THE REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)

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Introduction

Congress enacted the Real Estate Settlement Procedures Act (RESPA) in 1974 to ensure that consumers are provided with timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges that are the result of abusive practices. 12 USC § 2601(a). The ATG Underwriting Department receives many questions about various practices and procedures and whether they fall within the requirements of RESPA. We thought ATG members would find helpful a basic summary of RESPA, its purpose, scope, required disclosures, prohibited practices, and other information. See also our sidebar story on the ongoing RESPA reform situation.

Purpose

The act was intended to make changes in the settlement process that accomplish four objectives: (1) result in effective advance disclosure of settlement costs to home buyers and sellers; (2) eliminate kickbacks or referral fees that unnecessarily increase the costs of settlement services; (3) reduce the amounts home buyers are required to place in escrow accounts established to ensure the payment of real estate taxes and insurance; and (4) significantly reform and modernize local record keeping of land title information. 12 USC § 2619(b).

Scope

RESPA applies to all federally related mortgage loans. 24 CFR § 3500.5. A "federally related mortgage loan" is any loan which is secured by a lien on residential real property designed principally for the occupancy of from one to four families and made in whole or part by any lender insured by an agency of the federal government or regulated by the federal government. 12 USC § 2602(1).

RESPA, however, does not apply to credit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes or extensions of credit to government or governmental agencies. 12 USC § 2606(a). In addition, the regulations exempt from RESPA: loans on property of 25 acres or more, business purpose loans, temporary financing, vacant land, assumptions without lender approval, loan conversions and secondary market transactions. 24 CFR § 3500.5(b).

Required Disclosures: At Time of Application

1. Special Information Booklet
24 CFR § 3500.6 requires a lender to provide a special information booklet to a person for whom the lender receives or for whom the lender prepares a written application for a federally related mortgage loan. The booklets are intended to help people borrowing money to finance the purchase of residential real estate to better understand the nature and costs of real estate settlement services. 12 USC § 2604(a).

The booklets must contain the following: (1) a description and explanation of the nature and purpose of each cost in a real estate settlement; (2) an explanation and sample of the standard real estate settlement form prescribed under section 2603; (3) a description of the nature and purpose of escrow accounts when used in connection with loans secured by residential real estate; (4) an explanation of choices available to buyers of residential real estate in selecting persons to provide necessary services; and (5) an explanation of the unfair practices and unreasonable or unnecessary charges to be avoided by the prospective buyer with respect to a real estate settlement. 12 USC § 2604(b). The lender must provide or mail the booklet no more than three days after receiving the application. 12 USC § 2604(d).

2. Good-Faith Estimate
Along with the special information booklet, the lender must provide a good faith estimate of the amount or range of charges of the specific settlement services that the borrower is likely to incur. 12 USC § 2604(c). The estimate must consist of a dollar amount or range of each charge the borrower is likely to incur at or before settlement based upon common practice in the locality of the mortgaged property. Each estimate must be made in good faith and have a rational relationship to the charge a borrower is likely to be required to pay in settlement. 24 CFR § 3500.7(c)(2). The estimate must be provided within three days of when the application is received or repaired. However, if the loan is denied within three days, then there is no duty to disclose. 24 CFR § 3500.7.

3. Mortgage Servicing Disclosure Statement
Each person who makes a federally related mortgage loan must disclose to each person who applies for the loan, at the time of the application for the loan, whether the servicing of the loan may be assigned, sold, or transferred to any other person at any time while the loan is outstanding. 12 USC § 2605(a).

Required Disclosures: Before Closing

1. Affiliated Business Arrangement Disclosure
RESPA defines an "affiliated business arrangement" as an arrangement in which a person who is in a position to refer business incidental to a real estate settlement service involving a federally related mortgage loan, has either an affiliate relationship with or a direct or beneficial ownership interest of more than one percent in a provider of settlement services. 12 USC § 2602(7). If a person directly or indirectly refers business to that provider or affirmatively influences the selection of the affiliated business, they must disclose the nature of the relationship they have with the provider of the settlement services and of an estimated range of charges made by the provider. The disclosure must be made no later than the time the referral is made. 24 CFR § 3500.15(b)(1).

2. HUD-1 Settlement Statement
The person conducting the settlement must provide a standard form for the statement of settlement costs that will itemize all charges imposed upon the buyer and seller in connection with the settlement and will indicate whether any title insurance premium included in the charges covers or insures the lender's interest in the property, the borrowers, or both. 12 USC § 2603(a). However, RESPA does not require that the part of the standard form that relates to the borrower's transaction be furnished to the seller and the part relating to the seller be furnished to the buyer. 12 USC § 2603(a). The person conducting the settlement must complete the form and make it available for inspection by the borrower at or before settlement. 12 USC § 2603(b).

