The Real Estate Settlement Procedures Act

The Real Estate Settlement Procedures Act

Overview

Certainly, the purchase of a home is a very significant event. In 1974, Congress enacted the Real Estate Settlement Procedures Act (RESPA) in order to protect home buyers from paying excessive settlement costs and from certain abusive practices.

Disclosures

RESPA requires that home buyers receive specified disclosures at various times during the settlement process.

At the time a home buyer applies for a mortgage loan, the lender and/or mortgage broker must provide the home buyer with:

• an information booklet detailing consumer information on various settlement services;
  
• a “good faith estimate” of the settlement costs; and
  
• a “Mortgage Servicing Disclosure Statement,” which notifies the home buyer as to whether the lender plans to service the loan following settlement or plans to transfer the loan to another lender and which contains information on dispute resolution.

If, for whatever reason, the home buyer does not receive these disclosures at the time of the loan application, the lender and/or mortgage broker must mail the disclosures to the home buyer within three days of its receipt of the loan application.

Prior to settlement, the home buyer is entitled to:

• a “HUD-1 Settlement Statement” showing all of the charges imposed on the home buyer, as well as the home seller, in connection with the settlement, based on the information available at the time; and
  
• an “Affiliated Business Arrangement Disclosure” detailing the relationship, if any, among certain businesses or individuals involved in the settlement process.

At settlement, the home buyer must receive:

• a final “HUD-1 Settlement Statement” detailing the actual costs of settlement to both the home buyer and the home seller; and
  
• an “Initial Escrow Statement” itemizing the estimated taxes, insurance premiums, and any other charges that will be paid from the escrow account during the first 12 months of the loan.

Following the settlement, the loan servicer must provide the home buyer with:

• an “Annual Escrow Statement” summarizing any payments from the escrow account, including payments for taxes and insurance, and notifying the home buyer of any shortages or overages in the escrow account; and
  
• a “Servicing Transfer Statement” in the event the loan is transferred to another servicer.

Prohibited Practices

RESPA contains prohibitions against kick-backs, as well as fee-splitting. Moreover, RESPA prohibits a provider in the settlement process from receiving a fee for a service not actually performed by the provider. In addition, RESPA contains a prohibition against a home seller requiring a home buyer to use a particular title insurance company as a condition of the sale. RESPA also contains a prohibition against a lender charging a home buyer with an excessive amount for purposes of the escrow account.

Enforcement

A home buyer may initiate a private lawsuit to seek recovery for alleged violations of RESPA. Furthermore, various government entities, including the United States Department of Housing and Urban Development, have the authority to enforce the provisions of RESPA.

In conclusion, it is important to note that many states have enacted laws that require disclosures in addition to those that are required by RESPA. Such laws vary from state to state.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.