The Real Estate Settlement Procedures Act (RESPA) Explained

The Real Estate Settlement Procedures Act of 1974 (RESPA) is a federal law that provides home buyers and sellers with basic mortgage protections. Originally, RESPA mandated the disclosure of mortgage costs, eliminated kickbacks and limited the use of escrow accounts.

RESPA aims to protect individuals involved in a real estate transaction, but it’s one of many real estate terms that homeowners and future buyers may be unaware of. Don’t worry, though, because we’re here to help you make sense of it all so you can buy a house with confidence.

RESPA is designed to protect borrowers from situations that may arise during the mortgage loan process. Situations that RESPA protects borrowers from include undisclosed loan costs and extreme escrow fund minimums. RESPA also requires lenders to provide all the necessary financial information for buyers to make an informed home buying decision.

RESPA applies to home loans made for residential properties designed to accommodate one to four families. These loans include most home purchase loans as well as home equity lines of credit (HELOCs), mortgage refinances and home improvement loans.

RESPA Consumer Protections 

Collectively with the Truth in Lending Act (TILA), mortgage lenders who wish to offer government-issued or government-backed loans must comply with TILA-RESPA Integrated Disclosure, or TRID, rule.

Below is an overview of protections that RESPA affords:

• Full disclosure of loan costs
• Protection of borrowers’ rights from lenders, real estate brokers and loan servicers
• Prohibition of kickbacks and regulation of business affiliations
• Limits on escrow account requirements
• Prevention of preferred title insurance requirements

RESPA Amendments

RESPA was first passed in 1974, and it’s undergone several amendments to keep up with evolving real estate trends and needs. Below is an overview of RESPA amendments since its inception:

• Cranston-Gonzalez National Affordable Housing Act of 1990: This required disclosures for a mortgage servicing transfer, sale or The law also required escrow account disclosures at closing, with annual statements. All of these facets were put into place with the goal of helping provide affordable housing for low-income families, and help them save for a down payment.

• October 1992: Around this time, RESPA was amended to cover subordinate lien loans.

• Economic Growth and Regulatory Paperwork Reduction Act of 1996: This clarified specific definitions and reduced mortgage servicing provision disclosures.

• 2008 RESPA Reform rule: This rule added a standard Good Faith Estimate form and a revised settlement It also streamlined mortgage servicing disclosures, removed outdated provisions and permitted electronic disclosures.

• 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act: This act granted RESPA authority and enforcement rights to the Consumer Financial Protection Bureau (CFPB).

• 2013 – 2014 amendments: During this time frame, amendments were made that modified process and notification procedures and added provisions for escrow payments, force-placed insurance, general servicing updates, loss mitigation and more.

• 2013 TILA-RESPA Integrated Disclosure rule (TRID): In 2013, the CFPB published TRID as a single disclosure that includes regulations under the Truth in Lending Act (TILA) and RESPA for closed-end consumer home loans. 

There are several ways mortgage lenders or other service providers can commit a RESPA violation. RESPA violations include inflating costs, using bribes or shell entities, and implementing kickbacks or referral fees. These violations can result in steep fees and even jail time.

The CFPB relies on borrower complaints, self-reporting by real estate professionals and information gathered online to initiate investigations. So, it’s important that home buyers and sellers understand these regulations to help protect themselves.

Let’s take a closer look at what consumers can expect from their loan servicer, thanks to RESPA.

1.   Full And Frequent Disclosures Of Loan Costs

Prior to RESPA, borrowers didn’t always have clarity on the details of their mortgage loan. For example, they may not have known what they were charged for or what costs were rolled into their mortgage. With RESPA in place, lenders are required to disclose all of the costs associated with a borrower’s mortgage. 

Here are the steps in a loan application that trigger itemized disclosures to borrowers:

1. When you apply, lenders must send an information booklet that includes the loan settlement process, a Good Faith Estimate or Loan Estimate of mortgage costs and a mortgage loan servicing disclosure agreement.

2. If you’re referred to another service provider, all financial relationships between providers must be disclosed. Referral fees are prohibited.

3. When you receive the Closing Disclosure, you’ll have 3 days to review the details and all of the closing costs.

4. Every year, for the life of the loan, you’ll receive an escrow statement of all deposits and payments into the accounts.

Any disclosure violation can lead to lawsuits and civil penalties.

2. Prohibition On Kickbacks, Fee Splitting And Unearned Fees

Disclosure laws aim to make all relationships transparent so that borrowers have all the information upfront and can make more informed decisions.