Required Disclosures: At Closing

1. Initial Escrow Statement
A borrower for which an escrow account has been established should receive a statement that itemizes the estimated taxes, insurance premiums, and other charges that are reasonably anticipated to be paid from the account within the first twelve months. 12 USC § 2609(c)(1)(A). The statement must be submitted to the borrower either at closing or within 45 days of the establishment of the escrow account. 12 USC § 2609(c)(1)(B).

Required Disclosures: After Closing

1. Annual Escrow Statement
Any servicer that has established or continued an escrow account in connection with a federally related mortgage loan must submit to the borrower for which the account is established a statement at least once for every twelve-month period. 12 USC § 2609(c)(2)(B). The statement must itemize the amount of their current monthly payment, the portion of that payment that is placed in an escrow account, the total amounts paid into and out of the escrow account over the period, and the balance of the account at the end of the period. 12 USC § 2609(c)(2)(A). If the lender or escrow servicer fail to submit the statement to a borrower, they will be assessed a civil penalty of $50 for each failure. The total amount imposed on the lender for all failures in any twelve-month period may not exceed $100,000. 12 USC § 2609(d)(1). However, if the failure was intentional, then the penalty is $100 for each failure and the $100,000 limit will not apply. 12 USC § 2609(d)(2).

2. Servicing Transfer Statement
A servicer of a federally related mortgage loan must notify a borrower in writing of any assignment, sale or transfer of the servicing of the loan to any other person. 12 USC § 2605(b)(1). The notice must be made no less than fifteen days before the effective date of the transfer. 12 USC § 2605(b)(2)(A). However, if the assignment, sale or transfer is preceded by either (i) the termination of the servicing contract for cause; (ii) commencement of bankruptcy proceedings; or (iii) commencement of proceedings by the FDIC or RTC for conservatorship or receivership of the servicer, then the notice must be made not more than thirty days in advance. 12 USC § 2605(b)(2)(B).

Under Section 2605(b)(3), the notice must include the following: (a) the effective date of the transfer; (b) name, address and telephone of the transferee; (c) a toll-free number the buyer can use concerning questions about the transfer; (d) the name or department of the transferee that can be contacted by the borrower for questions; (e) the date on which the transferor will cease to accept payments relating to the loan and on which the transferee will start to accept; (f) any information concerning the effect on the continued availability of the mortgage, life, or other insurance the borrower must have to maintain coverage; and (g) a statement that the transfer does not affect any term or condition of the security instruments other than terms directly related to the servicing of the loan.

Prohibited Practices: Kickbacks

In addition to requiring the foregoing disclosures, RESPA prohibits any person from giving or accepting any fee, kickback, or thing of value pursuant to any agreement or understanding that business incidental to or part of a real estate settlement service (see below for definition) involving a federally related mortgage loan will be referred to any person. 12 USC § 2607(a). RESPA also prohibits the splitting, by portion or percentage, of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. 12 USC § 2607(b). The Department of Housing and Urban Development (HUD) has authority to investigate high prices to see if they are the result of a referral fee or a split fee. If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided. 24 CFR § 3500.14(g)(2).

Definition of Settlement Service

The term "settlement service" is defined in CFR Section 3500.2 as any service provided in connection with a prospective or actual settlement including, but not limited to:

  1. Origination of a federally related mortgage loan (including, but not limited to the taking of loan application, loan processing and origination services, and communicating with the borrower and lender);

    2.  

  2. Rendering of services by a mortgage broker (including counseling, taking of applications, obtaining verifications and appraisals, and other loan processing and origination services, and communicating with the borrower and lender);

    3.  

  3. Provision of any services related to the origination, processing or funding of a federally related mortgage loan;

    4.  

  4. Provision of title services, including title searches, title examinations, abstract preparation, insurability determinations, and the issuance of title commitments and title insurance policies;

    5.  

  5. Rendering of services by an attorney;

    6.  

  6. Preparation of documents, including notarization, delivery, and recordation;

    7.  

  7. Rendering of credit reports and appraisals;

    8.  

  8. Rendering of inspections, including inspections required by applicable law or any inspections required by the sales contract or mortgage documents prior to transfer of title;

    9.  

  9. Conducting of settlement by a settlement agent and any related services;

    10.  

  10. Provision of any services involving mortgage insurance;

    11.  

  11. Provision of services involving hazard, flood, or other casualty insurance or homeowner's warranties;

    12.  

  12. Provision of services involving mortgage, life, disability, or similar insurance designed to pay a mortgage upon disability or death of a borrower, but only if the insurance is required by the lender as a condition of the loan;

    13.  

  13. Provision of services involving real property taxes or any other assessments or charges on the real property;

    14.  

  14. Rendering of services by a real estate agent or real estate broker; and

    15.  

