The Real Estate Settlement Procedures Act (RESPA) protects homebuyers by requiring lenders to disclose the terms of the real estate settlement process.
A real estate agent who violates this act can face severe penalties. This makes RESPA a crucial part of the real estate exam for students to understand. As a trusted professional with hands-on experience, I’m here to provide valuable information regarding this fair lending law.
In this post, we’ll define the Real Estate Settlement Procedures Act, give examples of its use, and discuss its impact on the housing market.
What Is the Real Estate Settlement Procedures Act?
The Real Estate Settlement Procedures Act requires that lenders and mortgage brokers provide homebuyers with disclosures regarding the real estate settlement process. This act, also known as Regulation X, protects homebuyers from predatory lending agreements.
What Do Real Estate Settlement Services Do?
Before we can understand how RESPA works, we must understand what a settlement service is. A real estate settlement service helps homebuyers with the closing process after purchasing a home. These organizations generally provide title insurance or offer escrow services.
Why Was RESPA Passed?
Before RESPA, there were few laws regulating these types of services. This meant that lenders could get away with abusive behaviors, including doling out predatory loan terms. That’s why RESPA was passed in 1974 to protect borrowers from these practices and support a fair housing market.
What Are the Two Main Components of RESPA?
The Real Estate Settlement Procedures Act has two primary purposes:
- To provide borrowers with timely mortgage disclosures
- To prevent predatory lending practices
Under RESPA, homebuyers must be made fully aware of mortgage loan terms before agreeing to the settlement. RESPA also provides that lending companies cannot engage in illegal lending practices.
What Are the Six Pieces of Information for RESPA?
Under RESPA, borrowers must submit the following items to be considered for a mortgage loan:
- Social security number
- Property address
- An estimate of the property’s value
- Loan amount
How Does RESPA Protect Homebuyers?
RESPA protects homebuyers from unjust practices and surprise fees in mortgage loans. Under RESPA, lenders have to be upfront about the costs of their real estate settlement services. They must disclose a good faith estimate of how much the borrower will pay. This allows consumers to make informed decisions and shop for the best deal.
RESPA also prohibits mortgage companies from adding kickbacks and referral fees to the cost of a real estate settlement. This saves homebuyers money by ensuring they only have to pay for the cost of the actual work done.
Finally, RESPA allows homebuyers to seek help if a mortgage company overcharges or takes advantage of them. If a lender includes hidden fees in a home loan, homebuyers are protected under federal law and will not have to pay these charges.
What Loans Does RESPA Cover?
The Real Estate Settlement Procedures Act covers all federally related mortgage loans for one-to-four-family properties. A federally related mortgage loan is a loan for a residential property insured by the government. This includes:
- Home loans
- Home improvement loans
- Equity lines of credit
- Reverse mortgages
- Lender approved assumptions
What Loans Does RESPA Not Cover?
RESPA does not apply to commercial or business loans. If a property is not a dwelling intended for families to live in, buyers are not protected by this federal law. Examples of loans that RESPA does not apply to include:
- Extensions of credit to the government
- Loans for businesses
- Loans for commercial purposes
- Loans for agricultural purposes
Examples of RESPA Violations
RESPA prohibits predatory lending tactics that force homebuyers to pay more for settlement services. Examples of RESPA violations include:
- Offering kickbacks and referral fees
- Requiring large escrow account balances
- Inflating costs of services
- Bribing in exchange for referrals
- Not disclosing good faith estimated settlement costs
- Demanding title insurance
Let’s look at a real example of how housing professionals violate the Real Estate Settlement Procedures Act.
Kallai v. Jatola Homes
In Kallai v. Jatola Homes, Kallai sued Jatola Homes for violating Section 8 of RESPA. Section 8 prohibits any person from giving or receiving a “thing” of value in exchange for a referral. The plaintiff alleged that Jatolla Homes promised to reward real estate agents with a monetary bonus for referring buyers to their services.
As we know, referral fees are illegal under federal law in most states. However, the court had to decide if a company promising money in exchange for referrals was enough for them to intervene.
While the agent never actually received a monetary gift, the plaintiff argued that the “thing” of value, in this case, was the promise of financial gain. If the court agreed with this argument, that would make this act illegal under RESPA.
Ultimately, the court decided that this promise violated RESPA and that Jatola Homes would be penalized. While it was a close call, this case set the precedent that settlement services offering referral fees were enough to violate fair lending laws.
Who Enforces RESPA?
The Consumer Financial Protection Bureau (CFPB) is responsible for enforcing RESPA. If a mortgage lender violates RESPA, homebuyers can report them to the CFPB. The CFPB will investigate the claim to determine if a violation has occurred.
However, it’s important to note that homebuyers must bring up the claim no later than one year after the violation has occurred. Otherwise, the CFPB will be powerless to seek retribution for the borrower.
