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Real Estate Settlement Procedures Act
(RESPA)
Introduction
The Real Estate Settlement Procedures Act (RESPA)
is a consumer protection statute, first passed in 1974. The purposes
of RESPA are
1. to help consumers become better shoppers
for settlement services and
2. to eliminate kickbacks and referral fees
that unnecessarily increase the costs of certain settlement services.
Details about RESPA
Corresponding with the above purposes:
1. RESPA requires that borrowers receive disclosures
at various times. Some disclosures spell out the costs associated
with the settlement, outline lender servicing and escrow account
practices and describe business relationships between settlement
service providers.
2. RESPA also prohibits certain practices that
increase the cost of settlement services. Section 8 of RESPA prohibits
a person from giving or accepting any thing of value for referrals
of settlement service business related to a federally related mortgage
loan. It also prohibits a person from giving or accepting any part
of a charge for services that are not performed. Section 9 of RESPA
prohibits home sellers from requiring home buyers to purchase title
insurance from a particular company.
RESPA in general
RESPA covers loans secured with a mortgage
placed on a one-to-four family residential property. These include
most purchase loans, assumptions, refinances, property improvement
loans, and equity lines of credit. HUD's Office of RESPA and Interstate
Land Sales is responsible for enforcing RESPA. Back to top
RESPA required disclosures:
At the time of loan application
When borrowers apply for a mortgage loan, mortgage
brokers and/or lenders must give the borrowers:
* a Special Information Booklet, which contains
consumer information regarding various real estate settlement services.
(Required for purchase transactions only) and
* a Good Faith Estimate (GFE) of settlement
costs, which lists the charges the buyer is likely to pay at settlement.
This is only an estimate and the actual charges may differ. If a
lender requires the borrower to use a particular settlement provider,
then the lender must disclose this requirement on the GFE.
* a Mortgage Servicing Disclosure Statement,
which discloses to the borrower whether the lender intends to service
the loan or transfer it to another lender. It also provides information
about complaint resolution.
If the borrowers don't get these documents
at the time of application, the lender must mail them within three
business days of receiving the loan application.
If the lender turns down the loan within three
days, however, then RESPA does not require the lender to provide
these documents.
The RESPA statute does not provide an explicit
penalty for the failure to provide the Special Information Booklet,
Good Faith Estimate or Mortgage Servicing Statement. However, bank
regulators may choose to impose penalties on lenders who fail to
comply with federal law. Please read the section on RESPA enforcement
for more information.
Disclosures before settlement/closing
occurs
The terms "settlement" and "closing"
can be and are used interchangeably.
An Affiliated Business Arrangement (AfBA) Disclosure
is required whenever a settlement service provider involved in a
RESPA covered transaction refers the consumer to a provider with
whom the referring party has an ownership or other beneficial interest.
The referring party must give the AfBA disclosure
to the consumer at or prior to the time of referral. The disclosure
must describe the business arrangement that exists between the two
providers and give the borrower an estimate of the second provider's
charges.
Except in cases where a lender refers a borrower
to an attorney, credit reporting agency or real estate appraiser
to represent the lender's interest in the transaction, the referring
party may not require the consumer to use the particular provider
being referred.
The HUD-1 Settlement Statement is a standard
form that clearly shows all charges imposed on borrowers and sellers
in connection with the settlement. RESPA allows the borrower to
request to see the HUD-1 Settlement Statement one day before the
actual settlement. The settlement agent must then provide the borrowers
with a completed HUD-1 Settlement Statement based on information
known to the agent at that time.
Disclosures at settlement
The HUD-1 Settlement Statement shows the actual
settlement costs of the loan transaction. Separate forms may be
prepared for the borrower and the seller. Where it is not the practice
that the borrower and the seller both attend the settlement, the
HUD-1 should be mailed or delivered as soon as practicable after
settlement.
The Initial Escrow Statement itemizes the estimated
taxes, insurance premiums and other charges anticipated to be paid
from the Escrow Account during the first twelve months of the loan.
It lists the Escrow payment amount and any required cushion. Although
the statement is usually given at settlement, the lender has 45
days from settlement to deliver it.
Disclosures after settlement
Loan servicers must deliver to borrowers an
Annual Escrow Statement once a year. The annual Escrow account statement
summarizes all escrow account deposits and payments during the servicer's
twelve month computation year. It also notifies the borrower of
any shortages or surpluses in the account and advises the borrower
about the course of action being taken.
