RESPA. These five little letters can have a big impact on your financial well being whether you are buying a home, or you run a business that has anything to do with residential real estate transactions—whether you are a mortgage broker, lender, builder, developer, title company, home warranty firm, real estate broker or agent, or even an attorney.
RESPA is the abbreviation for the Real Estate Settlement Procedures Act, a federal consumer protection law overseen by the U.S. Department of Housing and Urban Development (HUD) that is designed to require residential real settlement providers to make a number of disclosures about the mortgage and real estate settlement process to home buyers to ensure that they can make informed choices about their choice of settlement providers and that the fees they are charged in connection with the settlement process are fair and reasonable under the law.
RESPA has two main purposes: (1) to mandate certain disclosures in connection with the real estate settlement process so home purchasers can make informed decisions regarding their real estate transactions; and (2) to prohibit certain unlawful practices by real estate settlement providers, such as kickbacks and referral fees, that can drive up settlement costs for home buyers.
RESPA requires settlement providers to make disclosures to homebuyers at four different points during the typical home purchase process.
Disclosures At The Time Of The Loan Application
The first disclosures must be made at the time of the mortgage loan application. RESPA requires mortgage brokers and lenders to provide borrowers with three specific disclosures at this point in the transaction:
- A Special Information Booklet must be provided to the prospective borrower at the time of the loan application or within three days thereafter. This booklet must describe and explain the nature of all closing costs; explain (and contain a sample of) the RESPA settlement form; describe and explain the nature of escrow accounts; explain the choices available to borrowers for the selection of settlement providers; and explain the different types of unfair practices and unreasonable charges that the borrower should watch out for in the settlement process.
- A Good Faith Estimate (GFE) of settlement costs must also be provided to the borrower. The GFE must describe all the charges the buyer is likely to pay at closing. The GFE is only an estimate, and the total amount of the charges the borrower may be liable for may vary from the amount set forth in the GFE. If the lender requires the borrower to use a particular settlement provider, then the lender must also disclose this requirement in the GFE.
- The lender must also provide the borrower with a Mortgaging Service Disclosure Statement. This statement must advise the borrower whether the lender intends to service the loan or transfer it to another lender. The statement must also contain information about the steps borrowers can take to resolve any complaints they may have.
Disclosures Before Settlement
Before settlement, the lender must provide the borrower with an Affiliated Business Arrangement Disclosure when the settlement provider refers the borrower to another settlement provider with whom the referring party has some form of ownership interest. The referring party must give the borrower the disclosure at or prior to the time of referral, and the disclosure must describe the nature of relationship between the business entities and give the borrower an estimate of the second provider's charges. Generally, RESPA prohibits the referring party from requiring the borrower to use the entity being referred.
Another required disclosure before settlement is the HUD-1 Settlement Statement. This is a form that lists all fees that will be charged to the borrower and the seller at closing. The borrower may review the HUD-1 Settlement Statement one day before closing.
Disclosures At Settlement
At closing, the borrower must receive the final HUD-1 Settlement Statement showing the actual settlement costs of the transaction. The borrower must also receive an Initial Escrow Statement itemizing the insurance, taxes, and other charges that will be paid from the escrow account during the first 12 months of the loan. It also lists the monthly escrow payment amount. Although this statement is typically provided to the borrower at closing, the lender has up to 45 days from the date of closing to provide it to the borrower.
Disclosures After Settlement
The loan servicer must deliver an Annual Escrow Statement to the borrower once a year. This statement summarizes all escrow account deposits and payments made during the year. It also advises the borrower if there are any surpluses or shortages in the escrow account and informs the borrower what type of action may be taken.
If the loan servicer sells or assigns the servicing rights to a borrower's loan to another servicer, the transferring servicer must provide the borrower with a Servicing Transfer Statement. Typically, this must be provided to the borrower 15 days before the date of the loan transfer. RESPA contains a safe harbor provision that provides that as long the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized. This 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.
There are no specific penalties or private rights of action for violations of these disclosure requirements.
There are four critical sections of RESPA that consumers and settlement providers need to be aware of before engaging in a residential real estate transaction.RESPA Section 6
Section 6 protects homeowners against abuses in connection with the servicing of home loans. If a borrower has a problem with the servicing of a loan and contacts the loan servicer in writing to describe the complaint, Section 6 requires the servicer to acknowledge the receipt of the complaint in writing within 20 business days of receipt. Within 60 business days thereafter, the servicer must resolve the complaint, either by taking action to address the issues raised in the complaint or giving the reasons for its refusal to do so. Borrowers should make sure to continue to make all required payments until the complaint is resolved. If a servicer violates Section 6, the aggrieved borrower may bring a private lawsuit. If there is a large enough group of borrowers who have been victimized by the same servicer, those borrowers may bring a class action suit. Borrowers who have been harmed by a servicer’s violation of Section 6 may obtain actual damages, as well as additional damages if there is a pattern of noncompliance.RESPA Section 8
Section 8 is for most individuals and businesses the most important aspect of RESPA and is the provision which gives rise to the majority of RESPA litigation and RESPA liability. Section 8 prohibits three different types of financial practices by settlement providers: kickbacks, fee splitting, and unearned fees.
Under Section 8, no one may give or accept a fee, a kickback or anything of value in exchange for the referral of settlement business. Also, it is illegal for a party to charge for a RESPA-related service and then share or split a portion of that fee with a third party who does no service for the fee.
Individuals and businesses that violate Section 8 are subject to both criminal and civil penalties. Criminal penalties can include fines of up to $10,000 and imprisonment up to one year. Individuals who have been victimized by a Section 8 violation may bring private civil lawsuits to recover their actual losses, treble damages, attorneys’ fees and costs.RESPA Section 9
Section 9 of RESPA prohibits the seller of a home from requiring the buyer to use a particular title insurance company. If the seller violates this provision, the buyer may file suit against the seller and recover damages in an amount equal to three times all of the title insurance fees paid by the buyer.
Section 9 often ensnares real estate developers and builders who make arrangements with their preferred title companies to handle bulk title insurance transactions in new home developments. Also, attorneys for sellers who require buyers to use a specific title company can run afoul of the law.RESPA Section 10
Section 10 of RESPA limits the amounts that a mortgage lender may require a borrower to deposit to an escrow account for the payment of real estate taxes, homeowner’s insurance and other escrow related charges.
During the term of a mortgage loan, Section 10 prohibits lenders from charging excessive amounts to maintain escrow accounts. The maximum amount that a lender may require a borrower to deposit to the escrow account is 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. Every year, the mortgage lender must perform an escrow account analysis and notify the borrower of any shortage. Any excess of $50 or more in the escrow account must be returned to the borrower.
Section 10 authorizes HUD to levy civil penalties on loan servicers who fail to submit initial or annual escrow account statements to borrowers.
This is a brief overview of RESPA, and the actual law and regulations are even more complex than we can describe here. If you have any RESPA questions, or need an experienced RESPA attorney to help you with any RESPA issues you may be facing, call the RESPA Resource Law Center toll-free at 877-854-2182 or email us, and a member of our crack RESPA compliance or litigation team will get back to you as soon as possible.