What is RESPA?
In the mortgage process, you’ll come across a lot of acronyms — ARM, FHA, PMI and more. While some of these terms won’t impact your specific experience, there’s one acronym that all borrowers should know: RESPA. What does it stand for, and why should you care? Let’s find out.
What is RESPA?
The acronym RESPA stands for the Real Estate Settlement Procedures Act, a federal law in place since 1975. While Congress has made changes to RESPA since its enactment, at its core, the purpose of the law has remained the same: to keep consumers safe and informed when they are buying a house.
“Buying a home can be a little scary at times, mainly because it’s the largest purchase a person is usually involved in, and it’s not something someone does every day,” says Mark J. Schmidt, a real estate agent with RE/MAX Country in Milltown, New Jersey. “That’s where the Real Estate Settlement Procedures Act comes in. RESPA is there to protect consumers throughout the homebuying process.”
This process involves several parties: agents, appraisers, attorneys, home inspectors, loan officers and underwriters, title company reps. Part of RESPA’s aim is to oversee that entire ecosystem.
What does RESPA cover?
There’s a lot involved in this legislation, which is part of TILA-RESPA Integrated Disclosures (TRID), a combination of RESPA and the Truth in Lending Act. But three key areas matter most for homebuyers: offering a transparent look at your loan costs, eliminating kickback fees and regulating escrow accounts.
1. Settlement costs
There is a range of closing costs homebuyers need to pay before a home is officially theirs. These are also known as settlement costs, and they include transfer taxes, title insurance, recording fees, origination charges and more.
RESPA requires that you receive estimates of these costs, along with complete information on your interest rate, your monthly payments and other details. This is documented in the loan estimate, which RESPA requires you receive within three days of applying for a loan. Then, at least three days before you’re scheduled to close your loan, RESPA requires you receive a closing disclosure from your lender to verify how much you’ll actually pay and other details pertaining to your mortgage.
2. Kickbacks
When you’re buying a home, you buy many other services, too. If you’re a first-time homebuyer, this can be especially overwhelming — after all, you’ve never had a home title or paid for title insurance before, so where do you start?
You may get recommendations about which companies to work with from your real estate agent, your lender or another party. RESPA ensures that these recommendations don’t involve behind-the-scenes money changing hands.
“One of the ways that RESPA protects consumers is by outlawing kickbacks, referral fees and unearned fees,” Schmidt says. “This means that, throughout their purchase, a buyer can feel confident that they are not being overcharged or being convinced to use a certain provider — like a title company or attorney — simply because the agent would get a fee for referring them.”
3. Escrow accounts
In addition to making your mortgage principal and interest payments each month, your mortgage lender will likely have you pay additional funds set aside for homeowners insurance and property taxes. These funds are held in escrow and paid out when they’re due. RESPA ensures that you don’t have to overpay or maintain a larger-than-normal cushion in this account. The law stipulates that each payment can include an amount equal to one-twelfth of the total yearly costs of insurance and taxes, with the ability to charge no more than one-sixth of those yearly costs as a buffer.
Examples of RESPA violations
There are a number of scenarios that could potentially violate RESPA, such as:
- A mortgage lender pays a real estate agent $500 for referring the agent’s client to the lender.
- Your real estate agent refers you to an attorney and gets a portion of the fee you pay for those legal services.
- An appraiser gives a mortgage broker courtside tickets to a professional basketball game in exchange for business.
- Your loan servicing company requires an additional $300 per month for escrow, even though your annual property tax bill will be $2,000.
- A mortgage broker fails to send you an affiliated business disclosure form that acknowledges his company is also part of a network of another company that conducts title searches.
- Your mortgage lender sells your mortgage to another servicer after closing, but it does not inform you of the change.
How RESPA is enforced
The Consumer Financial Protection Bureau (CFPB), a U.S. government agency, is in charge of enforcing RESPA, and violating the law can result in hefty fines. For example, HomeStreet Bank, based in Seattle, paid $1.35 million for RESPA violations in 2019, and Freedom Mortgage Corporation out of Boca Raton, Florida, got hit with a $1.75 million RESPA violation in 2023.
Individual fines can be much smaller. The CFPB charges $97 per penalty, but those can add up to an annual maximum of more than $195,000.
What RESPA means for you
RESPA’s main purpose is to provide consumers with some peace of mind as they’re buying a home. It can be challenging to know who to trust in an industry that sometimes lacks clear price tags on fees, along with occasional aggressive tactics to push you toward a big purchase. RESPA provides some guardrails to keep you protected and informed, from first making an offer to the final stage of getting the keys to your new home.
Hiring a real estate attorney is one of the best ways to make sure that all parties involved in your transaction are compliant with RESPA. An experienced real estate lawyer will be able to identify any warning signs of illegal behavior.
It’s not just the attorney’s job, though. Read through all your RESPA-required paperwork thoroughly — your loan estimate, closing disclosure and any affiliated business disclosures. Do your research on the typical costs of those settlement fees to make sure that the price you’re paying is fair.
If you have reason to believe that a party in the process of buying a home has violated RESPA, you can submit a complaint directly through the CFPB’s website.
FAQs
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RESPA, or the Real Estate Settlement Procedures Act, is a consumer-protection law designed to safeguard homebuyers interests when purchasing real estate. Three main areas it covers are transparency in loan costs, the outlawing of kickbacks, and the regulation of escrow accounts associated with the homebuying process.
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This legislation prohibits a wide range of practices that could cost or mislead homebuyers. For example, it bans real estate agents from accepting kickbacks for referring buyers or sellers to specific service providers. It also prevents lenders from collecting more than is necessary for escrow accounts and requires them to transparently disclose fees and affiliations.
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RESPA rules are enforced by the Consumer Financial Protection Bureau (CFPB).