A Servicing Transfer Statement is required
if the loan servicer sells or assigns the servicing rights to a
borrower's loan to another loan servicer. Generally, the loan servicer
must notify the borrower 15 days before the effective date of the
loan transfer. As long the borrower makes a timely payment to the
old servicer within 60 days of the loan transfer, the borrower cannot
be penalized. The notice must include the name and address of the
new servicer, toll-free telephone numbers, and the date the new
servicer will begin accepting payments.
RESPA'S statutes explained: consumer
protections and prohibited practices
Section 8: kickbacks, fee-splitting,
unearned fees
Section 8 of RESPA prohibits anyone 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. In addition, RESPA prohibits fee splitting and receiving
unearned fees for services not actually performed.
Violations of Section 8's anti-kickback, referral
fees and unearned fees provisions of RESPA are subject to criminal
and civil penalties. In a criminal case a person who violates Section
8 may be fined up to $10,000 and imprisoned up to one year. In a
private law suit a person who violates Section 8 may be liable to
the person charged for the settlement service an amount equal to
three times the amount of the charge paid for the service.
Section 9: Seller required title insurance
Section 9 of RESPA prohibits a seller from
requiring the home buyer to use a particular title insurance company,
either directly or indirectly, as a condition of sale. Buyers may
sue a seller who violates this provision for an amount equal to
three times all charges made for the title insurance.
Section 10: Limits on escrow accounts
Section 10 of RESPA sets limits on the amounts
that a lender may require a borrower to put into an escrow account
for purposes of paying taxes, hazard insurance and other charges
related to the property. RESPA does not require lenders to impose
an escrow account on borrowers; however, certain government loan
programs or lenders may require escrow accounts as a condition of
the loan.
During the course of the loan, RESPA prohibits
a lender from charging excessive amounts for the escrow account.
Each month the lender may require a borrower to pay into the escrow
account no more than 1/12 of the total of all disbursements payable
during the year, plus an amount necessary to pay for any shortage
in the account. In addition, the lender may require a cushion, not
to exceed an amount equal to 1/6 of the total disbursements for
the year.
The lender must perform an escrow account analysis
once during the year and notify borrowers of any shortage. Any excess
of $50 or more must be returned to the borrower.
RESPA enforcement
Civil law suits
Individuals have one (1) year to bring a private
law suit to enforce violations of Section 8 or 9. A person may bring
an action for violations of Section 6 within three years. Lawsuits
for violations of Section 6, 8, or 9 may be brought in any federal
district court in the district in which the property is located
or where the violation is alleged to have occurred.
HUD, a State Attorney General or State insurance
commissioner may bring an injunctive action to enforce violations
of Section 6, 8 or 9 of RESPA within three (3) years.
Loan servicing complaints
Section 6 provides borrowers with important
consumer protections relating to the servicing of their loans. Under
Section 6 of RESPA, borrowers who have a problem with the servicing
of their loan (including escrow account questions), should contact
their loan servicer in writing, outlining the nature of their complaint.
The servicer must acknowledge the complaint in writing within 20
business days of receipt of the complaint. Within 60 business days
the servicer must resolve the complaint by correcting the account
or giving a statement of the reasons for its position. Until the
complaint is resolved, borrowers should continue to make the servicer's
required payment.
A borrower may bring a private law suit, or
a group of borrowers may bring a class action suit, within three
years, against a servicer who fails to comply with Section 6's provisions.
Borrowers may obtain actual damages, as well as additional damages
if there is a pattern of noncompliance.
Other enforcement actions
Under Section 10, HUD has authority to impose
a civil penalty on loan servicers who do not submit initial or annual
escrow account statements to borrowers. Borrowers should contact
HUD's Office of Consumer and Regulatory Affairs to report servicers
who fail to provide the required escrow account statements.
Filing a RESPA complaint
Persons who believe a settlement service provider
has violated RESPA in an area in which the Department has enforcement
authority (primarily sections 6, 8 and 9), may wish to file a complaint.
The complaint should outline the violation and identify the violators
by name, address and phone number. Complainants should also provide
their own name and phone number for follow up questions from HUD.
Requests for confidentiality will be honored. Complaints should
be sent to:
Director, Office of RESPA and Interstate Land
Sales
US Department of Housing and Urban Development
Room 9154
451 7th Street, SW
Washington , DC 20410
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