When you take out a mortgage in the United States, you can do so knowing you enjoy many protections under the law. One of those protections comes from the 1974 Real Estate Settlement Procedures Act, or RESPA.
RESPA requires mortgage lenders to disclose all loan costs. It also prohibits kickbacks, limits escrow account requirements, and prevents preferred title insurance requirements.
Required Disclosures
RESPA requires lenders to provide the following:
- An up-to-date Special Information Booklet which provides information about the mortgage and closing process
- A disclosure of all loan closing costs
- A Loan Estimate
The Loan Estimate must include the following information:
- The terms of the loan
- The amount of the loan
- All origination charges
- Estimated monthly payments
- Principal
- Interest
- Mortgage insurance
- Closing costs
- Escrow accounting for property taxes, homeowner’s insurance, and flood insurance
In simpler terms, a mortgage lender must tell you exactly what you’ll be paying and why before you sign on the dotted line.
See also: What Are Mortgage Notes? Essential Information for Homebuyers
Kickback Prevention
A mortgage provider can’t pay a real estate agent or other professional to bring them business.
The reason RESPA prohibits this practice is to ensure consumers aren’t pressured to take one mortgage loan or another from a biased referring person, but rather make informed decisions which allow them to shop around for the best deal.
It’s impossible to make an informed decision when you don’t know whether your trusted real estate agent is making money off the loan you choose. They may not receive gifts or items of any value either. Whether $10 or $1,000.
That’s not to say your Realtor can’t recommend a lender. Many do! But they can’t make money off the relationship. They may co-advertise, refer providers without making a fee, take advantage of cross-promotional activities, sell advertising space on each other’s websites with a fee and disclosure, and distribute company marketing materials.
See also: What Role Do Real Estate Agents Play During the Home Buying Process?
Escrow Fund Regulations
While lenders and loan services can collect funds to pay property taxes, homeowner’s insurance, and escrow accounts, they must follow strict regulations when they do so.
They can require a 2-3 month cushion of payments equallying 1/12th of the total annual amount.
If you overpay, lenders or loan servicers must reimburse you for the overpayment.
Preference Prohibition
Many lenders and real estate agents have professional relationships with title companies as well. But they may not compel you to use the title company of their choice. Sellers may choose the settlement agent if they pay for your title insurance.
Again, the agent may suggest a title company. But if you want to use a different one and you’re the one paying for it, they can’t refuse to move forward by insisting that you use the company they choose.
Who enforces RESPA?
The Consumer Financial Protection Bureau (CFPB) enforces RESPA. If you believe your lender or real estate agent has violated the law, you can submit a complaint online. You can also hire a real estate attorney to launch a civil lawsuit of your own. You have one year to pursue the suit.
CFPB may sue within three years, but you might not necessarily benefit from such a suit.
See also: The Role of the Consumer Financial Protection Bureau in Mortgage Lending
What happens to lenders who violate RESPA?
RESPA violators may be required to pay fines and/or refund consumer accounts. They may also face lawsuits. In severe cases, RESPA violators may even go to prison.
Protect Yourself with the Right Mortgage
While it’s nice to know certain mortgage lending abuses are against the law, it’s even better to know you’ve got a mortgage broker who will treat you right no matter what.
After all, when someone cheats, even when you’re in the right, it can take a lot of time to get reimbursed. Keep that money in your pocket right now by doing business with a trustworthy lender.
The Doce Group has a 36+ year track record of treating borrowers right, and we never intend to stop! Schedule your free consultation to get a great loan at a great rate from a mortgage broker who always does the right thing.
