Often custom homes are to be built and the land is used as collateral for a temporary construction loan to get the home built.  When the loan will be paid off and a new permanent mortgage initiated, RESPA isn't involved.  However, if the loan is a construction-to-permanent loan in one package, it is subject to RESPA.

Governments - As is usually the case with laws, the government exempted itself and state governments.  We won't get into whether government is any smarter than we are, but they always exempt themselves from stuff like this.

It seems like every year there are new laws, regulations, limitations and more.  The expert real estate agent should keep abreast of them, at least at the big picture level.  The title companies and lenders are much more into them, as they have to get the paperwork right.