Real Estate Settlement Procedures Act (RESPA) Definition
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.
A Little More on What is the Real Estate Settlement Procedures Act
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.
References for the Real Estate Settlement Procedures Act
Academic Research on Real Estate Settlement Procedures Act (RESPA)
The value of the sunshine cure: The efficacy of the Real Estate Settlement Procedures Act disclosure strategy, Shroder, M. D. (2007). Cityscape, 73-91. This paper investigates the efficiency of the disclosure strategy of RESPA and presents four critical questions in the evaluation of the effectiveness of federally obligated disclosure by itself as a strategy of regulation. It also shows preliminary tests carried out on the issues discussed from a small and unrepresentative sample of FHA-insured loans.
Federal Regulation of Home Closings-The Real Estate Settlement Procedures Act of 1974, Hisrchler, E. S. (1975). U. Rich. L. Rev., 10, 63. This paper explains some of the necessary reforms in the real estate process that were instituted by Congress due to high settlement charges caused by abusive practices in some parts of the US. It then lists the purpose of RESPA and how the regulations under it will accomplish these purposes
An Implied Cause of Action under the Real Estate Settlement Procedures Act, Sagers, C. L. (1997). Michigan Law Review, 95(5), 1381-1403. This article presents explains the tax and insurance obligations that are subjected to various mortgage properties. It also describes how foreclosure is not always a sufficient remedy to real estate lenders when borrowers fail to meet these types of obligations since the properties may be subjected to liens that are superior to the mortgage. The lenders, therefore, require borrowers to make regular deposits to escrow accounts from which tax and insurance charges could be paid.
A Product of Compromise: Or Why Non-Pecuniary Damages Should Not Be Recoverable Under Section 2605 of the Real Estate Settlement Procedures Act, Mahaffey Jr, G. S. (2002). U. Dayton L. Rev., 28, 1. This study first provides the Federal Rule of Civil Procedure that states that a court may dismiss a complaint if a claim is not stated for which relief may be granted. The study then goes on to state the reasons why the non-pecuniary damages should not be recovered under section 2605 of RESPA.
Real Estate Settlement Procedures Act of 1974, Suess, S. (1975). Indiana Law Review, 9(1), 299-305. The paper explains RESPA as an act formed by Congress to give better disclosures of settlement costs to buyers and sellers of homes and also to abolish some abusive practices that plagued the process of real estate settlement. It also explains the various changes and amendments made on RESPA since it was enacted.
Real Estate Settlement Procedures Act, Regulation, X. (2014). Banks have to give new consumer cost disclosures, including amended RESPA core disclosure forms. (Effective 1/2010). This article explains the work of RESPA in regulating settlement costs through obligating, lenders and other home loans servicers to provide borrowers with disclosures that enable them to understand real estate transactions, the current consumer protection laws, and settlement services as well as relevant information that is necessary for the real estate settlement process.
The Lender’s Labyrinth and the Banker’s Burden: The Real Estate Settlement Procedures Act of 1974 and the 1975 Amendents, Murphy, L. K. (1976). Land & Water L. Rev., 11, 383. This paper reviews the legislative history of RESPA and clarifies various amorphous sections of the act, their interpretations, regulations as well as their realities of settlement closings. The RESPA amendments of 1975 increase the mandates of attorneys representing parties involved in various mortgage home closings and also have controversial value for their intended home buyers.
Real Estate Settlement Procedures Act of 1974: Federal Controls in Residential Real Estate Transactions, the, Pedowitz, J. M. (1975). NY St. BJ, 47, 264. This article details the federal enforcers of transactions under RESPA. It explains that after RESPA was formed, the enforcement was under the US Department of Housing & Urban Development. Later the implementation changed hands and fell under the Consumer Financial Protection Bureau because of the legislation of Wall Street Reform and Consumer Protection.
The Real Estate Settlement Procedures Act of 1974, as Amended in 1975, Darrow, M. (1975). This study presents the RESPA bill that was adopted in 1974 and that aimed at solving the abuses and high settlement services costs through regulating the underlying business practices in the industry. It also presents the amendments made to RESPA in 1975 that called for a repeal of the sections that required a constant settlement statement, beforehand disclosures of the settlement costs and the advance disclosure to buyers of the previous selling price.
Real Estate Settlement Procedures Act, CC, C. C. (2015). This research presents background information and the various optional extensive examination methods for the Real Estate Settlement Act. It is used by examiners to determine the relevant methods after the completion of a compliance core assessment listed in the large bank supervision or the community bank supervision.
Statutory Interpretation Real Estate Settlement Procedures Act, Hawkins, D. (2018). Wisconsin Law Journal. This paper explains the statutory interpretation of the Real Estate Settlement Procedures Act using a case study of Kelly Jean Linderman V. US National Bank Association. The paper discusses how Kelly moved out of her home and stopped paying the loan secured by a mortgage on the house. The US bank that owned the mortgage started foreclosure proceedings, but Kelly stated that she was not notified.