The Real Estate Settlement Procedures Act (RESPA) was enacted in 1974 in order to provide protection for consumers throughout the loan origination process, during closing, and after closing. RESPA assists consumers in selecting appropriate settlement services, as well as eliminating fraudulent costs associated with settlement services such as kickbacks and referral fees. RESPA deals with loans secured with mortgages on one-to four-family residential properties including most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit.
In order to maintain a firm standard of consumer protection, new RESPA regulations were published November 17, 2008, and the last of the proposed changes took effect January 1, 2010. The updated statutes are located in Title 24, Section 3500 of the Code of Federal Regulations, and can be located online.
There are several situations in which coverage of RESPA is not extended. These exemptions include:
- Twenty-five acres or more: A loan on property of 25 acres or more is exempt.
- Business purpose loans: Extensions of credit primarily for business, commercial, or agricultural use are exempt. To determine whether RESPA applies to a particular situation, persons may refer to Regulation X.
- Temporary financing: This exemption includes a construction loan but does not apply to a loan made for the construction of a one-to four-family residential property if conversion to permanent financing is intended. A loan in which a lender takes a security interest in otherwise covered one-to four-family residential property, known as a “bridge” or “swing” loan, is not covered by RESPA.
- Vacant land: Any loan secured for vacant or unimproved property is exempt, unless a structure or manufactured home will be built using the loan proceeds within two years from the settlement date.
- Assumptions without lender approval: Any assumption in which the lender does not have the right to approve a borrower for a loan is exempt; if the lender’s permission is required and obtained, the assumption is covered by RESPA.
- Loan conversions: If the terms of a federally related loan are converted and are still consistent with original provisions and a new note is not required, the loan is exempt.
Secondary market transactions: A bona fide transfer of a loan obligation in the secondary market is exempt. In order to determine if a transfer is bona fide, HUD takes into consideration the real source of funding and the real interest of the funding lender.
Overview of Required Disclosures
The Department of Housing and Urban Development (HUD) enforces RESPA to ensure consumers are protected. One requirement of RESPA is that disclosures are provided to borrowers at various times throughout the settlement process. These disclosures include information regarding costs, lender servicing, escrow account practices, and business relationships between settlement providers.
At the time a borrower applies for a loan, or within three business days, mortgage brokers and lenders must provide the borrower with:
- Special Information Booklet: Contains consumer information regarding real estate settlement services and the settlement process and is required for purchase transactions only
- Good Faith Estimate (GFE): Lists the charges the borrower is projected to pay at settlement
- Mortgage Servicing Disclosure Statement: Divulges whether the lender intends to service the loan or transfer it to another lender
If a borrower does not receive these documents at the time of application, the mortgage loan originator must mail them within three business days of receiving the loan application. A mortgage loan originator is not required to provide these documents if the loan is turned down within three days.
There are also several disclosures required before the closing of a loan occurs. These are the:
- Affiliated Business Arrangement (AfBA): Required if a settlement service provider refers the consumer to a provider with whom he/she has an ownership or other beneficial interest. This form explains that the borrower is not required to use the affiliate and may search for another provider.
- HUD-1 Settlement Statement: Shows all costs of the settlement, including a comparison of charges disclosed on the GFE and the actual charges. This statement must be offered to the borrower for review one business day prior to closing.
At the time of settlement, the following document is required:
- The Initial Escrow Statement: Includes estimated taxes, insurance premiums and other anticipated charges to be paid from the escrow account during the first 12 months of the loan. The lender has 45 business days from settlement to deliver.
In addition, there are two disclosures required after settlement. These are the:
- Annual Escrow Statement: Breaks down all of the transactions to and from the escrow account during the past 12 months. This must be delivered to borrowers once a year.
- Servicing Transfer Statement: Required if the servicer sells or assigns the servicing rights of a borrower’s loan to another servicer. The borrower must be notified 15 days before the date of the transfer.
Prohibition Against Kickbacks and Unearned Fees (§3500.14)
In addition to required disclosures throughout the settlement process, RESPA also includes provisions prohibiting certain practices in order to protect consumers. Section 8 of RESPA focuses on kickbacks, fee-splitting, and unearned fees.
A referral is defined as “any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business.” (§3500.14(f)) Giving or receiving a fee, kickback, or other thing of value is strictly prohibited by RESPA. Things of value are defined broadly under HUD’s guidelines and can include, but are not limited to, meals, entertainment, sporting event and concert tickets, office equipment, and indirect compensation or reimbursements.
Compensation for any referral of a settlement service is not permitted, except for:
- Payment to an attorney for services actually rendered
- Payment by a title company for services performed in the issuance of title insurance
- Payment by a lender to its duly appointed agent or contractor for services performed during the origination, processing, or funding of a loan
- Payment to a person of a bona fide salary or other payment for goods furnished or services performed
- Payment pursuant to cooperative brokerage and arrangements between real estate agents and real estate brokers
- Promotional and educational activities not conditioned on the referral of business
- An employer’s payment to its own employees for any referral activities
Fee-Splitting and Unearned Fees
The giving or accepting of a portion of a charge for performing a settlement service is not permitted unless the service is actually performed. In other words, if a person receives a fee for which no services are rendered, this is considered an unearned fee and is prohibited by RESPA.
Sections 6, 9 and 10
Sections 6, 9 and 10 of RESPA also address important prohibitions:
- Section 6: Outlines the steps which should be taken if a borrower finds a problem with the servicing of their loan
- Section 9: Prohibits a seller from requiring a home buyer to purchase title insurance from a specific company as a condition of sale
- Section 10: Focuses on the limits imposed on lenders regarding the amount they may require borrowers to deposit into an escrow account. Each month, the lender may not require the borrower to pay more than 1/12 of the total disbursements from the year, plus any amount necessary to cover any shortage in the account. As previously mentioned, an Annual Escrow Statement must be produced, and borrowers must be notified of any shortages.
Affiliated Business Arrangements (§3500.15)
HUD defines an affiliated business arrangement (AfBA) as an arrangement in which someone in a position to refer business as part of a real estate settlement service involving a mortgage loan has a beneficial ownership interest in more than 1% of a provider and refers business to that provider. This type of referral is not a violation of Section 8 of RESPA as long as certain conditions are met, as outlined in later sections.