What Is the Real Estate Settlement Procedures Act? RESPA Requirements and Violations
The Real Estate Settlement Procedures Act (RESPA) was passed into law in 1974. The law regulates practices used by mortgage lenders, with the intention of protecting consumers from systems that just served to inflate the cost of mortgages relative to their real value. Like other regulations that apply to lending practices, RESPA is now managed and enforced by the Consumer Financial Protection Bureau (CFPB).
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What Is RESPA?
RESPA is a bill that was passed in 1974 by Congress and subsequently signed into law by President Gerald Ford. That law was intended as a consumer protection measure and meant to help consumers educate themselves about lending practices while, at the same time, putting an end to uncompetitive practices within the mortgage lending industry that drove prices up.
At the time that the law was passed, it fell under the jurisdiction of the Department of Housing and Urban Development (HUD). However, in 2011, the CFPB — and agency which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 — took over the job of enforcing the law, which is now identified under Regulation X of the CFPB regulations.
What Is the Purpose of RESPA?
Before the passage of RESPA, companies that bought and sold real estate — for example, real estate agents, mortgage lenders, construction companies, and companies that offered title insurance — were often providing financial kickbacks to one another. Financial kickbacks are, essentially, a form of bribery, where one institution partners with another to increase the cost of goods and services and then go on to share the benefit of those services.
For example, a kickback of the sort outlawed by RESPA might be a real estate agent who partners with a mortgage lender to sell a house. When a consumer comes along to buy the house, they are told by the real estate agent that they must use the agent’s affiliated mortgage lender. The mortgage lender might then include a $1,000 fee alongside the value of the mortgage, and they would then split the revenue from that fee with the real estate agent who delivered the homebuyer.
These kinds of kickbacks were made illegal by RESPA, in order to make real estate prices more transparent to consumers and to put an end to non competitive practices that drove the cost of real estate services up far beyond their actual value.
What Are the RESPA Regulations?
RESPA sets forth requirements for mortgage lenders who provide mortgages that are secured by federal mortgage loans. In short, lenders must:
- Provide a Good-Faith Estimate of Settlement Costs, a Special Information Booklet, a HUD-1/1A settlement statement, and Mortgage Servicing Disclosures to the consumer.
- Allow the consumer to compare the Good-Faith Estimate of Settlement Costs and the HUD-1/1A settlement statement when closing on a house.
- Follow the established escrow accounting practices with their real estate deals.
- Not go ahead with foreclosure on a home when the mortgage borrower has submitted a complete application for loss mitigation options.
- Not pay kickbacks to other institutions and agents in the real estate industry.
Referral Fees and Kickbacks
RESPA forbids financial institutions and other agents in the real estate industry from utilizing referral fees or kickbacks are a part of their business practices. Illegal referral fees and kickbacks occur when two agents in the industry conspire with one another to coerce the customer into paying more than the services they provide are worth. If a consumer believes that illegal referral fees and kickbacks are being used by a lender, then they can file a complaint for the CFPB complaints database. The company then has 15 days to respond to that complaint.
RESPA ensures that the closing cost on a home is transparent throughout the home buying process. If consumers are misled about the cost of their home at any point in the process, they can file a complaint with the CFPB.
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Nick Cesare is a writer from Boise, ID. In his free time he enjoys rock climbing and making avocado toast.
This post was updated December 18, 2018. It was originally published November 27, 2018.