This law protects consumers from abuses
during the residential real estate purchase and loan process and
enables them to be better informed shoppers by requiring disclosure
of costs of settlement services.
The U.S. Department of Housing and Urban
Development’s (HUD) Federal Housing Administration (FHA) administers
several regulatory programs to ensure equity and efficiency in the
sale of housing. One of these programs, under the Real Estate Settlement
Procedures Act (RESPA), applies to almost all mortgage loans and
lenders, not just FHA-insured mortgages. RESPA’s purposes are (1)
to help consumers get fair settlement services by requiring that
key service costs be disclosed in advance, (2) to protect consumers
by eliminating kickbacks and referral fees that would unnecessarily
increase the costs of settlement services, and (3) to further protect
consumers by prohibiting certain practices that increase the cost
of settlement services.
Type of Assistance:
RESPA protects consumers by
mandating a series of disclosures that prevent unethical practices
by mortgage lenders and that provide consumers with the information
to choose the real estate settlement services most suited to their
needs. The disclosures must take place at various times throughout
the settlement process:
- Disclosures at the time of loan application. When a potential
homebuyer applies for a mortgage loan, the lender must give the
buyer (1) a Special Information Booklet, which contains
consumer information on various real estate settlement services;
(2) a Good Faith Estimate of settlement costs, which lists
the charges the buyer is likely to pay at settlement and states
whether the lender requires the buyer to use a particular settlement
service; and (3) a Mortgage Servicing Disclosure Statement,
which tells the buyer whether the lender intends to keep the loan
or to transfer it to another lender for servicing, and also gives
information about how the buyer can resolve complaints. RESPA
does not specify penalties for lenders that fail to provide these
three items, but bank regulators can impose penalties on lenders.
- Disclosures before settlement (closing) occurs. (1) An
Affiliated Business Arrangement Disclosure is required whenever
a settlement service refers a buyer to a firm with which the service
has any kind of business connection, such as common ownership.
The service usually cannot require the buyer to use a connected
firm. (2) A preliminary copy of a HUD-1 Settlement Statement
is required if the borrower requests it 24 hours before closing.
This form gives estimates of all settlement charges that will
need to be paid, both by buyer and seller.
- Disclosures at settlement. (1) The HUD-1 Settlement
Statement is required to show the actual charges at settlement.
(2) An Initial Escrow Statement is required at closing
or within 45 days of closing. This itemizes the estimated taxes,
insurance premiums, and other charges that will need to be paid
from the escrow account during the first year of the loan.
- Disclosures after settlement. (1) An Annual Escrow
Loan Statement must be delivered by the servicer to the borrower.
This statement summarizes all escrow account deposits and payments
during the past year. It also notifies the borrower of any shortages
or surpluses in the account and tells the borrower how these can
be paid or refunded. (2) A Servicing Transfer Statement
is required if the servicer transfers the servicing rights for
a loan to another servicer.
Along with these disclosures, RESPA protects consumers by prohibiting
several other practices: (1) Kickbacks, fee-splitting, and unearned
fees: Anyone is prohibited 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, which covers
almost every loan made for residential property. RESPA also prohibits
fee-splitting and receiving unearned fees for services not actually
performed. Violations of these RESPA provisions can be punished
with criminal and civil penalties. (2) Seller-required title
insurance: A seller is prohibited from requiring a homebuyer
to use a particular title insurance company. A buyer can sue a seller
who violates this provision. (3) Limits on escrow accounts:
A limit is set on the amount that a lender may require a borrower
to put into an escrow account to pay taxes, hazard insurance, and
other property charges. RESPA does not require lenders to impose
an escrow account on borrowers, but some government loan programs
or lenders may require an escrow account. During the course of the
loan, RESPA prohibits a lender from charging excessive amounts for
the escrow account. And each year, the lender must notify the borrower
of any escrow account shortage and return any excess of $50 or more.
RESPA applies to almost all
mortgages and settlement service providers, including real estate
brokers and agents, title companies, attorneys, and mortgage lenders.
A borrower may bring a private lawsuit, or a class action suit against
a servicer that fails to comply with certain RESPA provisions. HUD
can also impose a civil penalty on a servicer who does not give
an escrow account statement to a borrower. HUD, State attorneys
general, and State insurance commissions may sue to enforce sections
This program is authorized
by the Real Estate Settlement Procedures Act of 1974 (12 U.S.C.
2601 and following). Program regulations are at 24 CFR Parts 3500
and 3800. RESPA is administered by the Office of Consumer and Regulatory
Affairs within HUD’s Office of Housing.
For More Information:
There is a special RESPA
section of HUD’s home
page, where there is a variety of detailed information ranging
from answers to questions of consumers and loan providers to statements
of legal policy. A detailed booklet on the settlement process is
available on the home page or by calling HUD at 1-800-767-7468.
Persons who believe a settlement service provider has violated
RESPA may file a complaint with the Director, Office of RESPA and
Interstate Land Sales, U.S. Department of Housing and Urban Development,
451 Seventh Street, SW, Room 9154, Washington, DC 20410.