Penalties for Violating RESPA
Penalties for violating RESPA vary depending on severity. For example, creditors and real estate brokers who accidentally violate RESPA may pay as little as $94.
However, more serious offenses can result in $10,000 fines and up to a year in prison. In private settlements, violators may even be fined an amount equal to three times as much as the charge paid for the service.
How to Avoid Violating RESPA
To avoid violating RESPA, lenders should ensure they properly disclose the terms of all real estate settlement procedures. They should avoid sneaking in hidden fees or offering gifts to agents in exchange for referrals.
Real estate agents must also be careful to avoid violating this act. The best way to follow RESPA is never to accept fees, kickbacks, or other items of value from real estate settlement services. While referral fees are legal in some states, their use is not recommended, as it can lead to legal risks.
A real estate agent can still help their clients by cross-promoting other businesses, but they shouldn’t financially benefit from doing so.
What Are the Problems With RESPA?
Some critics say that RESPA fails to eliminate all predatory lending practices.
For example, lenders can still legally provide captive insurance to the title companies they work with. Many argue this is an example of a kickback, as it incentivizes real estate agents to work with specific businesses. RESPA is supposed to prohibit this behavior, but the CPFB will not step in to regulate this particular practice.
Critics of RESPA call for amendments that will ban this loophole and end kickbacks in real estate once and for all.
When Was RESPA Amended?
Since RESPA was passed in 1974, many amendments have been made to improve and empower this law. Let’s look at some of the most notable examples below.
National Affordable Housing Act of 1990
The National Affordable Housing Act required that lenders provide disclosures regarding the sale, assignment, or transfer of mortgage servicing. This allows homebuyers to clearly understand the mortgage loan terms before agreeing to a settlement.
The 1992 amendment provided that RESPA would cover subordinate lien loans. A subordinate lien loan, or a subprime mortgage, is a loan against a property with a low priority status. Previous to 1992, subprime mortgages were not covered under RESPA.
Economic Growth and Regulatory Paperwork Reduction Act of 1996
This act clarifies RESPA by providing specific definitions and reducing mortgage servicing provision disclosures. This helped to streamline the real estate settlement process for both mortgage companies and borrowers.
2008 RESPA Reform Rule
This amendment required that mortgage companies provide a Good Faith Estimate form to give borrowers an idea of settlement costs. It also removed outdated provisions and simplified the real estate settlement process.
2010 Dodd-Frank Wall Street Reform and Consumer Protection Act
These laws empowered the Consumer Financial Protection Bureau to enforce RESPA. Under this amendment, lenders and real estate agents who violate the law would be investigated by the CFPB.
2013 and 2014 Amendments
These amendments added provisions for the following:
- Escrow payments
- Force-placed insurance
- General servicing
- Loss mitigation
This meant that more aspects of the real estate settlement process would be regulated to protect homebuyers from abusive behavior.
2013 TILA-RESPA Integrated Disclosure Rule (TRID)
This rule integrated RESPA and the Truth in Lending Act (TILA) to create TRID. Under this amendment, mortgage companies have to provide one single disclosure that follows the regulations of both RESPA and TILA.
Are There Other Fair Lending Laws?
The Real Estate Settlement Procedures Act is not the only federal law that protects homebuyers. The three other significant fair lending laws are
- The Truth in Lending Act
- The Fair Housing Act
- The Equal Credit Opportunity Act
Truth in Lending Act
The Truth in Lending Act prohibits mortgage lenders from using predatory lending tactics. This law requires that lenders disclose the following information about their loans:
- Creditor’s identity
- Annual percentage rate
- Finance charges
- Total number of payments
- Monthly payment costs
- Late fees
Fair Housing Act
- National origin
- Sex (including sexual orientation and gender identity)
- Familial status
Equal Credit Opportunity Act
The Equal Credit Opportunity Act (ECOA) prohibits mortgage lenders from discriminating against protected classes. Protected classes under the ECOA include:
- National origin
- Sex (including sexual orientation and gender identity)
- Receipt of income from a public assistance program
- The applicant’s exercise of any right under the Credit Consumer Protection Act
Other fair lending acts that protect borrowers include:
- Fair Credit Reporting Act
- Fair Credit Billing Act
- Fair Debt Collection Practices Act
What to Know Before the Real Estate Exam
The Real Estate Settlement Procedures Act requires lenders to disclose the costs of the real estate settlement process for federally related mortgage loans. This act is essential for lenders and real estate agents to follow and understand.
Now that we’ve covered the crucial details regarding RESPA, you’re closer to acing the real estate exam. But there’s still a lot more vital information to learn before you can call yourself a real estate pro.
Brush up on more critical terms with our Real Estate Flashcards and head into exam day feeling prepared!