The Real Estate Settlement and Procedures Act (RESPA) is of great benefit to consumers during the settlement process. RESPA requires that the parties to certain transactions receive the correct figures pertaining to their closing costs.
RESPA applies to purchases:
- Of residential property – that is, one-to-four family homes, cooperatives and condominiums.
- Involving first or second mortgages.
- Financed by a federally-related loan – that is, loans that are insured by a federal agency, those that are insured or guaranteed by VA or FHA, HUD-administered loans, or those that will be sold to Fannie Mae, Freddie Mac or Ginnie Mae.
RESPA does not apply to seller-financed loans. It also does not apply to a loan assumption, unless the lender has changed the terms of the assumed loan or charges more than $50 for the assumption.
Lenders have very specific requirements under RESPA. Within three days of receiving a loan application, a lender must give the applicant:
- A copy of a Consumer Financial Protection Bureau booklet called “Your home loan toolkit.” This booklet describes how to shop for a mortgage, how to avoid pitfalls and handle problems, and gives the consumer information about the closing. It also discusses in detail the five pages of the Closing Disclosure, which we'll be talking about a little later in this unit.
- An estimate of the closing costs that would be expected in the transaction. This is provided on a Loan Estimate form. The lender normally bases the estimate on similar transactions that have already completed.
- A Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender. It also provides information about complaint resolution.
Note: If the lender turns down the loan within three days, then RESPA does not require the lender to provide these documents.
RESPA requires lenders to use the Closing Disclosure form to detail the costs that the buyer and seller will pay at closing. In addition to the costs payable to the lender, the form also itemizes any costs due to other parties, such as city or county tax assessments, recording fees, and attorney's fees.
The Closing Disclosure must be delivered to the borrower at least three days before closing. The actual time frame is based on the method of delivery. The settlement agent must also provide the seller with the Closing Disclosure, which may be done at consummation. We’ll go over the Closing Disclosure form in detail in a few minutes.
RESPA specifically prohibits any payment or receiving of fees or kickbacks when a service has not been rendered. For example, an insurance company cannot pay a kickback to a real estate agent or to a lender for referring a client to their agency.
Referral fees are strictly forbidden for these services:
- Title search
- Title insurance
- Inspection
- Survey
- Appraisal
- Loan
- Credit report
- Attorney
RESPA permits sharing commissions and the payment of referral fees among cooperating brokers or multiple-listing services.
Business relationships and affiliations among real estate firms, mortgage brokers, title insurance firms and other such companies that are involved in a transaction are permitted, provided the relationships are disclosed in writing to the consumer, the consumer is free to go elsewhere for the relevant service, and the companies do not exchange fees for referrals.
Computerized Loan Originations
A real estate firm may offer a computerized loan origination system (CLO) that:
- Provides a prospective borrower information about mortgage loan products
- Prequalifies a borrower
- Initiates a loan application process for a fee
However, RESPA allows only the borrower to pay the fee for such a service. In addition, the broker must disclose the fact that there are competing mortgage products that are not part of the system.
Disclosures After Settlement
Loan servicers must provide borrowers with an annual escrow statement which summarizes all inflows and outflows in the prior 12-month period. The statement must also disclose shortfalls or overages in the account, and how the discrepancies will be resolved.
Credit: Text From Real Estate Express
