One of the most complex financial transactions you’re likely to be involved with is buying a home. After all, the mortgage documents alone can be dozens of pages — many of them steeped in legalese.
However, there are regulations designed to at least give you the information you need upfront. The Real Estate Settlement Procedures Act (RESPA) requires mortgage lenders and servicers to let you know how much you are likely to pay in total, as well as disclose other important information about the settlement process. Once you understand the basics of RESPA, you’re more prepared to be a savvy consumer as you make a home purchase.
So, what is RESPA, and what does it cover? Let’s take a closer look.
What Is the Real Estate Settlement Procedures Act?
Congress passed RESPA in 1974, and it went into effect in 1975. For the most part, RESPA is designed to ensure that homebuyers are educated about the terms of their mortgage agreement. A RESPA disclosure is designed to let borrowers know what’s included in the settlement, what fees are involved, and what laws protect them.
Originally, RESPA enforcement was handled by the Department of Housing and Urban Development. However, over time, the enforcement of the requirements listed in RESPA became the responsibility of the Consumer Financial Protection Bureau (CFPB).
What Does RESPA Cover?
For the most part, according to Tia Elbaum, a spokesperson for the CFPB, RESPA outlines the processes required in a real estate transaction, and she specifically points to homebuyers as those who can potentially benefit from the disclosures that come when mortgage lenders and servicers follow the requirements.
First of all, a RESPA disclosure is designed to let a homebuyer — usually someone purchasing a one-to-four unit residential property — know exactly what fees and services they can expect to pay as part of the real estate settlement process. RESPA does not cover loans if the borrower plans to use the property for agriculture or real estate.
Part of understanding these costs is looking at the good faith estimate, which is also included with your disclosure documents. A good faith estimate provides you with an expected total amount paid once fees and interest are accounted for. And, while the numbers can change a bit between the time of the estimate and the closing, it should give you a pretty good idea of what to expect.
On top of that, RESPA also requires that lenders and servicers offer information about consumer protection and processes for filing complaints.
Another purpose of RESPA is to ban certain activities on the part of a “settlement service provider.” Elbaum points out that such a service provider could include a real estate agent, loan originator, lender, title company, or any other person involved with the process. Some of the banned activities include:
- Compensation for referrals
- Unearned fees
- Excessive escrow requirements
- Requiring specific title insurance companies
Elbaum points to this example provided by the CFPB’s RESPA Frequently Asked Questions:
[I]f a settlement service provider gives current or potential referral sources tickets to attend professional sporting events, trips, restaurant meals, or sponsorship of events (or the opportunity to win any of these items in a drawing or contest) in exchange for referrals as part of an agreement or understanding, such conduct violates RESPA Section 8(a).
You should also receive information about any type of affiliate relationship your mortgage lender has with other providers. For example, if the title insurance company has a common parent company with your mortgage lender, the lender must let you know under RESPA disclosure rules. You should have an idea of what types of business relationships exist — and have a chance to look elsewhere for settlement services.
How Does RESPA Help Homebuyers?
The main aim of RESPA is to help homebuyers by requiring mortgage lenders and others to disclose costs and fees associated with the process, as well as provide information that consumers need to make informed choices.
“The idea was that if consumers were told upfront what they’d get and what they’d pay for it, they could shop around,” says Jay Hack, an attorney at Gallet Dreyer & Berkey, LLP in New York. “Presumably, the buyer could choose the cheapest service providers, rather than what the lender insisted on.”
Additionally, the text of the law specifically states that one of the aims of RESPA is to eliminate kickbacks and referral fees that can add to the cost of a real estate transaction. Hack points out that under the law, service providers can only be paid according to the work done. On top of that, you can’t be required to use a specific service. “Kickbacks and referral fees used to be common practices in the 1970s,” Hack says. “It’s a huge benefit to consumers that this practice is gone.”
Hack also says that RESPA requires lenders to provide numbers regarding fees upfront, so you have an idea of what’s involved. While some numbers might change a little bit, especially if the closing takes a long time to arrange, some fees that can’t change at all.
“If you end up getting overcharged, the lender has to return that money to you,” Hack says.
Another way that RESPA can potentially help homebuyers is by providing a way for them to file a complaint as a way to receive restitution if they feel like they’ve been taken advantage of.
Enforcement of RESPA
First of all, it’s possible to file a complaint using the CFPB Consumer Complaint Database. The CFPB can use the information to push for change, as well as fine lenders that continue to violate code.
Hack says it makes more sense to file a CFPB complaint and get help with restitution. “In general, you’re not going to sue the lender directly,” he says. “You wouldn’t want to sue to get back $50. For the most part, once you file the complaint, and it’s verified, you get your restitution. Most lenders will automatically send you a check if they discover a mistake.”
Hack points out that RESPA violations are relatively rare because the law has been in place for so long that most lenders know what’s illegal. “If you’re a homeowner, you don’t even realize that it used to be a problem,” Hack says. “Most of the stuff RESPA was created to address just isn’t being done anymore.”
Criticism of RESPA
One of the main criticisms of RESPA is that it doesn’t actually protect borrowers and homebuyers in the way it was intended to.
According to a 2011 paper titled: “The limits of RESPA: An empirical analysis of the effects of mortgage cost disclosures” published in the Housing Policy Debate journal, closing costs and additional fees increased since the passage of RESPA. Additionally, the authors of the paper, Elizabeth Renuart and Jen Douglas, suggest that the law did very little in preventing bait and switch schemes and the good faith estimate isn’t always as accurate as it should be.
Hack suggests that the huge number of disclosures is actually a larger issue.
“The biggest problem with RESPA is that lenders are required to provide so much information in the form of disclosures,” he says. “It bombards a consumer with so much information that it is unfair to expect the average person to be able to absorb it effectively.”
Through the years, though, RESPA has evolved to address issues as they crop up, Hack says. “RESPA has a bad rap in some circles,” he says. “But the good things are issues that no longer arise because everyone knows they’re illegal.”
Overall, consumers want to arm themselves with knowledge and take the time to read each discourse thoroughly. Ask your lender questions for anything you don’t understand.