RESPA - The Real Estate Settlement Procedures Act

RESPA - The Real Estate Settlement Procedures Act

The Real Estate Settlement Procedures Act, or RESPA, is a consumer protection statute. One of its purposes is to help consumers become better shoppers for settlement services. Another purpose is to eliminate kickbacks and referral fees that can unfairly increase the costs of settlement services.

RESPA requires that borrowers receive disclosures, all at various times. Certain disclosures spell out the costs related to the settlement, describe business relationships between settlement service providers and outline lender servicing and escrow account details and practices.

The act generally covers loans secured with a mortgage placed on one- to four-family residential properties. These include most purchase loans, refinances, assumptions, equity lines of credit and property improvement loans. The Housing and Urban Development (HUD)'s Office of Consumer and Regulatory Affairs, Interstate Land Sales – RESPA Division is responsible for enforcing RESPA.

Disclosures at the time of loan application

When borrowers apply for a loan, the following are what the mortgage broker/lender should provide:

• Good Faith Estimate (GFE) of settlement costs, which lists the charges the buyer is likely to pay at settlement. This is only an estimate; the actual charges may differ. If a lender requires the borrower to use a particular settlement provider, the lender must disclose this requirement on the GFE. As the actual amount may change after the GFE is provided to the borrower, the numbers are usually very close. Its important to make sure you provide them with all the information they asked for, debts etc., in order to ensure that the GFE is as accurate as possible. But remember that changing market conditions can affect the final costs as well.
• Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender. This statement also includes information about how to service any complaints you may have.

If the borrowers do not receive these documents at the time of application, the lender must mail them within three business days of receiving the loan application. However, if the loan is denied, RESPA does not require the lender to provide these documents.

Disclosures before closing occurs

Controlled business arrangement are sometimes called an "affiliated" business arrangement. This is when a lender, real estate broker, or a participant in your settlement refers you to an affiliate for a settlement service. This can happen when a real estate agent refers you to a mortgage affiliate. When this occurs, RESPA requires the referring party to provide you with an Affiliated Business Arrangement Disclosure. This form will remind you that you are generally not required, with some exceptions, to use the affiliate and are free to look for another provider.

Disclosures at settlement

The HUD-1 Settlement Statement shows the actual settlement costs of the loan transaction. Separate forms may be prepared for the borrower and the seller. It is not the practice that the borrower and seller attend the settlement, but the HUD-1 should be mailed as soon as possible after settlement.

The Initial Escrow Statement itemizes the estimated taxes, insurance premiums and other charges anticipated to pay from the escrow account in the first twelve months of the loan. It will list for you the escrow payment amount and any "cushion" that they require. Most times this statement is provided at the closing/settlement, and the lender has 45 days from closing to deliver it.

Loan services must provide to borrowers an Annual Escrow Statement once a year. This summarizes the escrow payments for the year, and informs the borrower of any shortages or surpluses in the account and what the lender's course of action is going to be.

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