RESPA: What It Is And How It Affects Mortgages
Buying a home is probably the biggest investment you’ll ever make. And for most people, the home buying process also means an extensive learning curve to understand new terms and necessary services, and to hire a number of different service providers. Because the process is new and daunting for many buyers, some service providers may try to take advantage of them.
That’s why RESPA, the Real Estate Settlement Procedures Act, was enacted to protect consumers during the selling or purchasing of residential real estate. The law is in place to ensure that consumers receive fair and honest treatment from all real estate service providers. Specifically, it covers transactions involving homes for up to four-family units, so most purchase loans, mortgage refinances and home equity lines of credit (HELOCs) are covered by RESPA.
What Is RESPA?
Congress passed RESPA in 1974, but the federal law has been adjusted several times since. From the beginning, RESPA was intended to mandate full disclosure of all mortgage costs, eliminate kickbacks among mortgage service providers and limit the use of escrow accounts.
Over the years, RESPA has been amended and expanded to further protect real estate buyers and sellers. Passed in 2008, the RESPA Reform Rule requires lenders to use a standardized form to provide buyers with a good faith estimate (GFE) of charges associated with their mortgages.
This good faith estimate also must include estimated average charges for each service so that buyers can compare the rate they’re paying with the average rate. Other updates have included making it legal to provide disclosures electronically and to fully disclose compensation paid to mortgage brokers.
In 2010, after Congress created the Consumer Financial Protection Bureau (CFPB) in response to the 2008 financial crash, the CFPB took responsibility for enforcing RESPA. The CFPB was required to merge the Truth in Lending Act (TILA) disclosures with the RESPA disclosures, creating a new, simplified form.
How RESPA Works
To protect consumers in a real estate transaction, RESPA:
- Requires fee disclosures. RESPA requires full disclosure of all the costs and fees associated with the sale of a real estate property with one to four units. Mortgage brokers are required to provide these disclosures on standardized forms such as the GFE and the U.S. Housing and Urban Development settlement statement, which detail the amounts that will be charged to the buyer and the seller for each service.
- Prohibits kickbacks. Service providers cannot give or receive referral fees. For instance, a home appraiser is not allowed to pay a mortgage broker for referring his services to a client. “Those fees or kickbacks could be in the form of a flat fee, percentage rate, gift card or something else,” says Brooke Dalzell, vice president at Minute Mortgage in Scottsdale, Arizona.
- Bans unauthorized charges. The law also bans service providers from giving or accepting money for a service that wasn’t actually performed. For instance, a real estate attorney is not allowed to include home inspection charges along with other charges to a homebuyer if no inspection ever occurred.
- Requires fair prices. If costs to a homebuyer are inflated beyond what is standard, this can also be a RESPA violation. “Only the amount paid for third-party services may be charged to buyers,” says Tom McCormick, regional officer of branch administration at Trustco Bank in Saratoga County, New York.
- Regulates escrow accounts. RESPA prevents loan servicers from demanding excessively large escrow accounts, McCormick says.
Most homeowners are required to pay property taxes and homeowner’s insurance premiums once per year. Because these are often hefty payments, many mortgage providers add a monthly prorated charge for taxes and insurance to each borrower’s monthly mortgage statement.
The mortgage lender holds these funds in an escrow account and pays the tax and insurance bills on behalf of the borrower when they are due. While this arrangement can be helpful for the borrower, it also provides opportunities for fraudulent charges.
How Does RESPA Affect Home Buyers?
Real estate service providers are the ones who are subject to RESPA regulations, but home buyers should also be aware of the guidelines to protect themselves.
“Homebuyers should know about RESPA because it pertains to required disclosures that they should be receiving during the loan process,” McCormick says. “The goal of RESPA is to educate borrowers regarding their loan settlement costs, as well as to eliminate referral fees and kickbacks that can artificially inflate loan costs, thus protecting borrowers.”
If one service provider provides kickbacks to another in response to working on your mortgage, that may mean you’re not getting the best possible service—or that you’re paying more than necessary for the service you need.
When your Realtor, mortgage broker or other service provider recommends other service providers, reach out to more than one to get an idea for the one that you think will best meet your needs. They should be more focused on effectively serving you than on pleasing your agent or whoever recommended them. Dalzell recommends talking to at least two lenders when preparing to get a mortgage, to make sure they have your needs in mind.
“If you ask a Realtor for a recommendation for a mortgage lender, attorney or other service provider, it’s ideal for them to give you at least a couple of options to prohibit any appearance of a violation,” she says.
Home buyers should also read the documents provided by their lenders in response to RESPA. For instance, lenders are required to provide the GFE of closing costs when you apply for a mortgage or soon after, and it can help you make informed decisions during the loan process.
The lender also is required to provide you with a mortgage servicing disclosure statement, which details whether the lender intends to service your loan or sell it to another loan provider, as well as the process borrowers should follow should they have a complaint. Understanding this information also may help you make a more informed decision about which lender to use.
Did Your Lender Violate RESPA? Here’s What to Do
If you believe your mortgage lender or other service provider may have violated RESPA rules, “you should contact them in writing with your grievance,” McCormick says. “The lender is required to respond in writing within 20 days, and is required to either resolve the issue or give reasons for its validity within 60 days.”
A real estate attorney can help you provide the necessary notice to your lender or other service provider. If the issue is not resolved satisfactorily, the violation should be reported to the CFPB. You can file a complaint online to start the CFPB’s investigation process.
Penalties for RESPA Violations
If a mortgage lender or other service provider commits a RESPA violation, the penalty can be steep. For providing or accepting kickbacks or referral fees, the penalties are up to $10,000 in fines and up to one year in jail.
The penalties for other RESPA violations, such as inflating costs or using bribes, the penalties vary. They start at $94 for an accidental violation and can go up to almost $200,000 for more serious, intentional violations.
The bottom line is that RESPA exists to help protect home sellers and home buyers during the real estate transaction process. By understanding its rules and your rights, you can also help protect yourself from unfair business practices.