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:
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- An up-to-date Special Information Booklet which provides information about the mortgage and closing process
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- A disclosure of all loan closing costs
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- A Loan Estimate
The Loan Estimate must include the following information:
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- The terms of the loan
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- The amount of the loan
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- All origination charges
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- Estimated monthly payments
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- Principal
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- Interest
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- Mortgage insurance
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- Closing costs
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- 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 services 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.
What Does RESPA Prohibit?
RESPA prohibit unfair practices like kickbacks, referral payments, and charges for services that were never provided. For example, Section 8 makes it illegal for anyone to give or receive money, gifts, or anything of value in exchange for sending customers to a settlement service business.
The law also controls how escrow accounts are handled. Loan servicers are not allowed to demand more money than necessary for escrow. In addition, sellers cannot force buyers to use a specific title insurance company.
Marketing and Sponsorship
RESPA allows brokers and lenders to advertise together, but each side must pay its fair share of the costs. If one party pays more than their portion, it is not allowed. Sponsoring events can also be a problem if one party uses the event mainly to advertise its own services.
Brokers and title agents cannot make marketing agreements where one side charges more than the actual value of the marketing work. Also, a settlement service provider cannot rent office space from another provider unless it pays the fair market price for that space.
Referral Fees
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Brokers cannot pay agents to send clients to their affiliate mortgage company.
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Brokers cannot pay other brokers for referrals.
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Lenders cannot give gifts, money, or incentives to agents for sending them homebuyers.
All of these are considered kickbacks and are not allowed under RESPA.
Affiliated Business Arrangements
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If a broker refers a client to a title company they are connected with, they must clearly tell the customer about this relationship. They must also explain the company’s fees and their own financial interest in it. Customers must be told that they are free to choose a different company.
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Brokers and title companies cannot set up fake businesses to make money off referrals.
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Lenders cannot force borrowers to use their affiliated service providers, but they can offer discounts if customers choose them.
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 Mortgage 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.
RESPA Frequently Asks Questions
What is RESPA in real estate?
RESPA stands for the Real Estate Settlement Procedures Act. It is a law in the United States that makes sure homebuyers and sellers get clear information about the costs of buying a home. It also stops lenders, real estate agents, and others from giving or receiving unfair payments (kickbacks) during the process.
What is the purpose of RESPA?
The Real Estate Settlement Procedures Act (RESPA) is a law that makes lenders give clear details about settlement costs. It also lowers closing costs by stopping referral fees and kickbacks. RESPA was signed in December 1974 and started on June 20, 1975.
What does RESPA stand for in real estate?
RESPA stands for the Real Estate Settlement Procedures Act. It is a law that makes sure buyers and sellers get clear information about the costs of a real estate deal, including things like Appraisals in Home Buying and other required services.
Why are RESPA settlement services important?
They protect buyers from being overcharged or misled. By requiring full disclosure of fees and banning kickbacks, RESPA real estate regulations ensure settlement services stay fair and competitive.
What loans are covered by RESPA?
RESPA applies to most loans that are secured by a mortgage on a one-to-four family home. This includes:
- Home purchase loans
- Refinances
- Home improvement loans
- Home equity lines of credit (HELOCs)
It usually does not cover loans for business, commercial, or agricultural purposes.
How does the real estate settlement procedures act protect homebuyers?
The Real Estate Settlement Procedures Act makes sure buyers get clear details about closing costs, loan terms, and fees. It also prevents hidden payments or kickbacks between lenders, real estate agents, and settlement service providers.
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