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

The Real Estate Settlement Procedures Act (RESPA) was adopted as a law by Congress in 1974 with an objective of providing homebuyers and sellers with pertinent and timely disclosures regarding the nature and costs of their real estate settlement or closing process. It also aimed to eliminate the abusive practices (like kickback and referral fees) used by lenders. This practices unnecessarily inflate the cost of a closing.

How Does the Real Estate Settlement Procedures Act Work?

RESPA came into effect in the U.S. on June 20, 1975. It has gone through significant changes and amendments over the years. Initially, the U.S Department of Housing and Urban Development (HUD) was responsible for the implementation and enforcement of the Act. After 2011, the responsibility was transferred to the Consumer Financial Protection Bureau (CFPB) according to the Dodd-Frank Wall Street Reform and Consumer Protection legislation. Since then the responsibility of implementing RESPA falls under the jurisdiction of the CFPB. The Real Estate Settlement Procedures Act requires the mortgage broker, lender, or the servicer of the home loan to provide the borrower with proper disclosure regarding nature and costs involved in the real estate settlement process. It enables the borrower to make an informed decision regarding whether to go forward with the closing or sale or the real estate. The Act regulates the mortgage loans attached to one-to-four family residential properties. It covers the majority of purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. Prior to the enactment of this law, various companies engaged in the real estate business (including the agents, lenders, constructors, and title insurance companies) often used to get involved in providing undisclosed kickbacks to each other and inflating the settlement cost and obscuring price competition. The Act was passed to prohibit these abusive practices and safeguard the interests of the borrowers against such practices. Under this law, the lender, mortgage broker, real estate agent or the servicer of home loans are obligated to provide the buyers with the information regarding real estate transactions, settlement services, applicable consumer protection laws, and all other relevant information related to the cost of a settlement. They also need to disclose if there are any existing business relationships between the service providers and other parties involved in the settlement process. RESPA prohibits kickbacks, referrals and unearned fee and restrains the sellers from mandating a title insurance company for the settlement. It also prohibits the loan servicers from demanding excessively large escrow account for real estate settlement. If a kickback or any other abuse occurs during a settlement process the complainants are allowed to file a lawsuit within one year of the incident.

Procedure for Bringing a Legal Action Under RESPA

According to RESPA, some specific steps are to be followed before bringing a lawsuit by a complainant against a loan servicer. The borrower needs to communicate the issue to the servicer in writing. The servicer has 20 days to respond to the complaint after receiving it and they must respond in writing within this period. The servicer is required to address the issue within 60 business days or must explain the reasons validating their account. All these communications must be done in writing and the servicer also needs to provide the name and contact information of a person with whom the borrower can discuss the matter. During the whole process, the borrower needs to continue the payment until the issue is resolved. A borrower can bring a lawsuit against the mortgage servicer for violating specific provisions of the law within three years of its occurrence. The lawsuit can be filed in any federal district court, either in the district where the property is situated or in the district where the violation occurred.

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