Definition
The Real Estate Settlement Procedures Act (RESPA), enacted in 1974, is a federal statute designed to regulate the real estate settlement process. It ensures that consumers receive critical information concerning the cost of obtaining a mortgage loan and closes transactions transparently and fairly. RESPA primarily applies to mortgaged properties consisting of one to four-family units and aims to eliminate abusive practices by providing borrowers with enhanced understanding and preventing kickbacks and referral fees that unnecessarily increase the cost of certain settlement services.
Key Provisions
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Good Faith Estimate (GFE): Lenders must provide a GFE of settlement costs within three business days after receiving a loan application.
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HUD-1 Settlement Statement: RESPA requires the use of the HUD-1 or HUD-1A form which delineates all charges imposed on borrowers and sellers.
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Prohibition of Kickbacks and Unearned Fees: RESPA outlaws any payments or fees for services not actually performed during the settlement process.
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Escrow Account Regulations: Provides guidelines on how mortgage servicers manage borrowers’ escrow accounts, including limits on the amounts lenders can require to be deposited.
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Servicing Disclosure Statement: Ensures transparency about the servicing of the loan, emphasizing changes that may occur during the term of the loan.
Examples
Example 1: Disclosure of Costs
A borrower applies for a mortgage on a two-family property. Within three business days, the lender provides the borrower with a GFE, detailing expected settlement costs, enabling the borrower to compare with other mortgage offers effectively.
Example 2: Avoiding Kickbacks
A mortgage broker arranges a loan for a borrower but doesn’t provide any actual services. Under RESPA, receiving any fee or compensation without performing a legitimate service is illegal, preventing unnecessary cost inflation in the settlement process.
Frequently Asked Questions (FAQs)
What does RESPA cover?
RESPA primarily applies to mortgage loans secured on 1-4 family residential properties but does not cover commercial or agricultural loans, vacant land, and temporary loans.
Are home equity lines of credit (HELOCs) covered by RESPA?
Yes, HELOCs fall under RESPA’s jurisdiction if they are second mortgages on residential property.
What penalties exist for RESPA violations?
Violations such as illegal kickbacks can result in fines, restitution to borrowers, and legal proceedings against the offending parties.
What happens if RESPA disclosure requirements are not met?
Lenders must comply with RESPA’s disclosure requirements; failure can result in enforcement actions by the Consumer Financial Protection Bureau (CFPB).
How does RESPA benefit borrowers?
RESPA ensures borrowers receive adequate cost disclosures, maintain transparency of settlement costs, and eliminate hidden fees, enabling better-informed financial decisions.
Related Terms
- Mortgage: A legal agreement by which a bank or creditor lends money at interest in exchange for taking the title of the debtor’s property, with the condition of receiving the title when the debt is paid off.
- Title Insurance: A form of indemnity insurance which insures against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens.
- Escrow: A financial arrangement where a third party temporarily holds an asset or money on behalf of the two other parties that are in the process of completing a transaction.
Online Resources
- Consumer Financial Protection Bureau (CFPB) - RESPA
- U.S. Department of Housing and Urban Development - RESPA
- Investopedia - Real Estate Settlement Procedures Act (RESPA)
Suggested Books for Further Studies
- “RESPA: Real Estate Settlement Procedures Act” by James H. Pannabecker
- “Fundamentals of Real Estate Law” by Alan R. Romero
- “Mortgage Lending Principles & Practices” by David S. Horowitz and Judy A. Jacobs
