The home buying process involves many parties, from agents and appraisers, to loan officers and underwriters, to home inspectors and title companies. While there are many parties involved, and almost as many acronyms introduced throughout the process, there is a key one that borrowers and real estate agents should become familiar with. It’s RESPA.
What is RESPA?
With a home purchase likely the largest purchase a person makes in their lifetime, and it not being something people do every day, buying a home can be scary. Buyers are likely unaware of all the costs involved—and some servicers try to take advantage of this lack of knowledge.
Hence, Congress enacted the Real Estate Settlement Procedures Act (RESPA) in 1975. RESPA protects consumers during the home-buying process. With many parties involved, the law helps oversee the entire ecosystem to ensure consumers receive fair and honest treatment.
In 2008, the RESPA Reform Rule passed, requiring lenders to use a standardized form to provide buyers with a good faith estimate of charges associated with their mortgages. This estimate should also include an estimated average charge per service so buyers can compare the rate they’re paying with the average rate.
What properties are covered by RESPA?
RESPA regulates mortgage loans attached to one-to-four family residential projects.
Why was RESPA introduced?
RESPA educates borrowers on their settlement costs and eliminates kickback practices and referral fees that otherwise bloat the cost of obtaining a mortgage. In other words, it offers a transparent look at a consumer’s loan costs.
It prohibits kickbacks
Service providers cannot give or receive referral fees. For example, home appraisers cannot pay – whether through cash or gifts – a mortgage broker for referring their services to a client.
It requires fee disclosures
RESPA requires full disclosure of all the costs and fees associated with the sale of a real estate property with one to four units. These disclosures should be provided by mortgage brokers on standardized forms such as good faith estimates and the U.S. Housing and Urban Development settlement statement. It should detail the amounts the buyer and seller will be charged for each service.
It ensures fair prices
If a homebuyer’s costs are inflated beyond what is standard, it can be a RESPA violation. A homebuyer can only be charged the amount paid for third-party services.
Regulates escrow accounts
Lastly, RESPA prevents loan servicers from demanding excessively large escrow accounts.
How is RESPA enforced?
The Consumer Financial Protection Bureau (CFPB) enforces RESPA and violations can result in serious penalties. Today, any mortgage lender offering government-issued or government-backed mortgage loans must comply with RESPA rules or they can face harsh consequences. Providing or accepting kickbacks or referral fees can result in fines of up to $10,000 and up to one year in jail.
Plaintiffs have up to one year to bring a lawsuit to enforce violations where they suspect kickbacks or improper behavior occurred during the settlement process. It is always best to hire a real estate attorney to ensure all parties involved in the transaction are compliant with RESPA. Additionally, attorneys can identify potential warning signs of illegal behavior and guide you through the legal process.
What are examples of RESPA violations?
Some of the most common RESPA violations and penalties are:
- Inflating the cost of services
- Overcharging for common fees
- Giving and receiving cash or gifts in exchange for referrals
- Paying referral fees to an insurance company
- Setting up shell entities to receive referral fees and cover up kickbacks
The penalties can be quite severe—and companies do get caught. One example is Seattle-based HomeStreet Bank who paid $1.35 million in fines for RESPA violations. HomeBank’s now discontinued Home Loan Center-based mortgage banking business line entered into certain co-marketing agreements using online platforms and desk rental agreements. This resulted in the payment of fees to real estate brokers and home builders for their referrals of mortgage loan business.
RESPA exists to protect home sellers and home buyers during real estate transactions. It can be a chaotic time but by better understanding the rules and your rights, you’ll be protected, too.