First passed in 1974, the
Real Estate Settlement Procedures Act (RESPA) is a federal
statute enacted by the U.S. Department of Housing and
Urban Development (HUD) to govern the real estate settlement
process by mandating all parties fully inform borrowers
about all closing costs, lender servicing and escrow
account practices, business relationships between closing
service providers and other parties to the transaction.
The RESPA statute covers mortgage loans on a one-to-four
family residential property. These include most purchase
loans, assumptions, refinances, property improvement
loans, and equity lines of credit.
According to HUD, the goal of the rule is to clarify
and outline the settlement process and fees to consumers
and
eliminate illegal activity such as kickbacks and referral
fees among settlement service providers. HUD's Office
of Consumer and Regulatory Affairs, Interstate Land Sales/RESPA
Division is responsible for enforcing RESPA. Timeline of revisions, amendments
Minor revisions were made in 1976 and 1983. RESPA was
further amended in 1992 to extend coverage to affiliated
business arrangements. The rule was also revised in
1992 to permit realty companies to affiliate with allied
services, such as a mortgage lender and a title insurance
company, and give discounts to consumers who use the
package of services. Such business affiliations must
be fully disclosed in writing to buyers before they're
referred from one company to another affiliated company.
The 1992 RESPA rule also sanctions the use of computer
loan originations by real estate brokers to help buyers
select and apply for a mortgage.
In June 1996, HUD issued a final RESPA rule that reversed
a 1992 HUD regulation permitting compensation of employees
by employers for marketing settlement services of an
affiliated company.
In addition, the revised RESPA rule:
- Introduced more narrow exemptions for an employer's
payments to its managerial employees and to employees
who
don't perform settlement services in any transaction;
- Added exemption language
clarifying that an employer's payments to "bona
fide" employees for
generating business for the employer were permissible;
- Revised
certain controlled business disclosure requirements;
- Withdrew
exemptions for payments by borrowers for computer
loan origination services;
- Issued three HUD policy
statements dealing with computer loan originations,
sham controlled business
arrangements, and office space, lockouts, and retaliation.
In October 2001, HUD Secretary Mel Martinez issued a
RESPA Statement of Policy 2001-1, which clarified HUD’s
position on lender payments to mortgage brokers, and
guidance concerning unearned fees under Section 8(b).
According to Martinez, the Statement of Policy was issued
to eliminate any ambiguity concerning the department’s
position with respect to those lender payments to mortgage
brokers characterized as YSPs and to overcharges by settlement
service providers as a result of questions raised by
two pivotal court decisions, Culpepper v. Irwin Mortgage
Corp. and Echevarria v. Chicago Title and Trust Co.
In June 2002, Martinez announced the most sweeping
changes to RESPA in its 30 years of existence by proposing
the
homebuyer’s bill of rights, aimed at reforming
the regulatory requirements in the federal rule. Stating
the need for greater disclosure to homebuyers, Martinez
said his proposed RESPA reform rule would need to:
- Change the way lender payments to brokers are recorded
and reported to consumers;
- Improve HUD's Good Faith
Estimate settlement cost disclosure; and,
- Remove
regulatory barriers to allow market forces and increased
competition to promote greater choice
for consumers by allowing guaranteed packages or "bundling" of
settlement services and mortgage loans.
In addition, Martinez vowed to put more emphasis
on enforcement measures regarding RESPA
violations.
The proposal went through a 90-day comment
period in which HUD received more than 80,000
comments
from various
sectors of the real estate industry. In March 2004, the new HUD Secretary, Alphonso Jackson,
announced that the Department was withdrawing the reform
rule due to the number of concerns from real estate industry
and consumer groups. “There are many groups concerned
that they have not had a chance to see the changes that
have been made to the rule since it was proposed two
years ago. They deserve to see those changes,” he
said.
In the summer of 2005, HUD held a series of seven roundtables
with industry members, consumer groups and small businesses
to talk about RESPA reform. At that time, they unveiled
the proposals that had been under consideration for the
2004 final rule, including a revised GFE form and a new
Mortgage Package Offer (MPO) form. They also introduced
a Settlement Services Package (SSP) concept which would
allow for the bundling of settlement services separate
from the package. The SSP was HUD’s answer to the
industry’s previous request for a two-package proposal,
as opposed to HUD’s original single-package proposal.
As of September 2005, HUD is taking all of the feedback
they received at the roundtables and going back to the
drawing board to draft a new proposed rule, which will
likely be released sometime in late fall or early winter.
Present RESPA rule provisions
Until a RESPA reform rule is finalized, those in the
real estate industry must abide by the rule as it stands
after the 1996 revision.
Disclosure requirements
RESPA requires that borrowers receive disclosures at
various times in the transaction process. Some disclosures
spell out the costs associated with the settlement,
outline lender servicing and escrow account practices
and describe
business relationships between settlement service providers.
- Specifically, when a borrower applies for a loan,
HUD requires mortgage brokers and/or lenders to:
- Give
the borrower a Special Information Booklet containing
consumer information regarding various real estate
settlement services. (Required for purchase transactions only).
- A Good Faith
Estimate (GFE) of settlement costs, which lists the
charges the buyer is likely to pay at
settlement. This is only an estimate and the actual charges may
differ. If a lender requires the borrower to use of a particular
settlement provider, then the lender must disclose
this requirement on the GFE.
- 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.
If the lender fails to give the borrower these documents
at the time the borrower applies for the loan, the
lender must mail them within three business days of receiving
the loan application.
All of the charges imposed on borrowers and sellers
in connection with the real estate settlement must be
disclosed on a HUD-1 Settlement Statement and presented
to the buyer at the closing – or one day prior
to the closing. The HUD-1 also allows for adjustments
or proration of expenses paid for the property over time,
for example – water bills, tax bills, homeowner
association fees, condominium fees and other assessments.