  15. Provision of any other services for which a settlement service provider requires a broker or seller to pay.

Permitted Practices

RESPA may not be construed to prohibit the following:

  • The payment of a fee to attorneys for services actually rendered, by a title company to its duly appointed agent for services actually performed in the issuance of a title insurance policy or by a lender to its agent for services actually rendered. 12 USC § 2607(c)(1);

    •  

  • The payment of a bona fide salary of compensation for goods or facilities actually furnished for services actually performed. 12 USC § 2607(c)(2);

    •  

  • Payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and brokers. 12 USC § 2607(c)(3);

    •  

  • Affiliated business arrangements if a disclosure is made of the existence of the arrangement and a written estimate is provided of the charges generally made by the provider to which the person is referred. 12 USC § 2607(c)(4)(A). The person being referred must not be required to use any particular provider of settlement services. It is not a violation, however, if a buyer is required to pay for the services of an attorney, a credit reporting agency, or real estate appraiser chosen by the lender to represent the lender's interest in the transaction. It is also not a violation where an attorney represents a client in a real estate transaction and issues a policy of title insurance in the transaction directly as agent or through a separate corporate title insurance agency that may be established by that attorney and operated as an adjunct to their practice. 12 USC § 2607(c)(4)(B). The only thing of value that can be received from the arrangement other than permitted payments is a return on the ownership interest or franchise relationship. 12 USC § 2607(c)(4)(C). A person is not liable for a violation of § 2607(c)(4)(A) if they prove by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding maintenance of procedures that are reasonably adapted to avoid the error. 12 USC § 2607(d)(3).

    •  

  • Computer loan origination systems (CLOS). In its 1996-1 Statement of Policy, HUD defined CLOS as a computer system used by or on behalf of a consumer to facilitate their choice among alternative settlement service providers in connection with a federally related mortgage loan. These computer systems may: (1) provide information concerning products or services; (2) pre-qualify a prospective buyer; (3) provide consumers with an opportunity to select ancillary settlement services; (4) provide prospective borrowers with information regarding the rates and terms of loan products for a particular property and other information on a mortgage loan application for evaluation by a lender or lenders; (5) collect and transmit information concerning the borrower, the property and other information on a mortgage loan application for evaluation by a lender or lenders; (6) may provide loan origination, processing, and underwriting services, including but not limited to the taking of loan applications, obtaining verifications and appraisals, and communicating with the borrower and lender; and (7) may make a funding decision. The policy statement stated that it is not intended to be restrictive or exhaustive. Rather it only attempts to define existing practices of service providers.

For other services to be acknowledged as compensable under RESPA, they should be identifiable and meaningful services akin to those identified. Paragraph II-C.

However, to be legal, the payment must be reasonably related to the services performed. In paragraph II-D of the 1999-1 Statement of Policy, HUD stated that payments must be commensurate with that amount normally charged for similar services, goods, or facilities. HUD also explains that it is not necessary to distinguish between services that benefit the borrower and those that benefit the lender since either type of services benefits both by making the transaction possible.

Violations

Any person who violates provisions under Section 2607 will be fined up to $10,000 or imprisoned for not more than one year. 12 USC § 2607(d)(1). In addition, violators will be joint and severally liable to the persons charged for the settlement service involved in violation in an amount equal to three times the amount of any charge paid for the settlement service. 12 USC § 2607(d)(2). The court may also award the prevailing party in a civil suit the court costs of the action together with reasonable attorneys fees. 12 USC § 2607(d)(5). Finally, the Secretary, the Attorney General of any state, or the insurance commissioner of any state may bring an action to enjoin violations under 12 USC § 2607.

Seller Required Title Insurance

A seller of property that will be purchased with the assistance of a federally related mortgage loan may not require, either directly or indirectly, that title insurance covering the property be purchased by the buyer from any particular title company as a condition to selling the property. 12 USC § 2608(a). A seller in violation is liable to the buyer in an amount equal to three times all charges made for the title insurance. 12 USC § 2608(b).

Limitations on Escrow Accounts

A lender in connection with a federally related mortgage loan may not require a borrower to deposit in an escrow account an aggregate sum in excess of a sum that will be sufficient to pay taxes, insurance premiums and other charges attributable to the period beginning on the last date on which the charge would have been paid and ending on the date of its first full installment payment under the mortgage plus one-sixth the estimated total amount of the charges. 12 USC § 2609(a)(1). In addition, a lender may not in a given month require the borrower to deposit in excess of one-twelfth of the total amount of estimated charges plus an amount to maintain a balance of no more than one-sixth the estimated total charges. 12 USC § 2609(a)(2). The servicer must notify the borrower not less than annually of any shortage of funds in the escrow account. 12 USC § 2609(b).

Conclusion

If you have concerns about the behavior of other parties to a real estate transaction, the HUD website describes how a person can file a complaint if he or she feels there was a violation of one of the provisions in RESPA. A complaint must outline the violation and identify the violators by name, address, and phone number. The person filing the complaint should also provided his/her own name and phone number so HUD can ask follow up questions.

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