Passed in 1974 as one of the original consumer protection statutes, RESPA ensures that home-buyers receive adequate information and guidance in the weeks leading up to closing and settlement. You may recognize it by its full name: the Real Estate Settlement Procedures Act.
The U.S. Department of Housing and Urban Development is charged with administering and enforcing RESPA's provisions. By its own definition, the act fills two principal functions:
- Eliminating various charges, including referral fees and kickbacks, that may unnecessarily add to closing costs
- Providing home-buyers with a full picture of the settlement landscape and ensuring that they choose honest settlement providers
Like many statutes, RESPA is complex and long-winded. However, its dual purposes are relatively straightforward, and there are a few key facts that any prospective home-buyer should know about it before making a settlement.
Required Disclosures
RESPA requires brokers, lenders and closing services providers to make several important disclosures during the course of the home-buying process. These include:
- AfBA Disclosure: The Affiliated Business Arrangement Disclosure must be made by a mortgage broker or loan servicer that recommends the services of a settlement provider with which it maintains a working business relationship. It must provide a good-faith cost estimate of the provider's services and reveal the nature of the arrangement between the two entities.
- HUD-1 Settlement Statement: This document clearly outlines all of the pertinent settlement fees in itemized fashion. It's meant to be compared with the document described below.
- Good Faith Estimate: Released by the broker or loan provider during the initial mortgage application process, the GFE outlines a range within which the provider expects settlement costs to fall. In certain cases, it may be accompanied by a list of reputable settlement providers that operate in the area.
- Initial and Annual Escrow Statements: These documents outline the parameters of the escrow accounts from which soon-to-be homeowners pay their mortgages, property taxes, insurance costs and other expenses. Whereas the Initial Escrow Statement outlines the expected charges during the first year of homeownership, the Annual Escrow Statement provides a regular follow-up that accounts for any changes to the mortgage's structure, local tax rates or insurance premiums.
Depending on the circumstances, RESPA may compel brokers and settlement providers to provide other disclosures and information packets.
"Section 8" Cost Controls
Section 8 and Section 9 of RESPA are designed to reduce unnecessary costs that were once commonly attached to the closing process. For its part, Section 8 prohibits kickbacks or shady "value-added" fees at any point during settlement. Examples of such kickbacks might include referral fees paid by settlement providers to the brokers or loan servicers that recommended them. Criminal penalties for violations of Section 8 may include $10,000 fines and prison terms of up to 365 days.
Section 8 also prohibits the once-common practice of fee-splitting by mortgage brokers. This typically occurred as a result of an arrangement within a "cartel" of lenders and settlement providers and served to provide non-participating entities with a "cut" of every real estate transaction that occurred within a given area.
"Section 9" Cost Controls
Section 9 deals specifically with title insurance. Under its terms, brokers, loan servicers and settlement providers are prohibited from encouraging or compelling home-buyers to purchase a particular brand of title insurance from a specific issuer. Before RESPA's enactment, these entities would often condition sale closings on the buyer's willingness to purchase specific title insurance. While title insurance is required in most jurisdictions, buyers are given complete freedom of choice in the matter.
RESPA has plenty of other important provisions. Before you buy a home, be sure to get the full measure of the statute at HUD's website.
* Image courtesy of HUD.gov
