The Real Estate Settlement Procedures Act, or RESPA, was passed by Congress in 1974 and requires all parties involved in the real estate settlement process to make certain disclosures about their services. This helps borrowers and home buyers make more informed decisions about mortgages, escrow services, real estate agents, and many other service providers in the real estate industry.
RESPA is a complicated legislation with many confusing points. In this article, we’ll go over some of the most frequently asked questions so you can get a better idea of how this statute will affect you and your real estate plans.
1. What is the main purpose of RESPA?
The purpose of RESPA is twofold:
- To ensure that home buyers and borrowers are better informed about their real estate transactions.
- To eliminate shady and unlawful business practices like kickbacks and referral fees.
RESPA achieves its first goal by requiring all providers involved in the real estate settlement process to disclose information about their services. What information needs to be disclosed in particular depends on the stage of the real estate transaction.
Secondly, RESPA prohibits kickbacks and referral fees. This means that lenders cannot charge or receive compensation (a “kickback”) from another lender for referring a borrower to them. Lenders can only charge for the services they perform themselves and cannot split their proceeds with a third party that didn’t provide any services.
2. What are the RESPA requirements?
Lenders must provide these three disclosures upon receiving a borrower application:
- Good Faith Estimate: An estimate of all the costs the borrower will need to pay upon closing.
- Mortgaging Service Disclosure Statement: This disclosure informs the buyer as to whether the lender will carry out the loan themselves or have another lender service it. The statement must also tell the buyer how to make and resolve complaints they may have.
- Special Information Booklet: The lender must provide a booklet explaining closing costs, escrow processes, the RESPA settlement form, and alert the buyer to deceptive practices they may encounter throughout the home buying process.
If a loan provider refers a borrower to another lender, the provider must give the borrower an Affiliated Business Arrangement Disclosure. After closing, the buyer must receive an Annual Escrow Account Disclosure Statement.
3. What is prohibited by RESPA?
RESPA prohibits parties involved in the real estate settlement process from receiving any compensation for lending referrals or services that they do not carry out themselves. Under RESPA, lenders and related servicers are also prohibited from charging or receiving payment for services that are not fully carried out. As such, lenders cannot share a portion of their compensation with a third party that hasn’t provided a service to the borrower.
These prohibitions help keep fees lower for buyers and protect them from deceptive business practices wherein a lender may advertise a lower fee but then require the borrower to pay a higher fee to a different lender after applying.
4. Does RESPA apply to all mortgage loans?
RESPA does not apply to all mortgage loans. The following loan types are exempt:
- Commercial or Business Loans: Mortgages for commercial properties of greater than four units are not covered by RESPA. Agricultural land or other business purposes do not fall under RESPA’s umbrella either.
- Vacant land: If a borrower is applying for a loan for vacant land without the intention of building a residential property, they are not protected by RESPA.
- Large Stretches of Land: Any loan for a purchase of land over 25 acres is exempt from RESPA’s protections regardless of whether or not there are plans to build a residential property.
- Loan Assumptions: Assumed loans, such as VA loans, are not covered by RESPA.
5. Who is responsible for enforcing RESPA?
The Consumer Financial Protection Bureau, or CFPB, is currently responsible for enforcing RESPA regulations. Prior to July 2011, RESPA was enforced by the US Department of Housing and Urban Development. The CFPB is dedicated to protecting consumers from unfair practices that banks, lenders, and other financial institutions may engage in.
6. What is the penalty for a RESPA violation?
Anyone that accepts a kickback or referral fee for settlement business or is caught fee-splitting is subject to a $10,000 fine and up to one year in prison. Loan servicers that don’t provide the required escrow statements are subject to a $75 fine. Intentionally disregarding the statutes of Section 10, which focuses on the amount a lender may require a buyer to hold in escrow, can result in a penalty of $110 per violation. Other violations of servicing requirements can result in a $1,000 fee.
7. Who is covered by RESPA?
Technically, RESPA covers all loans related to the federal government. While this may sound limiting, almost all home buyers will end up taking out a federally related loan in one way or another. As such, RESPA covers most home buyers.
RESPA regulations can be difficult to understand. If you’re buying a home and have any questions about how RESPA may affect your purchase, drop us a line and one of our experienced Partner Agents will be happy to schedule a free, no-obligation consultation with you.
Clever Partner Agents offer a $1,000 Home Buyer Rebate to buyers in 40 states, which can be used to help cover closing costs and make the home buying process a little easier on your wallet.
To get in touch with one of our qualified real estate agents, simply contact Clever and we’ll be in touch with you shortly.