All closing costs are represented on this statement to
identify the bottom line paid for the property by the
buyer and the bottom line received by the seller.
Disclosures before the closing/settlement
According to RESPA, all Affiliated Business Arrangements
(AfBA) must be disclosed to the consumer. An AfBA is
an arrangement in which a person who is in a position
to refer business in connection with a real estate
transaction has an ownership interest in a provider
of settlement services and such person refers or influences
the selection of that provider. The referring party
must give the AfBA disclosure to the consumer at or
prior to the time of referral. The disclosure must
describe the business arrangement that exists between
the two providers and give the borrower an estimate
of the second provider's charges.
Except in cases where a lender refers a borrower to
an attorney, credit reporting agency or real estate appraiser
to represent the lender's interest in the transaction,
the referring party may not require the consumer to use
the particular provider being referred.
Disclosures at settlement
The Initial Escrow Statement itemizes the estimated taxes,
insurance premiums and other charges anticipated to
be paid from the escrow account during the first twelve
months of the loan. It lists the escrow payment amount
and any required cushion. An Annual Escrow Statement
must be also delivered to the borrower once a year.
Disclosures after settlement
Besides the Annual Escrow Statement, RESPA requires a
Servicing Transfer Statement to be sent to the consumer
if the loan servicer sells or assigns the servicing
rights to a borrower's loan to another loan servicer.
The loan servicer must notify the borrower 15 days
before the effective date of the loan transfer. The
notice must include the name and address of the new
servicer, toll-free telephone numbers, and the date
the new servicer will begin accepting payments.
Prohibited practices
RESPA also outlines certain prohibited practices by those
involved in the real estate settlement. Those sections
of main interest include:
Section 6
Section 6 of RESPA provides borrowers with consumer protections
relating to the servicing of their loans. If a borrower
sends a “qualified written request” to
his loan servicer concerning the servicing of the loan,
the servicer must provide a written acknowledgment
within 20 business days of receipt of the request.
Not later than 60 business days after receiving the
request, the servicer must make any appropriate corrections
to the borrower’s account, and must provide a
written clarification regarding any dispute. During
this 60-day period, the servicer may not provide information
to a consumer reporting agency concerning any overdue
payment related to such period or qualified written
request.
Section 6 of RESPA also provides for damages and costs
for individuals or classes of individuals in circumstances
where servicers are shown to have violated the requirement
of that Section.
Section 8
Section 8 of RESPA prohibits a person from giving or
accepting any thing of value for referrals of settlement
service business related to a federally related mortgage
loan. It also prohibits a person from giving or accepting
any part of a charge for services that are not performed.
These are also known as kickbacks, fee-splitting and
unearned fees.
Violations of Section 8 are subject to criminal and
civil penalties. According to HUD, a person who violates
Section 8 may be fined up to $10,000 and imprisoned up
to one year. In a private law suit a person who violates
Section 8 may be liable to the person charged for the
settlement service an amount equal to three times the
amount of the charge paid for the service.
Section 9
Section 9 of RESPA prohibits home sellers from requiring
home buyers to purchase their settlement services from
a particular company either directly or indirectly,
as a condition of sale. Buyers may sue a seller who
violates this provision for an amount equal to three
times all charges made for the title insurance.
Section 10
Section 10 of RESPA limits the amount of money a lender
may require the borrower to hold in an escrow account
for payment of taxes, hazard insurance and other charges
related to the property. RESPA does not require lenders
to impose an escrow account on borrowers; however,
certain government loan programs or lenders may require
escrow accounts as a condition of the loan.
RESPA also prohibits a lender from charging excessive
amounts for the escrow account. The lender may require
a borrower to pay into the escrow account no more than
1/12 of the total of all disbursements payable during
the year, plus an amount necessary to pay for any shortage
in the account. In addition, the lender may require a
cushion, not to exceed an amount equal to 1/6 of the
total disbursements for the year. The lender must perform
an escrow account analysis once during the year and notify
borrowers of any shortage. Any excess of $50 or more
must be returned to the borrower.
RESPA enforcement
RESPA also outlines enforcement measures for any violation
of the rule. Civil law suits
Individuals have one year to bring a private law suit
to enforce violations of Section 8 or 9, according
to HUD. A person may bring an action for violations
of Section 6 within three years. Lawsuits for violations
of Section 6, 8, or 9 may be brought in any federal
district court in the district in which the property
is located or where the violation is alleged to have
occurred.
HUD, a state attorney general or state insurance commissioner
may bring an injunctive action to enforce violations
of Section 6, 8 or 9 of RESPA within three years.
Loan servicing complaints
Section 6 provides borrowers with important consumer
protections relating to the servicing of their loans.
Under Section 6 of RESPA, borrowers who have a problem
with the servicing of their loan (including escrow
account questions), must contact their loan servicer
in writing, outlining the nature of their complaint.
The servicer must acknowledge the complaint in writing
within 20 business days of receipt of the complaint.
Within 60 business days the servicer must resolve the
complaint by correcting the account or giving a statement
of the reasons for its position. Until the complaint
is resolved, borrowers should continue to make the
servicer's required payment.
A borrower may bring a private law suit, or a group
of borrowers may bring a class action suit, within three
years, against a servicer who fails to comply with Section
6’s provisions. Borrowers may obtain actual damages,
as well as additional damages if there is a pattern of
noncompliance.
Other enforcement actions
Under Section 10, HUD has authority to impose a civil
penalty on loan servicers who do not submit initial
or annual escrow account statements to borrowers.
* Re-printed
with permission from RESPAnews.com
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