What Is RESPA?
RESPA, or the Real Estate Settlement Procedures Act, is a United States law designed to protect home buyers and sellers by providing them with complete disclosure of all costs related to settlement during a real estate transaction. The RESPA real estate law was enacted in order to eliminate the abusive practices found during the real estate settlement process. It also helps limit the use of escrow accounts and prohibits kickbacks and other improper behaviors. Today, it is a federal law regulated by the Consumer Financial Protection Bureau, or the CFPB.
RESPA was initially passed by Congress in 1974 and officially became effective on June 20, 1975. The law has undergone many changes and amendments over the years, and enforcement initially fell on the U.S. Department of Housing and Urban Development (HUD). The responsibilities later shifted to the CFPB after 2011 due to a clause in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law was designed to regulate mortgage loans for one to four-family homes and residential properties. It helps educate borrowers about their settlement costs so that they know how much they spend during settlement and where that money goes. It also eliminates unscrupulous kickback practices and referral fees that can increase the cost of getting a mortgage. Most new home loans, refinances, property improvement loans, and home equity lines of credit are protected by RESPA.
The purpose of RESPA is to protect the consumer, which includes both buyer and seller. It’s important to note that RESPA doesn’t apply to any loans or other extensions of credit to the government or governmental agencies. It also doesn’t apply to real estate transactions when a borrower plans to use property or land primarily for business or commercial use. RESPA does not apply to loans for property or land used for agricultural purposes either, such as the transfer or purchase of a farm or orchard.
Requirements of RESPA
Under RESPA, all lenders, mortgage brokers, and other servicers of home loans must disclose information about the transaction to borrowers. These disclosures include settlement information and other information related to the cost of completing a real estate transaction. It also offers more in-depth information about any relevant consumer protection laws. Any other business relationships with closing service providers and other parties should also be disclosed to the borrower to ensure transparency.
Mortgage brokers and lenders must give the borrower a special information booklet that contains consumer information about the various settlement services related to real estate. This applies to purchase transactions only. All borrowers must be given a good faith estimate, or GFE, of all settlement costs. This GFE lists each cost separately and explains what it applies to so that the buyer knows what they will most likely be responsible for paying during settlement. Keep in mind that the charges may vary, as this is only an estimate. Borrowers must also receive a Mortgage Servicing Disclosure Statement informing the borrower whether the lender intends to service the loan directly or transfer it to a different lender. If any of these documents are not given to the borrower at the time of loan application, the lender must mail them within three days of receiving the application.
What does RESPA not allow?
RESPA also prohibits certain things in addition to what it requires. Some of these things include:
- Loan servicers may not provide information to any consumer reporting agencies concerning overdue payments within 60 days after receiving a written request from the borrower concerning the servicing of the loan.
- No person involved in the transaction may accept anything of value for referrals related to settlement services. People also may not give or accept any charges for services that are not received, which are also known as kickbacks, unearned fees, or fee-splitting.
- Home sellers may not require home buyers to purchase their settlement services from a particular company as a condition of sale. If this happens, buyers may sue the seller for violating this provision of RESPA. The suit amount may be equal to as much as three times the cost of all charges paid for title insurance.
- The amount of money a lender requires the borrower to hold in escrow is limited under RESPA. Lenders are also not allowed to charge excessive amounts for an escrow account. Borrowers may be required to pay no more than 1/12 of the total disbursements payable during the year to an escrow account. Approximately 1/6 of the total disbursements for the year may be added as a cushion, as long as the lender performs an escrow analysis once during the year.
What home inspectors need to know about RESPA
Home inspectors should be certified and a member of a qualified organization, such as InterNACHI. While unqualified inspectors may charge less, they could pose a risk to buyers if they’re not aware of specific issues with a home. In addition to regular home inspections, most lenders also require a certificate from a qualified inspector that states the home is free of pests like termites and that there is no pest damage present. Buyers may reserve the right to cancel their offer, or they may ask the seller to seek treatment and make repairs if an inspector finds any pest damage or an infestation. If you’re a home inspector and want to give real estate agents a gift to say thank you, it’s important to ensure that you do so while following RESPA regulations. According to InterNACHI, there are several ways you can show your appreciation for referrals and the agents you work with while remaining in compliance with RESPA laws. This may include giving agents a full-color home maintenance book with your logo and contact information on the cover. You can also offer to give real estate agents access to free continuing education through InterNACHI. When in doubt, refer to the official RESPA rules to ensure that you stay in compliance and maintain good relationships with your network.