Real Estate Settlement Procedures - Information and Advice
"Your rights under the Real Estate Settlement
Procedures Act."
Real Estate Settlement Procedures Act
This law protects consumers from abuses during the residential real estate
purchase and loan process and enables them to be better informed shoppers by
requiring disclosure of costs of settlement services.
The U.S. Department of Housing and Urban Development’s (HUD) Federal Housing
Administration (FHA) administers several regulatory programs to ensure equity
and efficiency in the sale of housing.
One of these programs, under the Real
Estate Settlement Procedures Act (RESPA), applies to almost all mortgage loans
and lenders, not just FHA-insured mortgages.
RESPA’s purposes are:
- To help consumers get fair settlement services by requiring that key
service costs be disclosed in advance,
- To protect consumers by eliminating kickbacks and referral fees that would
unnecessarily increase the costs of settlement services
- To further protect consumers by prohibiting certain practices that
increase the cost of settlement services.
RESPA protects consumers by mandating a series of disclosures that prevent
unethical practices by mortgage lenders and that provide consumers with the
information to choose the real estate settlement services most suited to their
needs.
The disclosures must take place at various times throughout the
settlement process:
- Disclosures at the time of loan application
- Disclosures before settlement (closing) occurs
- Disclosures at settlement
- Disclosures after settlement
• Disclosures at the time of loan application. When a potential homebuyer
applies for a mortgage loan, the lender must give the buyer (1) a Special
Information Booklet, which contains consumer information on various real estate
settlement services; (2) a Good Faith Estimate of settlement costs, which lists
the charges the buyer is likely to pay at settlement and states whether the
lender requires the buyer to use a particular settlement service; and (3) a
Mortgage Servicing Disclosure Statement, which tells the buyer whether the
lender intends to keep the loan or to transfer it to another lender for
servicing, and also gives information about how the buyer can resolve
complaints.
RESPA does not specify penalties for lenders that fail to provide
these three items, but bank regulators can impose penalties on lenders.
• Disclosures before settlement (closing) occurs. (1) An Affiliated Business
Arrangement Disclosure is required whenever a settlement service refers a buyer
to a firm with which the service has any kind of business connection, such as
common ownership. The service usually cannot require the buyer to use a
connected firm. (2) A preliminary copy of a HUD-1 Settlement Statement is
required if the borrower requests it 24 hours before closing. This form gives
estimates of all settlement charges that will need to be paid, both by buyer and
seller.
• Disclosures at settlement. (1) The HUD-1 Settlement Statement is required to
show the actual charges at settlement. (2) An Initial Escrow Statement is
required at closing or within 45 days of closing. This itemizes the estimated
taxes, insurance premiums, and other charges that will need to be paid from the
escrow account during the first year of the loan.
• Disclosures after settlement. (1) An Annual Escrow Loan Statement must be
delivered by the servicer to the borrower. This statement summarizes all escrow
account deposits and payments during the past year. It also notifies the
borrower of any shortages or surpluses in the account and tells the borrower how
these can be paid or refunded. (2) A Servicing Transfer Statement is required if
the servicer transfers the servicing rights for a loan to another servicer.
Along with these disclosures, RESPA protects consumers by prohibiting several
other practices:
- Kickbacks, fee-splitting, and unearned fees
- Seller-required title insurance
- Limits on escrow accounts
Kickbacks, fee-splitting, and unearned fees: Anyone is
prohibited from giving or accepting a fee, kickback, or any thing of value in
exchange for referrals of settlement service business involving a federally
related mortgage loan, which covers almost every loan made for residential
property.
RESPA also prohibits fee-splitting and receiving unearned fees for
services not actually performed. Violations of these RESPA provisions can be
punished with criminal and civil penalties.
Seller-required title insurance: A seller is prohibited from requiring
a homebuyer to use a particular title insurance company. A buyer can sue a
seller who violates this provision.
Limits on escrow accounts: A limit is set on the amount that a lender
may require a borrower to put into an escrow account to pay taxes, hazard
insurance, and other property charges.
RESPA does not require lenders to impose an escrow
account on borrowers, but some government loan programs or lenders may require
an escrow account.
During the course of the loan, RESPA prohibits a lender from
charging excessive amounts for the escrow account. And each year, the lender
must notify the borrower of any escrow account shortage and return any excess of
$50 or more.
Related Pages
Mortgage Broker
- Questions to Ask - Questions to ask your prospective mortgage
broker about home loans, mortgages, and getting the lowest mortgage rates.
Finding A Good
Realtor - Tips on finding a good realtor - Questions to ask and key
financial points of real estate contracts.
Mortgage Terms
- Information on mortgage terms and what they mean in plain English - View
mortgage rates and learn home equity borrowing tips.
Seller Disclosure
- What needs to be included on the seller disclosure form - What to expect in
your home inspection and termite inspection.
Real
Estate Agent - New Construction - Use a real estate agent to protect
your interests when your new home is also new construction.
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