SolveYourProblem
Real Estate Article Series
What is RESPA
(Real Estate Settlement Procedures Act)?
The United States Department of Housing and
Urban Development (HUD) drafted and enacted the Real Estate
Settlement Procedures Act (RESPA) more than 30 years ago as
a consumer protection statute designed to help home
buyers navigate their way through the sometimes complicated
business
of real estate. Specifically, RESPA addresses the issue of
home buying closing costs and settlement procedures.
Under the terms of RESPA, home
buyers are entitled to receive certain disclosures during
the course of a real estate transaction. The law also prohibits kickbacks and referral fees that unnecessarily
inflate the cost of settlement services and therefore falsely
driving up the cost buying a home. RESPA provisions apply to
loans secured with a mortgage on residential properties designed
to house one to four families. Examples of the types of loans
covered by RESPA include:
- Purchase loans
- Assumptions
- Refinancing loans or measures
- Property improvement loans
- Lines of credit based on equity
An office within HUD, called ‘RESPA and Interstate Land Sales’
enforces the RESPA statute. Buyers may contact the office directly
if they think the terms of closing and settlement in their
house deal do not respect RESPA provisions.
RESPA
stipulates that certain disclosures be made at particular
times during the real estate transaction process. When a buyer
goes to apply for a mortgage loan, his or her broker or lender
must provide – either at the time of the application or by
mail within three days – a Special Information Booklet, a Good
Faith Estimate (GFE) of potential settlement fees, and a Mortgage
Servicing Disclosure Statement.
The Special Information is required for home purchases only,
and contains details about different kinds of real estate settlement
services. The GFE outlines the type and amount of settlement
costs the buyer will likely encounter when his or her house
deal closes, as well as whether the broker or lender requires
the buyer to use a particular settlement services vendor. The
figures in the GFE are estimates, but they should be relatively
close to the actual settlement costs at closing. Finally, the
Mortgage Servicing Disclosure Statement reveals whether the
broker or lender will handle the buyer’s loan or whether it
will be transferred to another lender. The Mortgage Servicing
Disclosure Statement should also have a section dedicated to
options the buyer may employ to resolve any complaints.
If
the buyer decides to go ahead with the transaction after
securing appropriate financing, the next RESPA-required disclosure
is an Affiliated Business Arrangement disclosure (AFBA),
which is used if a settlement service vendor or provider refers
the
buyer to another provider that is affiliated with the original
service provider. The affiliation can be part or full ownership
of any other beneficial interest. The AfBA disclosure must
be made before or at the time the referral is made, and it
must give a full description of the relationship that exists
between the two companies as well as a reasonable estimate
of the fees of the second settlement service provider. In most
cases, the buyer is not obligated to accept the services offered
by the second service provider, but he or she may choose to
do so.
One
day before the settlement (or closing) date, the borrower
may see the HUD-1 Settlement form, which details all settlement
charges imposed on borrowers and sellers. All parties receive
a complete copy of this form, showing all of the actual settlement
costs, at the time of settlement, or in the mail shortly thereafter.
Another disclosure that is made at the time of settlement
is the Initial Escrow Statement, which lists the estimates
of charges that are expected to be paid from the escrow account
during the first year of the loan. Charges may include taxes
and insurance premiums. After the first year, loan servicers
must provide borrowers with an updated annual escrow, which
lists all deposits and payments, as well as any relevant shortages
or surpluses related to the account.
If, at some point after the settlement occurs, the loan servicer
reassigns the loan to another servicer, the borrower must be
notified 15 days in advance by means of a Servicing Transfer
Statement.
While RESPA does not set out particular penalties for non-disclosure
of the above mentioned items, kickbacks and referral fees that
violate Section 8 of the law are subject to fines of up to
$10,000 and imprisonment for up to one year.
Settlement
or closing fees cost Americans about $55 billion each year. HUD has initiated a RESPA reform process that the
department hopes will simplify the costs involved with buying
a home to better reflect the Bush administration’s goal of
helping to build an ‘ownership society’ in which all Americans
can own their own home. The reform process has not been completed,
and for now, the rules remain as they have been for the past
three decades.
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SolveYourProblem.com : 2007
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