The Real Estate Settlement Procedures Act (RESPA) was established in 1974 by the US Congress to protect against unfair business practices and unnecessarily high costs associated with homeownership. RESPA strives to eliminate unethical practices like kickbacks, fees, and errors and ensures disclosures are provided to buyers and sellers while obtaining a mortgage. By knowing RESPA laws and regulations, all parties involved can avoid RESPA violations, penalties, and unethical business practices.
What Is RESPA in Real Estate: History & Coverage
History of RESPA
- 1974: The Real Estate Settlement Procedures Act (RESPA) was passed into law
- 1983: RESPA amended to extend coverage to controlled business arrangements
- 1990: Section 6 mortgage servicing requirements were added
- 1992: RESPA extended to all residential mortgage loans with a lien, disclosures in writing for an agent to mortgage referrals, and computer loan originations
- 1996: HUD removed compensation for referrals to affiliate companies and stricter payment rules
- 2002: Revised RESPA has greater disclosure, more consumer choices, and limited fees
- 2008: Implemented a standardized GFE (good faith estimate) for consumer costs
- 2010: Dodd-Frank Act mandated RESPA to shorten time limits, increase penalties, and provide amendments
- 2011: The Consumer Financial Protection Bureau (CFPB) took over RESPA regulatory duties
- 2012: New mortgage disclosure forms implemented
- 2020: Updated frequently asked questions addressing gifts and promotional activities
Why RESPA Started
RESPA violation penalties were implemented because individuals and companies associated with real estate transactions, like lenders, agents, and construction and insurance companies, received undisclosed kickbacks and referral fees for recommending a settlement service provider.
Kickbacks and increased fees ultimately resulted in higher costs for the homebuyer. RESPA seeks to ensure homebuyers have all the information about their transactions so they can make an educated decision on the vendors they choose to work with.
Who RESPA Involves
Unlike the rules listed in the Fair Housing Act, which seeks to prevent discrimination against those buying, renting, or selling homes, RESPA applies to all real estate settlement services. These services can be defined as agent services, services rendered by an attorney, the origination of a mortgage loan, and the settlement or closing process.
The act oversees all activities of a person or entity involved in the home purchasing, improvement, and closing process when a federally related mortgage loan is involved for one to four residential units. Although RESPA primarily seeks to protect consumers seeking to become eligible to obtain a federally insured mortgage loan, it benefits other parties involved. The required disclosures and honesty about upfront costs and fees provide benefits for the following parties:
- Sellers: They don’t have to decide which title insurance agency should be used.
- Real estate agents: Clients are treated fairly for smoother and faster transactions.
- Buyers: They understand all reasonable upfront costs involved in the buying process.
- Loan servicers: RESPA eliminates some competition, and clients can choose who they want to work with based on their personal evaluations.
RESPA Requirements
RESPA requires lenders, mortgage brokers, or home loan servicers to inform borrowers about any details regarding the real estate transaction, such as relevant consumer protection laws, settlement services, and any other information linked to the cost of the real estate settlement process. Additionally, any business relationships between closing service providers and other parties involved in the settlement process must be disclosed to the borrower.
What RESPA Does Not Cover
Real estate statistics indicate a seller’s market, where homes sell quickly. However, before rushing to close deals, it’s important to remember the protection RESPA provides. It ensures that transactions involving all-cash sales, rental transactions, and loans obtained by real estate for business purposes aren’t covered. Similarly, loans obtained to purchase vacant land are not covered as long as no proceeds from the loan are used to build any residential property.
6 Most Common RESPA Violations
The Consumer Financial Protection Bureau enforces RESPA violations, ensuring that all federally regulated mortgage loans, including purchase loans, refinances, home improvement loans, land contracts, and home equity lines of credit, are administered according to RESPA guidelines.
The general rule of thumb is to ensure all payments and fees are charged for services performed to avoid most violations. The RESPA violation statute of limitations is one year from the violation date. If consumers believe you have violated their rights under RESPA, they have one year to file a claim.
To help you avoid RESPA violation penalties, we’ve listed six common RESPA violations:
1. Kickbacks & Referral Fees
Section 8a of RESPA prohibits giving or receiving referral fees, kickbacks, or anything of value in exchange for referring business involving a federally related mortgage loan. The violation applies to verbal, written, or established conduct of such referral agreements. Items considered of value in exchange for business can be discounts, increased equity, trips, and even stock options.
Section 8b of RESPA prohibits giving or receiving any portion or percentage of a fee received for real estate settlement services unless it’s for services performed. These fees must be split between two or more persons for it to be a direct violation of the law.
2. Requiring Excessively Large Escrow Accounts Balances
Section 10 of RESPA provides rules and regulations to protect borrowers with escrow accounts. This section limits the amount of money a borrower may be required to keep in the escrow account to cover payments for things like taxes, flood insurance, private mortgage insurance, and other costs related to the property. While not every borrower will be required to have an escrow account, if they do, it is limited to approximately two months of escrow payments.
3. Responding to Loan Servicing Complaints
Section 6 of the RESPA protects borrowers’ consumer protection rights regarding their mortgage loans. If a borrower has an issue with their servicer, they can contact their servicer in writing. The servicer must acknowledge the complaint within 20 days of receipt and resolve it within 60 days. To resolve the complaint, they must do so with either a correction or a statement providing reasons for its defense.
Pipedrive customizing pipeline (Source: Pipedrive)
A real estate CRM that can assist professionals with this time-sensitive process is Pipedrive. Pipedrive allows you to create tasks and send automatic reminders and emails and has built-in digital signature and document tracking features. These features will ensure you prioritize everyone in your pipeline and remain compliant with RESPA laws.
4. Inflating Costs
In section 4 of RESPA, mortgage lenders and brokers cannot charge clients an inflated cost of third-party services beyond the original service cost. This violation is specific to settlement costs itemized in HUD-1 and HUD-1A settlement statements, where costs cannot exceed the amount received by the settlement service.
5. Not Disclosing Estimated Settlement Costs
Mortgage lenders and brokers are required to provide an itemized statement of settlement costs to their clients. These costs are presented in a Good Faith Estimate (GFE) form. The form shows the estimated costs the borrower should incur during the mortgage settlement process, such as origination fees, estimates for services, title insurance, escrow deposits, and insurance costs.
Example Closing Disclosure (Source: Consumer Financial Protection Bureau)
6. Demanding Title Insurance
Under RESPA section 9 violations, sellers of a property purchased with a federally related mortgage loan cannot require, directly or indirectly, that the buyer purchase title insurance from a particular company. Sellers should not list this as a condition of the sale of a property.
Example of title insurance (Source: Andrew Robb RE/MAX Fine Properties)
Frequently Asked Questions (FAQs)
RESPA covers all federally regulated mortgage loans, including purchase and home improvement loans, land contracts, refinances, and home equity lines of credit (HELOCs).
RESPA Section 8(c) specifies acceptable payments and arrangements, including attorney fees for services rendered, fees paid by a title firm covering services executed, and fees paid by a mortgage lender covering services performed.
RESPA was enacted to restrict the utilization of escrow accounts and disallow unfair conduct in the real estate sector, such as kickbacks and referral fees.
Bottom Line
RESPA was created to ensure homebuyers and sellers receive fair and honest treatment during the real estate process. Even the newest real estate agents should understand what RESPA is in real estate and its nuances to avoid accidentally receiving a violation. Although each party involved in settlement services is not responsible for each other’s RESPA violations, by understanding all forms of RESPA violations for realtors, you can help protect your client’s interest while also ensuring you’re involved in ethical business practices.