If you're an investor who wants to focus on buying and selling residential real estate, you'll need to be familiar with the Real Estate Settlement Procedures Act (RESPA). This act, which regulates the actions of real estate settlement service providers, is overseen by the Consumer Financial Protection Bureau (CFPB) and is central to the way real estate transactions function in today's industry.
With that in mind, below is your guide to this piece of legislation. Read it over to understand what protections are provided to you as an investor and what you need to know going forward.
What is the Real Estate Settlement Procedures Act?
The Real Estate Settlement Procedures Act (12 U.S.C. § 2601, et seq.) is a piece of legislation that was first passed by Congress in December of 1974. Enacted by June of 1975, Regulation X, which implements RESPA. was primarily passed in an effort to provide consumers with improved disclosures about closing costs.
However, in addition, the act will also put in place an order to eliminate abusive practices on the part of real estate service providers, such as kickbacks and exorbitant referral fees. It also regulates the use of escrow accounts
In particular, RESPA covers loans on one-to-four-unit residential properties, which can include purchase loans, refinances, or home equity lines of credit. While this act was originally enforced by the Department of Housing and Urban Development (HUD), those responsibilities were absorbed by the Consumer Financial Protection Bureau (CFPB) following its creation in 2011.
Notably, every settlement provider is subject to the provisions under RESPA. In this case, the term "settlement provider" includes but is not limited to mortgage lenders, title personnel, appraisers, home warranty companies, and real estate professionals. Violators of the act can be subject to damages, fines, and even imprisonment.
How has RESPA changed real estate?
It's important to note that RESPA has gone through many changes since the implementation of Regulation X in the 1970s. However, below is an overview of how it stands today in its most current form. Read it over so you'll know what to expect during the course of your next real estate transaction.
Disclosures when submitting a loan application
The first time that a borrower will encounter RESPA is when they're making their loan application. In particular, they must receive three separate disclosures around the time their loan application is submitted. The disclosures are as follows:
- Within three days of submission of their loan application, the prospective borrower must receive a special information booklet. Among other things, the booklet must describe and explain any potential closing costs the borrower will encounter. It must explain how escrow accounts work and should contain information on how a borrower can select their own settlement service providers and include a sample of the RESPA settlement form.
- The lender must also provide the prospective borrower with a good faith estimate (GFE). As the name suggests, a good faith estimate is an estimate of the closing cost the borrower will be expected to pay at settlement.
- Finally, the lender must also provide the borrower with a mortgage service disclosure statement. In essence, this document must contain information on how the borrower can bring about any complaints they have during the settlement process. it must also state whether the lender intends to service the loan in-house or intends to hand it over to another loan servicer.
Disclosures before settlement
If one settlement service provider refers the borrower to another during the course of the transaction, they must provide the borrower with an affiliated business arrangement disclosure. This disclosure must be given to the borrower before the referral has been made and must disclose the relationship between the two parties. That said, it's also important to note that RESPA specifically prohibits requiring the borrower to use any specific service provider.
In addition, one day before settlement, the borrower must also be given a copy of their HUD 1 settlement statement. Similarly to the GFE the borrower received at the start of this process, this document lists all the costs and fees that will be charged to the borrower and seller at closing.
Disclosures at settlement
Then, at closing, the borrower must be provided with another, official copy of the HUD 1 settlement statement, which should include all of the specific costs being charged that day.
Additionally, they must also receive an initial escrow statement, which itemizes any charges that will be paid from an escrow account for the first 12 months of the loan, including taxes and insurance. While this document is most often provided at the time of settlement, technically, the mortgage lender has 45 days after the loan is funded to provide the borrower with a copy.
Disclosures after settlement
Going forward, the loan servicer must provide the borrower with an actual escrow statement at least once per year. In this case, the document details any escrow deposits and payments that were made during that year. It must also explain any surpluses or shortages in the account and provide detailed reasoning for any actions taken by the loan servicer.
Then, if the loan is ever sold to a different loan servicer, the borrower must be provided with a service transfer statement at least 15 days prior to when the transfer is scheduled to occur. This statement must include contact information for the new loan servicer and the date by which the new loan servicer will be expecting their first payment.
However, one of RESPA's provisions states that if the borrower continues to make payments to the old loan servicer for up to 60 days after the loan transfer, no negative action may be taken against them.
RESPA Section 6
In addition to receiving disclosures, there are some sections of RESPA that offer important protections for prospective borrowers to know. Specifically, RESPA Section 6 outlines the process for lodging a formal complaint against a loan servicer.
While there are many specifics listed in this section of the act, the basic gist is that if a borrower has a complaint, they must state it in writing. After that, the mortgage lender or loan servicer has 20 days from the time of receipt to acknowledge the complaint and another 60 days to either rectify the complaint or state their reasoning for refusing to do so.
RESPA Section 8
RESPA Section 8 is the section that details all of the act's litigation and liabilities. In particular, this section prohibits three different types of unlawful financial practices on the part of any settlement agent: kickbacks, fee-splitting, and unearned fees.
Here, a "kickback" refers to anything of value that is received in exchange for a business referral. Meanwhile, as you might suspect, an "unearned fee" refers to any fee charged for services not rendered and "fee-splitting" refers to service providers taking a portion of any fees charged for services in a real estate transaction.
Section 8 also explains that the penalty for a RESPA violation can include fines of up to $10,000 or up to a year in prison. It also gives borrowers the right to bring private, civil lawsuits against any individuals who have violated the act.
RESPA Section 9
Section 9, on the other hand, prohibits anyone from requiring the borrower to use a specific title insurance company. In this case, parties who can violate this section of the act include the seller, the real estate agent or real estate broker, the builder or developer, and the real estate attorney. If this right is violated, Section 9 also gives the borrower the right to sue for damages.
RESPA Section 10
Finally, Section 10 limits the amount that a mortgage lender can require a borrower to keep in an escrow account. The maximum amount that the lender can require is 1/12 of the total amount due per year. However, in addition, the lender can ask the borrower to provide a cushion, provided that it does not exceed one-sixth of the total disbursements per year.
This section also gives HUD the ability to penalize any loan servicers who fail to submit the proper escrow account statements to their borrowers.
What investors need to know about RESPA
As an investor, it's important that you're at least familiar with the Real Estate Settlement Procedures Act. On the one hand, you'll want to be familiar with the rights that are afforded to you under the act so you can ensure that you're receiving fair and adequate service from your settlement service providers.
However, on the other hand, it's also important to understand the limitations of this act, which may be relevant to you. In particular, only residential loans for one-to-four-unit properties are protected under the act. Commercial and business loans are not protected, nor are land loans or construction-only loans.
With that in mind, if you're planning on entering into a type of transaction that isn't covered under the RESPA regulations, you're going to want to make sure that you do your own due diligence in order to verify that your interests are being adequately protected.
The bottom line
Depending on what type of properties you intend to have fill your portfolio, you may or may not have to be intimately familiar with the protections provided to you under RESPA. Still, it never hurts to do your research.
To that end, use this as your guide to the Real Estate Settlement Procedures Act. While this is by no means a complete summation of all the protections that the act has to offer, it should be enough to at least get you started.