Real Estate Settlement Procedures Act (RESPA)

In this article we look at one of the most important consumer protection statutes known as Real Estate Settlement Procedures Act or RESPA. This act was passed in 1974.

This act covers loans which are secured with a mortgage on a one-to-four unit family residential property. This covers purchase loans, refinances, equity lines of credit, assumptions & property improvement loans.

  • The main aims of RESPA are:
  1. Help people become more aware of the settlement services & better shoppers of such services.
  2. Some referral fees and kickbacks result in unnecessarily increasing the costs of settlement services. RESPA tries to eliminate such referral fees and kickbacks.

RESPA also requires that at various times borrowers receive disclosures. Some of these disclosures describe the settlement costs, escrow account practices and lender servicing. Certain practices which result in increase in settlement service costs are also prohibited under RESPA.

Regarding settlement services, as per Section 8 of RESPA people are prohibited from accepting or giving anything valuable for referrals of settlement service business in connection with a mortgage loan. In addition to it, a person cannot accept or give any portion of a charge for services not performed.

  • Let us now look at the disclosures which are necessary under RESPA:
  1. Disclosures when a person applies for a loan.
  2. Disclosures before closing/settlement takes place.
  3. Disclosures at the time of settlement.
  4. Disclosures after settlement.
  • Disclosures when a person applies for a loan

When someone applies for a mortgage, a mortgage lender and/or broker is required to provide the applicant:

a) A Good Faith Estimate (GFE) of settlement costs. The GFE lists all the charges a buyer will be paying at the time of settlement. But this GFE is only an estimate and the actual charges can differ.

In case lender wants that the borrower uses a particular settlement provider then such requirement is to be disclosed on Good Faith Estimate.

b) MSDS or Mortgage Servicing Disclosure Statement. This statement discloses to borrower lender’s intention of servicing the mortgage himself or transferring it to some other lender. MSDS also provides information regarding complaint resolutions.

c) A Special Information Booklet that has information regarding various settlement services for consumer. But such booklet is to be provided for purchase transactions only.

If the borrower does not get these while applying, the lender has to mail them to borrower within 3 business days after the loan application is received.

Disclosures before closing/settlement takes place

a) AfBA Disclosure – Affiliated Business Arrangement or AfBA Disclosure is necessary if a settlement service provider refers borrower to a provider with whom he has an ownership or other type of beneficial interest. This disclosure should describe the business arrangement that exists & specify the estimated charges of second provider.

b) HUD-1 Settlement Statement – This is a standard form wherein settlement charges imposed on sellers & borrowers are shown. According to RESPA, borrower can ask to see the statement 1 day before the settlement.

Disclosures at the time of settlement

Initial Escrow Statement – This statement is normally given at the time of settlement but the lender is provided forty five days from settlement to deliver it. It itemizes the insurance premiums, taxes & other charges that will be paid from Escrow Account in the first 12 months of the mortgage loan. It also lists the escrow payment figure & any kind of cushion that may be required.

Disclosures after settlement

a) Annual Escrow Statement (AES) – Once a year, the loan servicer is required to deliver the AES to borrower. This statement describes all the deposits in escrow account & the payments during a 12 month period. It also informs borrower about any surpluses or shortage in the account & provides suggestions to borrower regarding the action that is to be taken.

b) Servicing Transfer Statement – If loan servicer assigns servicing rights for borrower’s loan to some other loan servicer or sells it to some other loan servicer then this statement is required. Normally, loan servicer has to inform borrower fifteen days before the loan transfer takes place. If the borrower makes on time payments to old loan servicer within sixty days of loan transfer, then borrower cannot be penalized. This statement should include name & address of new loan servicer, telephone number & date from which new servicer will start taking payments.