Real estate professionals, including real estate agents, attorneys, mortgage brokers, lenders and service providers (such as title companies and home inspectors) thrive on successful relationships. Home buyers and sellers benefit from those relationships by asking for professional recommendations and advice that they expect is trustworthy.

But when those recommendations are based on undisclosed financial interests, home buyers and sellers can suffer, either from poor service or inflated settlement costs. It’s impossible to know whether referrals are being made because the provider is knowledgeable, cost-effective and reliable – or because the person making the referral is being paid to say so.

Penalties for kickbacks and related transgressions include $10,000 fines and up to 1 year of imprisonment.

3. Limits On Escrow Accounts

RESPA allows lenders and loan servicing providers to collect funds to pay property taxes, required homeowners insurance and escrow account costs. However, it limits the amount that can be added to these accounts.

Lenders can require payments equaling 1/12 of total annual disbursements and require a 2-month cushion of these payments. Escrow account overage balances must be returned to the borrower after all annual disbursements are made.

Violations could lead to borrower lawsuits or escrow account refund requirements.

4. Prevention Of Preferred Title Insurance Companies

Real estate developers and builders often have relationships with title companies to handle bulk title insurance transactions in new home developments. In some cases, attorneys for sellers have financial relationships with title insurance companies and seek to direct buyers to use their services.

As a rule, if a seller seeks to compel potential buyers to use a title insurance company and will not let the sale go forward unless the buyer complies, they’ve violated RESPA. However, if sellers agree to pay for title insurance on behalf of the buyer, they’ll comply with RESPA as long as they don’t add the cost back elsewhere in the transaction.

5. Acknowledgement Of Borrower Complaints

RESPA also requires loan servicers to acknowledge borrower complaints made in writing within 5 days of receipt. Within 60 days of receipt, lenders must again write to the borrower to explain what action was taken or why action won’t be taken.

If you find yourself in a dispute with your lender, continue making payments but consider consulting an attorney experienced in RESPA litigation. 

RESPA is under the oversight and enforcement of the CFPB, oriented toward consumer protection enforcement.

After the 2008 downturn of the U.S. economy, Congress passed the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB. Congress then transferred responsibility for regulatory oversight of the TILA and RESPA from the U.S. Department of Housing and Urban Development (HUD) to the CFPB.

Borrowers have 1 year to initiate a civil lawsuit against a service provider, based on specific RESPA violations. Violations of specific TILA sections may be brought to a civil lawsuit within 3 years of the violation, and the CFPB can pursue violators within a 3-year statute of limitations.

Depending on state laws, a borrower may still use lender violations as a defense against collections.

Prior to filing an official lawsuit, borrowers must provide a lender with written notice detailing the issue. The servicer then has 60 days to respond or fix the issue before the borrower can pursue further actions.

Borrowers who believe a service provider has violated any TRID regulations should contact a real estate attorney.

A lender is required to provide a loan estimate within 3 business days of receiving these six details from a prospective borrower:

• Name
• Income
• Social Security number
• Property address
• Estimated property value
• Mortgage amount requested

When a borrower submits this information, they meet the loan application criteria detailed by TRID (which includes RESPA), and the transaction is subject to all TRID regulations going forward.

This information must be submitted to begin a loan application. A lender holding this information from a previous transaction (or receiving this information through a saved application that wasn’t officially submitted) doesn’t constitute a complete application for the purposes of TRID.

Creditors also can’t require more information than these six items, or supporting documents, to provide a loan estimate. However, the borrower can voluntarily provide the lender with additional information or supporting documents.

RESPA is a federal law that continues to evolve to address modern lending practices. Check out these common questions about RESPA to learn more about your rights as a home buyer.

What does RESPA stand for?

RESPA stands for Real Estate Settlement Procedures Act, which is a federal law that provides home buyers and sellers with basic mortgage protections.

Why was RESPA passed?

RESPA was passed to protect real estate buyers and sellers from lending practices that violate certain protections. Practices that borrowers are protected from include:

• Excessive escrow account balances
• Service provider referral fees and kickbacks
• Required title companies
• Undisclosed mortgage costs

What is TILA-RESPA?

The TILA-RESPA Integrated Disclosure rule (TRID) is a set of guidelines enforced by the CFPB to protect borrowers from lenders. These guidelines are sometimes called the “Know Before You Owe” rules and generally cover:

• What information lenders owe borrowers
• When borrowers should receive these details
• What mortgage fees are permitted through CFPB regulations

RESPA is an important consumer protection law that brings transparency and clarity into buying, selling or refinancing a house. Working with an experienced and reliable lender, broker or real estate agent is a major key to enjoying a smooth mortgage loan process.

Are you ready to take the next step in securing a home loan? Fill out an application and get started today.