The Real Estate Settlement Procedures Act, or “RESPA,” was enacted by Congress in 1975 in order to provide homebuyers and sellers with complete settlement cost disclosures. As a federal statute, it is now regulated by the Consumer Financial Protection Bureau, or “CFPB.”
Simply put, RESPA has regulated mortgage loans that are attached to one-to-four family residential properties. The Act is intended to educate borrowers in terms of their settlement costs, as well as to eliminate kickback practices and referral fees that frequently inflate the cost of obtaining a mortgage.
RESPA applies to the majority of:
- Purchase loans;
- Refinances;
- Property improvement loans; and
- Equity lines of credit.
RESPA requires all of the following parties to provide disclosures to borrowers:
- Lenders;
- Mortgage brokers; and/or
- Servicers of home loans.
These disclosures are required to contain information regarding real estate transactions, settlement services, and consumer protection laws. The disclosure should also contain any other information that is connected to the cost of the real estate settlement process. If there are any business relationships between closing service providers and other parties involved in the settlement process, this information should also be disclosed to the borrower.
Additionally, RESPA prohibits loan servicers from demanding excessively large escrow accounts. The Act also restricts sellers from mandating title insurance companies. In case of violations, the plaintiff has up to one year in which to bring a lawsuit in order to enforce violations that occurred during the settlement process. However, a plaintiff has up to three years in which to bring a lawsuit against their loan servicer.
Prior to RESPA being passed, various parties involved in the home purchase, sale, and lending process would work together to increase fees and costs for their clients. They would then pass on the profits to each other in a variety of different schemes, all without the client’s knowledge.
To reiterate, the Consumer Financial Protection Bureau monitors and prosecutes all violations of the Real Estate Settlement Procedures Act.
For each individual loan, the lender must provide an estimate in good faith of the total cost of the loan, which includes all fees. This is so that buyers will then be fully informed regarding what they are paying for, and who the money is going to.
What Is Forbidden By The Real Estate Settlement Procedures Act?
One of the defining features of RESPA is that the Act has rendered all kickbacks to be illegal. Kickbacks are illicit payments that are made for handling an appointment or transaction.
In terms of the real estate industry, kickbacks are most common during the transaction process. Service companies, such as escrow companies, title companies, and termite companies, will frequently incentivize real estate agents to use their services in exchange for considerably generous gifts.
Another way of putting it is that a kickback is a payment, similar to a fee or commission, that is made to a third party as part of agreement. By nature, a kickback involves collusion and secrecy. Generally speaking, one party will agree to do something illegal for another party in exchange for the kickback.
Here are some specific examples of circumstances involving a kickback:
- A construction company and lender agree to partner and share the proceeds resulting from any maintenance services provided to mortgaged homes. The lender tells all prospective buyers that they are required to use this specific construction company for any maintenance made to the home. The construction company then charges fees that are much higher when compared to all other local construction companies, and gives a portion of those fees to the lender;
- Another example would be if a broker pushes their clients to finance with a specific lender, because the lender provides the broker with a secret 2% bonus on all sold property. This money is then taken from the seller’s profits; and
- A lender forces all applicants to purchase title insurance through a specified company, for an objectively unreasonable amount of money. The title company then returns a portion of the price back to the lender.
How Is The Real Estate Settlement Procedures Act Enforced? How Are Violations Of The Act Addressed?
Despite the Real Estate Settlement Procedures Act, illegal kickbacks in the real estate field still occur relatively frequently. If the recipient of a home loan notices something strange in their account, a “qualified written request” can be sent to the lender. This will request information on any potential errors in the account. However, this system almost entirely relies on the honesty of the lender.
As previously mentioned, the plaintiff has up to one year in which to bring a lawsuit to enforce violations when kickbacks or other impropriety occurred during the settlement process.
If the grievance is with the loan servicer, there are specific steps that the borrower must follow before any suit can be filed. Although the exact process may vary, it generally proceeds as follows:
- The borrower must contact their loan servicer, in writing, detailing the nature of their issue or complaint;
- The servicer is required to respond to the borrower’s complaint, in writing, within twenty business days of receipt of the complaint; and
- The servicer has sixty business days in which to correct the issue, or provide their reasons regarding the validity of the account’s current status.
It is imperative to note that borrowers should continue to make the required payments until the issue is resolved. Failure to do so could result in further legal issues, such as foreclosure.
To reiterate, a plaintiff has up to three years in which to bring a suit for specific improprieties against their loan servicer. Any of these suits may be brought in any federal district court, if the court is located either in the district in which the property is located, or if it is in the district in which the RESPA violation occurred.
What Else Should I Know About My Rights As A Home Seller In General?
As a home seller, you have many rights to protect you and guide you through the process. Generally speaking, a home seller can legally do the following:
- Advertise the property;
- Request a home inspection; and
- Set a reasonable price for the home, or hire a real estate agent to complete these tasks.
Additionally, you may set certain conditions before the actual purchase of the home. An example of this would be how you may request a specific amount of deposit before the closing or verification of the mortgage loan.
Home sellers also have the right to either accept an offer to purchase their home, or refuse the offer, assuming the reason is legitimate. However, the Fair Housing Act prohibits property discrimination, such as refusing to sell your home to an otherwise qualified purchaser because of their race. You also have the right to legal representation throughout the process.
Do I Need An Attorney For Issues Associated With The Real Estate Settlement Procedures Act?
If you are involved in a real estate transaction and are experiencing any issues, especially those that may be a RESPA violation, you should consult with an area real estate attorney.
An experienced and local real estate lawyer will be aware of your state’s specific laws regarding real estate and kickbacks, and can provide you with the best information in terms of your rights and legal options under those laws. Additionally, your real estate lawyer will also be able to represent you in court, as needed.
