What is the Real Estate Settlement Procedures Act (RESPA)?

Robinhood Learn
Democratize finance for all. Our writers’ work has appeared in The Wall Street Journal, Forbes, the Chicago Tribune, Quartz, the San Francisco Chronicle, and more.
Definition:

The Real Estate Settlement Procedures Act (RESPA) is a law that requires certain disclosures to be made during the real estate settlement process and prohibits kickbacks to settlement providers.

🤔 Understanding the Real Estate Settlement Procedures Act (RESPA)

The Real Estate Settlement Procedures Act (RESPA) is a law that seeks to protect homebuyers by making the real estate settlement process (the final part of a real estate transaction) less expensive and more transparent. RESPA includes two main parts. First, it states that home settlement providers, such as lenders, mortgage brokers, etc., must make certain disclosures about the settlement process to borrowers. Second, it prohibits certain once-common practices such as kickbacks (bribing real estate agents to use a particular service) and referrals, which helps keep costs lower for homebuyers. Overall, it seeks to inform buyers about the real estate settlement process and protect them from price-raising practices like accepting kickbacks.

Example

Imagine you are buying a house and are nearing the end of the sale. During the settlement process, the final step in the transaction during which ownership is transferred to you, your lender is required to make certain disclosures. The Real Estate Settlement Procedures Act (RESPA) mandates these disclosures. They include information about the fees of the settlement, lender servicing, the lender’s business arrangements, and escrow account practices.

Takeaway

The Real Estate Settlement Procedures Act (RESPA) is kind of like a truth serum...

It forces lenders and other settlement providers to be transparent with borrowers and disclose how much everything will cost, what their business relationships are, how their servicing works, etc. Plus, it also dissuades them from earning any kickbacks (illicit bribes). This makes it easier to confidently purchase a new home.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.
Sign up for Robinhood
Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

Tell me more…

What is the Real Estate Settlement Procedures Act (RESPA)?

The Real Estate Settlement Procedures Act (RESPA) is a law passed by Congress in 1974 that makes it mandatory for real estate agents and everyone involved in the home settlement process to make full disclosures about all costs involved.

The law attempts to increase transparency around the home settlement process and reduce costs for buyers by eliminating price-raising practices like accepting kickbacks and referral fees.

Initially, the U.S. Department of Housing and Urban Development (HUD) enforced RESPA. But after the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) took over responsibility for the enforcement of the law.

When you buy a home, there are a few different stages. First, you look around for a home and attend viewings. When you find a home you like, you typically make an offer, negotiate, get an inspection, and hire an appraiser.

If everything checks out, you enter the final stage of the home buying process: settlement. During the settlement process, you’ll tie up all the loose ends and transfer the title into your name. Generally, you’ll confirm a title search, sign the mortgage contract, and make payments. In the end, you’ll walk away with the keys, and you’ll own a new home.

Unfortunately, it’s very easy to get lost in all the piles of paperwork you need to sign, and that leaves room for real estate agents and other people involved in the settlement process to take advantage of you.

For example, lenders or escrow agents could offer kickbacks (bribes) to real estate agents if they get you to use their services, even if it’s not in your best interest. Settlement providers could also keep you in the dark about your rights, causing you to make uninformed decisions that may hurt you in the long run.

RESPA guards against these deceptive practices. Under RESPA, settlement providers (real estate agents, lenders, escrow agents, title companies, etc.) are required to make disclosures about the costs of the services rendered, relationships between the businesses involved, and applicable consumer protection laws. Plus, it prohibits kickbacks and other similar practices.

What is the purpose of RESPA?

RESPA has two primary purposes.

First, it serves to increase transparency and reduce consumer confusion about the home settlement process. To achieve this, RESPA mandates that lenders and other settlement service providers must disclose estimates of closing costs, consumer rights, and business relationships.

For example, before October 3, 2015, RESPA required lenders to make good faith estimates (GFEs) about the total cost of a home loan, itemizing all the associated fees. On October 15, 2015, the Loan Estimate and Closing Disclosure Form replaced good faith estimates, but the concept is still the same, albeit with minor tweaks.

Second, RESPA makes practices like receiving kickbacks and referrals illegal. In essence, kickbacks are bribes that one settlement provider may offer another in exchange for using their services. For example, a lender might offer a real estate agent money if they convince their client to use them for a mortgage loan.

