The United States Department of Housing and Urban Development (HUD) drafted and enacted the Real Estate Settlement Procedures Act (RESPA) more than 30 years ago as a consumer protection statute designed to help home buyers navigate their way through the sometimes complicated business of real estate. Specifically, RESPA addresses the issue of home buying closing costs and settlement procedures.
Under the terms of RESPA, home buyers are entitled to receive certain disclosures during the course of a real estate transaction. The law also prohibits kickbacks and referral fees that unnecessarily inflate the cost of settlement services and therefore falsely driving up the cost buying a home. RESPA provisions apply to loans secured with a mortgage on residential properties designed to house one to four families. Examples of the types of loans covered by RESPA include:
• Purchase loans • Assumptions • Refinancing loans or measures • Property improvement loans • Lines of credit based on equity An office within HUD, called ‘RESPA and Interstate Land Sales’ enforces the RESPA statute. Buyers may contact the office directly if they think the terms of closing and settlement in their house deal do not respect RESPA provisions.
RESPA stipulates that certain disclosures be made at particular times during the real estate transaction process. When a buyer goes to apply for a mortgage loan, his or her broker or lender must provide – either at the time of the application or by mail within three days – a Special Information Booklet, a Good Faith Estimate (GFE) of potential settlement fees, and a Mortgage Servicing Disclosure Statement.
The Special Information is required for home purchases only, and contains details about different kinds of real estate settlement services. The GFE outlines the type and amount of settlement costs the buyer will likely encounter when his or her house deal closes, as well as whether the broker or lender requires the buyer to use a particular settlement services vendor. The figures in the GFE are estimates, but they should be relatively close to the actual settlement costs at closing. Finally, the Mortgage Servicing Disclosure Statement reveals whether the broker or lender will handle the buyer’s loan or whether it will be transferred to another lender. The Mortgage Servicing Disclosure Statement should also have a section dedicated to options the buyer may employ to resolve any complaints.
If the buyer decides to go ahead with the transaction after securing appropriate financing, the next RESPA-required disclosure is an Affiliated Business Arrangement disclosure (AfBA), which is used if a settlement service vendor or provider refers the buyer to another provider that is affiliated with the original service provider. The affiliation can be part or full ownership of any other beneficial interest. The AfBA disclosure must be made before or at the time the referral is made, and it must give a full description of the relationship that exists between the two companies as well as a reasonable estimate of the fees of the second settlement service provider. In most cases, the buyer is not obligated to accept the services offered by the second service provider, but he or she may choose to do so.
One day before the settlement (or closing) date, the borrower may see the HUD-1 Settlement form, which details all settlement charges imposed on borrowers and sellers. All parties receive a complete copy of this form, showing all of the actual settlement costs, at the time of settlement, or in the mail shortly thereafter.
Another disclosure that is made at the time of settlement is the Initial Escrow Statement, which lists the estimates of charges that are expected to be paid from the escrow account during the first year of the loan. Charges may include taxes and insurance premiums. After the first year, loan servicers must provide borrowers with an updated annual escrow, which lists all deposits and payments, as well as any relevant shortages or surpluses related to the account.
If, at some point after the settlement occurs, the loan servicer reassigns the loan to another servicer, the borrower must be notified 15 days in advance by means of a Servicing Transfer Statement.
While RESPA does not set out particular penalties for non-disclosure of the above mentioned items, kickbacks and referral fees that violate Section 8 of the law are subject to fines of up to $10,000 and imprisonment for up to one year.
Settlement or closing fees cost Americans about $55 billion each year. HUD has initiated a RESPA reform process that the department hopes will simplify the costs involved with buying a home to better reflect the Bush administration’s goal of helping to build an ‘ownership society’ in which all Americans can own their own home. The reform process has not been completed, and for now, the rules remain as they have been for the past three decades.