Real Estate Settlement Procedures
Act (RESPA)
Introduction
The Real Estate Settlement Procedures Act (RESPA) is
a consumer protection statute, first passed in 1974. The
purposes of RESPA are
1. to help consumers become better shoppers for settlement
services and
2. to eliminate kickbacks and referral fees that unnecessarily
increase the costs of certain settlement services.
Details about RESPA
Corresponding with the above purposes:
1. RESPA requires that borrowers receive disclosures
at various times. Some disclosures spell out the costs
associated with the settlement, outline lender servicing
and escrow account practices and describe business relationships
between settlement service providers.
2. RESPA also prohibits certain practices that increase
the cost of settlement services. Section 8 of RESPA prohibits
a person from giving or accepting any thing of value for
referrals of settlement service business related to a
federally related mortgage loan. It also prohibits a person
from giving or accepting any part of a charge for services
that are not performed. Section 9 of RESPA prohibits home
sellers from requiring home buyers to purchase title insurance
from a particular company.
RESPA in general
RESPA covers loans secured with a mortgage placed on
a one-to-four family residential property. These include
most purchase loans, assumptions, refinances, property
improvement loans, and equity lines of credit. HUD's Office
of RESPA and Interstate Land Sales is responsible for
enforcing RESPA. Back to top
RESPA required disclosures:
At the time of loan application
When borrowers apply for a mortgage loan, mortgage brokers
and/or lenders must give the borrowers:
* a Special Information Booklet, which contains consumer
information regarding various real estate settlement services.
(Required for purchase transactions only) and
* a Good Faith Estimate (GFE) of settlement costs, which
lists the charges the buyer is likely to pay at settlement.
This is only an estimate and the actual charges may differ.
If a lender requires the borrower to use a particular
settlement provider, then the lender must disclose this
requirement on the GFE.
* a Mortgage Servicing Disclosure Statement, which discloses
to the borrower whether the lender intends to service
the loan or transfer it to another lender. It also provides
information about complaint resolution.
If the borrowers don't get these documents at the time
of application, the lender must mail them within three
business days of receiving the loan application.
If the lender turns down the loan within three days,
however, then RESPA does not require the lender to provide
these documents.
The RESPA statute does not provide an explicit penalty
for the failure to provide the Special Information Booklet,
Good Faith Estimate or Mortgage Servicing Statement. However,
bank regulators may choose to impose penalties on lenders
who fail to comply with federal law. Please read the section
on RESPA enforcement for more information.
Disclosures before settlement/closing occurs
The terms "settlement" and "closing"
can be and are used interchangeably.
An Affiliated Business Arrangement (AfBA) Disclosure
is required whenever a settlement service provider involved
in a RESPA covered transaction refers the consumer to
a provider with whom the referring party has an ownership
or other beneficial interest.
The referring party must give the AfBA disclosure to
the consumer at or prior to the time of referral. The
disclosure must describe the business arrangement that
exists between the two providers and give the borrower
an estimate of the second provider's charges.
Except in cases where a lender refers a borrower to an
attorney, credit reporting agency or real estate appraiser
to represent the lender's interest in the transaction,
the referring party may not require the consumer to use
the particular provider being referred.
The HUD-1 Settlement Statement is a standard form that
clearly shows all charges imposed on borrowers and sellers
in connection with the settlement. RESPA allows the borrower
to request to see the HUD-1 Settlement Statement one day
before the actual settlement. The settlement agent must
then provide the borrowers with a completed HUD-1 Settlement
Statement based on information known to the agent at that
time.
Disclosures at settlement
The HUD-1 Settlement Statement shows the actual settlement
costs of the loan transaction. Separate forms may be prepared
for the borrower and the seller. Where it is not the practice
that the borrower and the seller both attend the settlement,
the HUD-1 should be mailed or delivered as soon as practicable
after settlement.
The Initial Escrow Statement itemizes the estimated taxes,
insurance premiums and other charges anticipated to be
paid from the Escrow Account during the first twelve months
of the loan. It lists the Escrow payment amount and any
required cushion. Although the statement is usually given
at settlement, the lender has 45 days from settlement
to deliver it.
Disclosures after settlement
Loan servicers must deliver to borrowers an Annual Escrow
Statement once a year. The annual Escrow account statement
summarizes all escrow account deposits and payments during
the servicer's twelve month computation year. It also
notifies the borrower of any shortages or surpluses in
the account and advises the borrower about the course
of action being taken.
