What Is the Real Estate Settlement Procedures Act (RESPA)?

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The Real Estate Settlement Procedures Act of 1974 (RESPA) was designed to help reduce unnecessarily high closing costs and to protect homebuyers from predatory or dishonest practices.

Definition and Examples of RESPA

The Real Estate Settlement Procedures Act (RESPA) is a federal act that requires mortgage brokers, lenders, and servicers to provide borrowers with disclosures about costs they may incur and what to expect from the real estate settlement process.

Typically, this process includes:

• Title searches
• Title examinations
• Provision of title certificates
• Title insurance
• Attorney services
• Preparation of key documents like property surveys, credit reports, inspections, etc.
• Mortgage origination

Note

The amounts homebuyers pay for these services are typically known as settlement costs or closing costs.

RESPA limits how escrow accounts may be used, requires specific cost disclosures, and prohibits practices such as kickbacks and referral fees. For example, RESPA prohibits a real estate agent from receiving payment for referring a homebuyer to a specific settlement servicer.

RESPA was passed in 1974 and came into effect in June 1975, when it was overseen by the Department of Housing and Urban Development (HUD). The act is now enforced by the Consumer Financial Protection Bureau (CFPB) and has been amended over the years to adapt to new developments in real estate and lending practices. For example, the Housing Act of 1990 was an amendment to RESPA requiring detailed disclosures about the transfer, sale, or assignment of mortgage servicing.

Note

RESPA applies to federally backed mortgages for residential properties designed for one to four families, including purchase loans, refinances, and reverse mortgage loans. It does not apply to mortgages for business, commercial, or agricultural properties, among others.

How the Real Estate Settlement Procedures Act Works

By requiring lenders to provide information about settlement services, real estate transactions, and consumer protection laws, RESPA helps buyers become better equipped to navigate a real estate transaction. RESPA also entitles borrowers to both annual and initial escrow account statements and itemized statements of actual settlement costs. Its goal is to ensure borrowers have a full understanding of the costs they’re committing to before finalizing a home purchase.

However, consumers don’t need to read the full act to benefit from it. To help homebuyers understand their rights under RESPA and choose the best mortgage for their needs, the CFPB launched an initiative called “Know Before You Owe.” Since 2015, it has required that lenders provide prospective borrowers with two disclosure forms to make it easier for them to compare their options:

• Loan Estimate: Includes required transaction details such as the loan amount, interest rate, monthly payment, and total closing costs. Lenders must provide it within three days after you apply for a mortgage, but it’s just an estimate—they haven’t yet approved your loan.
• Closing Disclosure: Lays out the final transaction details, which may have changed since the borrower reviewed the Loan Estimate. Lenders must provide it at least three days before closing to allow borrowers time to review it and ask any questions.

RESPA also prohibits sellers from requiring buyers to purchase title insurance from a specific company.

What To Do If You Think There’s Been a RESPA Violation

If you believe a lender, mortgage broker, or servicer has violated RESPA, whether through unnecessarily high closing costs or a lack of escrow account statements, you can file a complaint with the CFPB.

Before you go this route, it may be wise to contact someone at the company you’re working with and bring it to their attention. You can also contact an attorney for more help.

Key Takeaways

• The Real Estate Settlement Procedures Act (RESPA) aims to reduce unnecessarily high settlement fees and ensure homebuyers have the information they need to understand the costs of borrowing.
• Kickbacks, referral fees, and unearned fees are banned under RESPA. It also prohibits home sellers from requiring buyers to purchase title insurance from a specific company.
• RESPA has been amended multiple times to update disclosure rules in response to changing real estate market conditions.
• The Consumer Financial Protection Bureau (CFPB) enforces RESPA, and if you believe the act has been violated, you can file a complaint with the bureau.