The Real Estate Settlement Procedures Act (RESPA) explained

When you buy or refinance a home, the amount of paperwork, rules, and regulations can be overwhelming. Somewhere in that sea of paperwork, you might have come across a mention of RESPA and wondered, “What is a RESPA and what does it have to do with me?”

The Real Estate Settlement Procedures Act of 1974 (RESPA) – also known by its much cooler name: Regulation Z – is a federal law that protects consumers from hidden costs and predatory practices in residential real estate deals. Basically, the law ensures that lenders, real estate agents and other service providers are completely transparent when it comes to costs, fees, and relationships. This allows borrowers like you to make informed decisions based on honest and complete information.

Of course, it’s a law, so a lot of potentially confusing legal jargon can be involved. We’ll break through that, and by the end of this article, you’ll understand how RESPA works, what it prohibits, and how to protect yourself if something doesn’t seem quite right in your home-buying or refinancing journey.

What is RESPA?

RESPA exists to protect borrowers during their mortgage loan process. Its overriding goal is to make sure that lenders disclose all key information, such as loan terms, settlement costs, and more, up front – before you sign a contract. In short, RESPA protects against any surprises at closing.

The law also bans kickbacks – illegal payments made for referrals – and puts limitations on how escrow accounts can be used. This is important since it protects your funds and ensures they’re used for things like property taxes and insurance.

RESPA applies to a wide variety of residential real estate and loan types. It governs residential properties with one to four units, purchase loans, refinances, home equity lines of credit (HELOCs), 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

These protections, and more, ensure that the real estate market stays fair and transparent and that you, the borrower, get clear and honest documentation.

Additionally, lenders who offer government-backed loans, such as VA or FHA loans, have to comply with Truth in Lending Act (TILA) and RESPA Integrated Disclosure (TRID) rules. These streamline loan information into more readable and user-friendly formats to help ensure borrowers understand the terms and costs of their loan.

Timeline of the Real Estate Settlement Procedures Act

RESPA was created in 1974 and went into effect in 1975, but has gone through many revisions since then to remain relevant to the changing real estate market and the challenges borrowers face. Here’s a rundown of some of the major milestones of the law:

December 1974: RESPA is signed into law, with the goal of increasing transparency of settlement costs and banning kickbacks and referral fees in real estate transactions.

June 20, 1975: RESPA goes into effect and applies to most residential mortgage loans on one- to four-family properties.

2011: The Consumer Financial Protection Bureau (CFPB) is created and assumes RESPA enforcement from the Department of Housing and Urban Development (HUD).

October 8, 2015: The CFPB issues Compliance Bulletin 2015-05, which warns that Marketing Service Agreements (MSAs) can pose significant RESPA risks.

October 7, 2020: The CFPB rescinds the 2015 bulletin and updates its guidance with a case-by-case (“facts and circumstances”) approach for evaluating MSAs, gifts, and promotions.

What does RESPA prohibit?

Let’s take a deeper dive into what the Real Estate Settlement Procedures Act actually bans or restricts in real estate transactions.

RESPA prohibits kickbacks and unearned fees

A large focus of RESPA is preventing the practice of kickbacks and referral fees since these are not necessarily in the borrower’s best interest. For instance, imagine a scenario in which a real estate agent refers all their clients to one specific lender, not because that lender is the best fit or has the lowest rates, but because the real estate agent gets a kickback for each referral.

That’s a clear conflict of interest – and illegal under RESPA. You might see these fees referred to as “unearned fees,” and they can drive up the cost of your loan and reduce your choices.

It should be made clear that real estate agents can still refer you to lenders or other service providers. But they have to give you proper disclosures and comply with the law. Remember, they are supposed to always act in your best interests.

RESPA limits use of escrow funds

Under RESPA, escrow accounts are allowed, but the law regulates how they’re handled. For instance, lenders can require you to deposit money in an escrow account to cover property taxes, homeowners insurance and other similar expenses. But, importantly, there are limits on how much they can charge.

