Real Estate Settlement Procedure Act (RESPA)
A federal law passed in 1974 that requires lenders to provide home mortgage borrowers in advance with information of known or estimated settlement costs. RESPA also limits the amount lenders may require to be held in escrow for real estate taxes and insurance, requires the disclosure of known settlement costs to both buyers and sellers by the person conducting the settlement and outlaws certain referral fees.
RESPA covers loans secured with a mortgage placed on a one-to-four family residential property.
The purposes of RESPA:
- to help consumers become better shoppers for settlement services;
- to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services.
The requirements of RESPA:
Section 8 of RESPA prohibits a person from giving or accepting any thing of value for referrals of settlement service business related to a federally related mortgage loan.
It also prohibits a person from giving or accepting any part of a charge for services that are not performed.
Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company.
RESPA required disclosures at the time of loan application:
- a booklet, which contains consumer information regarding various real estate settlement services. (Required for purchase transactions only)
- a Good Faith Estimate (GFE) of settlement costs,
- a Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender.
If the borrowers don't get these documents at the time of application, the lender must mail them within three business days of receiving the loan application.
RESPA required disclosures before settlement/closing:
An Affiliated Business Arrangement (AfBA)
The HUD-1 Settlement Statement that clearly shows all charges imposed on borrowers and sellers in connection with the settlement.
The Initial Escrow Statement itemizes the estimated taxes, insurance premiums and other charges anticipated to be paid from the Escrow Account during the first twelve months of the loan.
A Servicing Transfer Statement - required if the loan servicer sells or assigns the servicing rights to a borrower's loan to another loan servicer.