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

The Real Estate Settlement Procedures Act of 1974 (RESPA) is a federal consumer protection law governing the home mortgage and buying process. Enacted by Congress in 1974 and amended many times since, the purpose of this law, which regulates loans for one-to-four family residential properties, is to make the buying process less confusing for home buyers and to prohibit anti-competitive practices common among real estate companies. Loan servicers that provide federally backed mortgage loans for refinancing, home equity lines of credit, and reverse mortgages must adhere to the requirements set forth by RESPA or face civil liabilities.

The federal law increases protections for homeowners throughout the home-purchasing process by requiring more information to be made available to consumers so they can make better decisions when buying a new home. It also outlaws certain anti-competitive practices, like kickbacks and referral fees, that can inflate real estate prices.

RESPA was originally enforced by the U.S. Department of Housing and Urban Development (HUD), but the Consumer Financial Protection Bureau (CFPB) took over administration in 2011 due to a provision in the Dodd-Frank Wall Street Reform and Consumer Protection.

There are two main components of RESPA:

• Mandates timely disclosure: RESPA requires residential mortgage lenders, mortgage brokers, or servicers of home loans to promptly disclose the cost of the real estate settlement services provided—including closing costs, mortgage transaction fees, loan servicing, escrow account practices, and any other disclosures required by the Truth in Lending Act. RESPA intends to increase disclosure requirements throughout the home-purchase process so consumers can become better educated about the expected costs and potential conflicts of interest.
• Prevents illegal practices: The federal law makes certain practices illegal, like kickbacks and other unearned fees, and limits the use of escrow accounts. RESPA prohibits any party involved in the mortgage loan settlement process, including lenders and brokers, from accepting a “thing of value,” like commission, special fees, or favors, in exchange for referrals. Under RESPA, loan servicers are also prohibited from demanding larger-than-necessary escrow accounts, and sellers are not allowed to choose a specific title insurance company for buyers to use during the home-buying process.

RESPA mandates lenders, mortgage brokers, or loan servicers of home loans to make available to borrowers any information about the real estate transaction, including the cost of the real estate settlement process and business relationships between closing service providers. These disclosures are made at four different steps throughout the process:

1. 1. The buyer receives disclosures when applying. When a prospective buyer submits a mortgage loan application, they should receive three separate disclosure statements: a special information booklet, a good faith estimate (GFE) form, and a mortgaging service disclosure statement. The special information booklet details all closing and escrow accounts, different types of unfair practices, and the RESPA settlement practice. The GFE outlines the loan terms, the predicted total costs a loan applicant will incur, including but not limited to origination fees, title insurance, appraiser fees, and credit report fees, and notes the date when the quoted interest rate for the offer will expire. The mortgage servicing disclosure spells out whether the lender will service the loan or do a servicing transfer.
2. 2. The buyer receives HUD disclosure before settlement. Before settlement, borrowers must receive the HUD-1 settlement statement and an affiliated business arrangement disclosure. The HUD form is a detailed list of the total settlement costs for the borrower to review. The affiliated business arrangement disclosure details the business relationship between the two service providers.
3. 3. The buyer receives disclosure during the closing process. At closing, borrowers should receive the final HUD-1 settlement statement with final transaction costs and an initial escrow statement, which lists all the charges that will be paid from the escrow account within the first year of the loan. These charges include closing fees, insurance premiums, monthly mortgage payments, and an itemized list of estimated taxes.
4. 4. Buyer receives annual disclosure after settlement. Once a year, the loan servicer must provide an annual escrow account statement to the borrower with an annual review of all the escrow account deposits and payments.

Service providers failing to comply with RESPA may be penalized with a fine. If a borrower suspects a lender of RESPA violations, they have one year to bring a lawsuit to enforce the consumer protection law. Here’s how the process to file a complaint works:

1. 1. Write to a service provider. Borrowers who believe their lender has violated RESPA will contact their provider in writing detailing the nature of their complaint as part of a qualified written request (QWR). This process can also be helpful during foreclosure because it can increase the amount of information available about the account.
2. 2. The servicer has 20 business days to respond. The servicer must acknowledge receipt of the written request within five business days and respond in writing within 20 business days to the complaint. They must provide lenders with access to contact information, like a name and telephone number, to a party who can help them resolve the issue. During this time, borrowers must continue to make their mortgage payments.
3. 3. The servicer must address the issue or face penalties. The servicer must correct the issue or justify its actions within 60 days of receiving the complaint. Failure to comply with RESPA can result in fees covering damages, up to $2,000 in additional damages, and attorneys’ fees and costs. There is a three-year statute of limitations for RESPA violations.

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