Overall, RESPA aims to protect consumers who are going through the home buying process by ensuring they have all the information they need and by prohibiting predatory practices.

What does RESPA apply to?

RESPA applies to all federally related mortgage loans that meet specific criteria:

  • Loans that have a first or subordinate lien (a lien that can only be paid after a first lien is paid off) on residential property within a state with either a one-to-four family structure or a manufactured home
  • Loans with a first or subordinate lien that will be used to build a one-to-four family structure or manufactured home on residential property within a state

If either of those conditions is met, the loan must then fall into one of the following categories:

  • The loan is made by a lender, creditor, or dealer
  • The loan is provided or insured by one of the federal government’s agencies
  • The loan is connected with one of the federal government’s housing or urban development programs
  • The loan is intended to be sold to FNMA (The Federal National Mortgage Association/Fannie Mae), GNMA (The Government National Mortgage Association/Ginnie Mae), or FHLMC (The Federal Home Loan Mortgage Corporation/Freddie Mac)
  • The loan is part of either a reverse mortgage or a home equity conversion mortgage issued by a lender, and needs to follow RESPA regulations

There are several exemptions, as well. For example, RESPA does not apply to loans for properties that will be primarily used for business.

What are the RESPA requirements?

RESPA requires mortgage lenders to make timely disclosures about all settlement costs and to provide information about the settlement process.

This includes alerting the homebuyer to any applicable consumer protection laws, affiliated business arrangements between settlement service providers that may create a conflict of interest, and any fees that may factor into the cost of a loan (origination fees, credit report pull fees, etc.).

The lender must also provide the borrower with a list of local homeownership counseling organizations.

In closed-end reverse mortgages (a specific type of loan for seniors), the settlement provider must give the buyer a HUD-1 Settlement Statement.

What is prohibited by RESPA?

RESPA prohibits several activities:

  • Kickbacks, referrals, and fee-splitting: RESPA prohibits any settlement service providers from offering kickbacks or referral fees for using their business.
  • Unearned fees: No one can pay or charge for a service that was not performed.
  • Limiting buyer choice: Home sellers cannot make the usage of a specific settlement service provider a condition for the sale of a home.
  • Excessive escrow fees: Mortgage lenders cannot charge excessive amounts for escrow accounts.

What are RESPA exemptions?

RESPA has the following exemptions:

  • Loans used for business: If the loan is used for a property that will primarily be used for business, RESPA does not apply.
  • Temporary loans: RESPA does not apply to temporary construction, bridge, or swing loans. However, if the construction loan is used to build a one-to-four-family residential property, RESPA still applies.
  • Vacant land: If a loan is secured by vacant land and no structures are built on it within two years, RESPA does not apply.
  • Assumptions without lender approval: If a mortgage is transferred (assumed) from one borrower to another without the approval of the lender, RESPA does not apply.
  • Loan conversions: If a loan conversion stays consistent with the principles of the original loan, it is exempt from RESPA.
  • Secondary market transactions: Loans that are bought or sold on the secondary market are not subject to RESPA except under very specific circumstances.

What are RESPA escrow rules?

When something is in escrow, it means that there is an agreement between two parties, such as a lender and borrower, that certain funds will only be disbursed from one party to another if certain conditions are met. Until then, the money is held by a neutral third-party.

RESPA limits the amount of money that lenders may require buyers to hold in an escrow account as a cushion. For example, some lenders may ask buyers to hold unreasonable amounts of money in escrow to cover environmental hazards, taxes, and title insurance, etc. RESPA sets limits on how much buyers are required to keep in escrow.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

1174919

Related Articles

You May Also Like

The 3-minute newsletter with fresh takes on the financial news you need to start your day.
The 3-minute newsletter with fresh takes on the financial news you need to start your day.


© 2021 Robinhood. All rights reserved.

This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Robinhood Financial LLC provides brokerage services. Robinhood Securities, LLC, provides brokerage clearing services. Robinhood Crypto, LLC provides crypto currency trading. Robinhood U.K. Ltd (RHUK) provides brokerage services in the United Kingdom. All are subsidiaries of Robinhood Markets, Inc. ('Robinhood').

1476799