Real Estate Settlement Procedures Act (RESPA)
What Is RESPA?
The Real Estate Settlement Procedures Act, abbreviated as RESPA, is a federal ordinance that was established by the U.S. Department of Housing and Urban Development (HUD). It is currently supervised by the Consumer Financial Protection Bureau (CFPB).
The purpose of RESPA is to govern real estate settlement processes. RESPA mandates that all parties involved in the financing of real estate purchases or transfers fully advise the borrowers about important matters involving closing costs in addition to lender servicing and escrow account practices. Business relationships between closing service providers and other parties affiliated with the transaction must also be disclosed.
RESPA is primarily concerned with providing transparency for all closing costs and settlement procedures. It covers most purchase loans, property improvement loans, refinances, equity lines of credit, and assumptions (in which the buyer assumes the seller’s mortgage).
How RESPA Works
RESPA requires that every borrower receives disclosures as part of the mortgaging process. These disclosures are distributed at various times throughout the process: at the time of the application, before settlement, and at settlement.
Some disclosures spell out the costs associated with loan settlement servicing while others outline lender servicing and escrow account practices. The majority of the disclosures detail the business relationships between settlement service providers.
How RESPA Violations Work
Some examples of RESPA violations are:
- Exchanging gifts for referrals. For instance, a violation might occur if an appraiser gave a mortgage company’s employees coffee shop gift certificates in exchange for referrals to his appraisal company.
- Price gouging. Raising the price of third-party settlement services, such as the charges associated with pulling a borrower’s credit report, are violations.
- Overcharging. For example, a real estate company charging a title company above market rates to use their office space for transactions is a violation. This scheme is sometimes used to disguise referral fees, which ultimately come at the expense of the customer.
- Insurance kickbacks. This occurs when a broker’s title business owns a financial stake in a captive reinsurance program established by the title insurer that underwrites the title company’s policies.
- Covering up kickbacks. For example, creating a fake company in order to funnel money through it and profit is a violation.
History of RESPA
RESPA was established in 1974 and was initially regulated by the Department of Housing and Urban Development (HUD). Decades later, the Consumer Financial Protection Bureau (CFPB), which was established under the administration of the Dodd-Frank Wall Street Reform and Consumer Protection Act, assumed authority over RESPA in 2011.