A Servicing Transfer Statement is required if the loan
servicer sells or assigns the servicing rights to a borrower's
loan to another loan servicer. Generally, the loan servicer
must notify the borrower 15 days before the effective
date of the loan transfer. As long the borrower makes
a timely payment to the old servicer within 60 days of
the loan transfer, the borrower cannot be penalized. The
notice must include the name and address of the new servicer,
toll-free telephone numbers, and the date the new servicer
will begin accepting payments.
RESPA'S statutes explained: consumer protections
and prohibited practices
Section 8: kickbacks, fee-splitting, unearned
fees
Section 8 of RESPA prohibits anyone from giving or accepting
a fee, kickback or any thing of value in exchange for
referrals of settlement service business involving a federally
related mortgage loan. In addition, RESPA prohibits fee
splitting and receiving unearned fees for services not
actually performed.
Violations of Section 8's anti-kickback, referral fees
and unearned fees provisions of RESPA are subject to criminal
and civil penalties. In a criminal case a person who violates
Section 8 may be fined up to $10,000 and imprisoned up
to one year. In a private law suit a person who violates
Section 8 may be liable to the person charged for the
settlement service an amount equal to three times the
amount of the charge paid for the service.
Section 9: Seller required title insurance
Section 9 of RESPA prohibits a seller from requiring
the home buyer to use a particular title insurance company,
either directly or indirectly, as a condition of sale.
Buyers may sue a seller who violates this provision for
an amount equal to three times all charges made for the
title insurance.
Section 10: Limits on escrow accounts
Section 10 of RESPA sets limits on the amounts that a
lender may require a borrower to put into an escrow account
for purposes of paying taxes, hazard insurance and other
charges related to the property. RESPA does not require
lenders to impose an escrow account on borrowers; however,
certain government loan programs or lenders may require
escrow accounts as a condition of the loan.
During the course of the loan, RESPA prohibits a lender
from charging excessive amounts for the escrow account.
Each month the lender may require a borrower to pay into
the escrow account no more than 1/12 of the total of all
disbursements payable during the year, plus an amount
necessary to pay for any shortage in the account. In addition,
the lender may require a cushion, not to exceed an amount
equal to 1/6 of the total disbursements for the year.
The lender must perform an escrow account analysis once
during the year and notify borrowers of any shortage.
Any excess of $50 or more must be returned to the borrower.
RESPA enforcement
Civil law suits
Individuals have one (1) year to bring a private law
suit to enforce violations of Section 8 or 9. A person
may bring an action for violations of Section 6 within
three years. Lawsuits for violations of Section 6, 8,
or 9 may be brought in any federal district court in the
district in which the property is located or where the
violation is alleged to have occurred.
HUD, a State Attorney General or State insurance commissioner
may bring an injunctive action to enforce violations of
Section 6, 8 or 9 of RESPA within three (3) years.
Loan servicing complaints
Section 6 provides borrowers with important consumer
protections relating to the servicing of their loans.
Under Section 6 of RESPA, borrowers who have a problem
with the servicing of their loan (including escrow account
questions), should contact their loan servicer in writing,
outlining the nature of their complaint. The servicer
must acknowledge the complaint in writing within 20 business
days of receipt of the complaint. Within 60 business days
the servicer must resolve the complaint by correcting
the account or giving a statement of the reasons for its
position. Until the complaint is resolved, borrowers should
continue to make the servicer's required payment.
A borrower may bring a private law suit, or a group of
borrowers may bring a class action suit, within three
years, against a servicer who fails to comply with Section
6's provisions. Borrowers may obtain actual damages, as
well as additional damages if there is a pattern of noncompliance.
Other enforcement actions
Under Section 10, HUD has authority to impose a civil
penalty on loan servicers who do not submit initial or
annual escrow account statements to borrowers. Borrowers
should contact HUD's Office of Consumer and Regulatory
Affairs to report servicers who fail to provide the required
escrow account statements.
Filing a RESPA complaint
Persons who believe a settlement service provider has
violated RESPA in an area in which the Department has
enforcement authority (primarily sections 6, 8 and 9),
may wish to file a complaint. The complaint should outline
the violation and identify the violators by name, address
and phone number. Complainants should also provide their
own name and phone number for follow up questions from
HUD. Requests for confidentiality will be honored. Complaints
should be sent to:
Director, Office of RESPA and Interstate Land Sales
US Department of Housing and Urban Development
Room 9154
451 7th Street, SW
Washington , DC 20410