The rule states that lenders may collect 1/12th of the annual costs of the respective cost or fee, plus a 2-month cushion. Anything above this is considered an overage and has to be refunded after final disbursements are made.

If a lender violates these rules, borrowers can file complaints or lawsuits and may be entitled to a refund.

RESPA prohibits preferred title insurance companies

Another critical protection that RESPA provides is blocking sellers from requiring buyers to use a particular title insurance provider, especially when there’s a financial relationship between the seller and that company.

There is one exception, however. If the seller pays the full cost of the title insurance and doesn’t add the cost into the transaction, then it’s allowed. Otherwise, steering buyers toward a specific company without disclosure can result in a RESPA violation.

This rule stops conflicts of interest and ensures you, the buyer, have the freedom to choose the right title company for your transaction.

RESPA penalties for lenders

Violating RESPA is not a small offense; it can have serious consequences for lenders, real estate agents, and service providers, including hefty fines and even jail time.

The CFPB enforces RESPA. They conduct investigations through borrower complaints, self-reporting by companies, and online monitoring.

Potential lender penalties for RESPA violations include:

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

What to do if your lender violates RESPA

If you think that your lender violated RESPA, it’s critical that you don’t wait to act. The first thing you should do is contact a real estate attorney.

You also need to understand some critical deadlines. You must file a civil lawsuit for most RESPA violations within 1 year. Certain Truth in Lending Act (TILA) violations have a window of up to 3 years, and the CFPB also has a 3-year statute of limitations for enforcement.

You should also check your state’s laws since in some states, even if that deadline passes, borrowers may still use the violation as a defense in collections cases.

It’s also important to follow the proper steps. Before taking legal action, you first have to send a written complaint to your loan servicer. They then have 60 days to respond or resolve the issue.

When does RESPA apply?

A lender must provide a Loan Estimate within 3 business days of receiving these six key details from a prospective borrower:

1. Name
2. Income
3. Social Security number
4. Property address
5. Estimated property value
6. Mortgage amount requested

Once you provide these details, the application becomes official under TRID. That means that both RESPA and TILA protections are in effect. However, incomplete applications or prior information from past transactions don’t start the RESPA clock. Lenders can’t demand additional information, beyond these six items, before issuing a Loan Estimate, but you can choose to provide more if you wish.

This rule ensures fairness and consistency and keeps lenders from delaying disclosures or demanding unnecessary information.

Who enforces RESPA?

The CFPB is responsible for the enforcement and oversight of RESPA. The agency was formed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in response to the 2008 financial crisis.

Before the CFPB, RESPA enforcement was overseen by HUD.

Why is there criticism against RESPA?

Even with strong protections and transparent Closing Disclosure documents, many argue RESPA isn’t perfect. The main complaint is that loopholes exist that make it possible for some companies to skirt the rules and successfully disguise referral fees, or kickbacks.

For instance, Justia claims that enforcement of RESPA is inconsistent, especially when it comes to defining what counts as “something of value” under the law.

The Mortgage Bankers Association (MBA) has even published reports covering the ambiguities, particularly in how Section 8 of RESPA defines prohibited activities.

Basically, while RESPA’s intent is clear and it has certainly amplified protections for borrowers, its enforcement is not perfect.

The bottom line: RESPA protects borrowers

At the end of the day, RESPA is a key consumer protection law that promotes transparency in home buying, selling, and refinancing. From banning referral fees and kickbacks to regulating escrow accounts and restricting pressure from title insurance companies, the Real Estate Settlement Procedures Act is a powerful law in borrowers’ favor.

It can help you spot red flags before they become financial headaches – or worse. In the home buying process, knowledge is power, so it’s wise to explore multiple resources and all your options, especially when it comes time to choose a lender. Get in touch with a Home Loan Expert at Rocket Mortgage® today to start exploring your options.