• By: Staff Editor
• Date: July 07, 2009

Real Estate Settlement Procedures Act (RESPA)

This Act was originally passed by U.S Congress in 1974. The latest RESPA regulations were published on November 17, 2008 and are scheduled to go into effect on January 1, 2010. Before this Act was created, it was a common practice for a lender to advertise a loan at a certain rate of interest provided the borrower use the lender's title insurance company or other affiliate at a greatly inflated price. The affiliate would then pay the lender a portion of the inflated fee as a kickback.

RESPA is a HUD consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD (Housing and Urban Development). It covers loans secured with a mortgage placed on a one-to-four family residential property. These include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit.
 

Features of the Act

• This Act was designed to protect potential homeowners and enable them to become more intelligent consumers.
• RESPA requires that lenders provide greater amounts of information to prospective borrowers at certain points in the loan settlement process.
• It ensures that consumers throughout the nation are provided with more helpful information about the cost of the mortgage settlement and protected from unnecessarily high settlement charges caused by certain abusive practices.
• It also prohibits the various parties involved from paying kickbacks to each other.
• The most recent RESPA Rule makes obtaining mortgage financing clearer and, ultimately, cheaper for consumers.
• The new Rule includes a required, standardized Good Faith Estimate (GFE) to facilitate shopping among settlement service providers and to improve disclosure of settlement costs and interest rate related terms.
• The HUD-1 was improved to help consumers determine if their actual closing costs were within established tolerance requirements.

Restrictions

• The Act prohibits kickbacks between lenders and third-party settlement service agents in the real estate settlement process (Section 8 of RESPA). Even reciprocal referrals among these types of professions could be construed in court as a violation of the law of RESPA.
• It requires lenders to provide a good faith estimate (GFE) for all the approximate costs of a particular loan and finally a HUD-1 (for purchase real estate loans) or a HUD-1A (for refinances of real estate loans) at the closing of the real estate loan. The final HUD-1 or HUD-1A allows the borrower to know specifically the costs of the loan and to whom the fees are being allotted. Beginning January 1, 2010, amendments to RESPA restrict the amount that fees can increase between the GFE and HUD-1 or HUD-1A.
• Origination charges are not allowed to increase, while certain third party service providers' fees can increase by no more than 10%.

Provisions Under the Act

Source:

1. http://en.wikipedia.org/wiki/Real_Estate_Settlement_Procedures_Act
2. http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/res/respa_hm
3. http://www.investopedia.com/terms/r/real-estate-settlement-procedures-act-respa.asp
4. http://www.mortgagesfinancingandcredit.org/mortgages/respa/respa1.htm
5. http://www.mortgagesfinancingandcredit.org/mortgages/respa/protections-enforcement3.htm