The Real Estate Settlement Procedures Act (RESPA) explained

RESPA stands for the Real Estate Settlement Procedures Act of 1974. The law was created to help protect consumers from predatory lending practices in residential real estate transactions.

If the jargon seems overwhelming, don’t worry. We’ll walk through exactly what protections the law offers you, how it has been updated over the years and how it gets enforced.

What is RESPA?

RESPA is designed to protect borrowers from situations that may arise during the mortgage loan process. It requires lenders to disclose necessary financial information so consumers can make an informed home-buying decision. It also eliminates kickbacks and limits the use of escrow accounts.

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

Below is an overview of protections RESPA affords borrowers:

• 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

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

What does RESPA prohibit?

A core component of RESPA is prohibiting or limiting lenders from engaging in certain actions. We’ll go through them in more detail below.

Prohibits kickbacks and unearned fees

To illustrate why kickbacks and unearned fees are prohibited, we’ll use a hypothetical example.

Imagine a real estate agent helping a prospective buyer find their dream home. Once they find the right property, the real estate agent recommends a mortgage loan provider to their client. In return for bringing them business, the mortgage loan provider pays the real estate agent.

In this example, the home buyer could have found a better deal by using another lender. They also didn’t know the real estate agent was making money by bringing them to this particular lender. U.S. lawmakers enacted RESPA to fight exactly this type of collusion against home buyers.

One important caveat here is a legal exemption exists for real estate brokers and real estate agents to still recommend services. They just need to follow additional federal regulations when doing so, like making necessary disclosures to the client.

Limits use of escrow funds

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

Lenders can require payments equaling 1/12th 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.

Prohibits 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 compels a potential buyer 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.

RESPA penalties for lenders

Mortgage lenders and other service providers who violate RESPA face steep fees and potentially jail time. The Consumer Financial Protection Bureau (CFPB) is responsible for enforcing RESPA.

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.

Potential lender penalties for RESPA violations include:

• Lawsuits and civil penalties
• Account refund requirements
• Fines
• Imprisonment

What to do if your lender violates RESPA

Borrowers who believe a service provider has violated any TRID regulations (which includes RESPA) should contact a real estate attorney. Recourse is available, but the clock starts ticking from the moment a violation occurs.

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.

When does RESPA apply?

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 the TILA-RESPA Integrated Disclosure rule (TRID), which is a set of guidelines enforced by the CFPB to protect borrowers from lenders.  This 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.

Who enforces RESPA?

RESPA is under the oversight and enforcement of the CFPB, a federal agency 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.

The bottom line: RESPA Protects borrowers

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.