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The Real Estate Settlement
Procedures Act (RESPA) is a consumer protection statute, first passed
in 1974. One of its purposes is to help consumers become better
shoppers for settlement services. Another purpose is to eliminate
kickbacks and referrals fees that increase unnecessarily the costs of
certain settlement services. RESPA requires that borrowers receive
disclosures at various times. Some disclosures spell out the costs
associated with the settlement, outline lender servicing and escrow
account practices and describe business relationships between
settlement service providers.
The
Real Estate Settlement Procedures Act (RESPA) applies to almost all
mortgage loans and mortgage companies. RESPA’s purposes are (1) to
help consumers get fair settlement services by requiring that key
service costs be disclosed in advance, (2) to protect consumers by
eliminating kickbacks and referral fees that would unnecessarily
increase the costs of settlement services, and (3) 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 companies 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:
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Disclosures at the time of loan
application. When a potential homebuyer applies for a mortgage loan,
the buyer must receive (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 buyer is required to use a particular settlement
service; and (3) a Mortgage Servicing Disclosure Statement, which
tells the buyer whether the loan will be kept or transferred for
servicing, and also gives information about how the buyer can
resolve complaints. RESPA does not specify penalties when these
three items are not provided, but bank regulators can impose
penalties.
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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.
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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.
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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: (1)
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.
(2) 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. (3) Limits on
escrow accounts: A limit is set on the amount that a borrower is
required to put into an escrow account to pay taxes, hazard insurance,
and other property charges. RESPA does not require an escrow account
on borrowers, but some government loan programs or mortgage companies
may require an escrow account. During the course of the loan, RESPA
prohibits charging excessive amounts for the escrow account. And each
year, the borrower must be notified of any escrow account shortage and
return any excess of $50 or more.
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