The Real Estate Settlement Procedures Act (or RESPA) is a federal regulation that governs certain aspects of the closing and settlement process in a real estate transaction. Designed to protect consumers who are buying houses, the U.S. Department of Housing & Urban Development (HUD) enforces RESPA. Essentially, RESPA requires that buyers be given certain disclosures or information at various points during the purchase process, and outlaws kickbacks that might increase the costs of closing and settlement.
RESPA applies to most mortgage loans taken out for primary homes. When you apply for a mortgage loan, the lender must give you:
- certain information about various real estate settlement services,
- a Good Faith Estimate as to the amount of settlement charges you will face if your loan is approved,
- a Mortgage Servicing Disclosure Statement, which addresses whether the lender intends to service the loan or transfer it to another lender,
- procedures for resolving complaints that you might have.
Lenders have to give you this information at the time of your loan application, or mail it to you within three business days of your application. The only exception is if the lender turns down your loan application within three days; in this case, the lender is not required to comply with this aspect of RESPA.
A lender must also make certain disclosures before settlement and/or closing on the loan occurs. RESPA requires that you receive a completed HUD-1 Settlement Statement at least one day before closing. This document sets forth all of the charges that apply to both the buyer and seller at the time of closing. RESPA also mandates that you receive an Affiliated Business Arrangement Disclosure prior to settlement, if the settlement provider has referred you to a provider with whom it has some sort of business arrangement.
Furthermore, in addition to the HUD-1 Settlement Statement, RESPA also provides that you receive an Initial Escrow Statement at settlement or within 45 days thereafter, which sets forth the estimated property taxes and insurance premiums that you will pay during the first year of the loan. This Statement also must contain the total amount of escrow payments you will make, as well as any required minimum amount that the lender requires to remain in your escrow account at all times.
Following settlement of your loan, RESPA imposes an obligation on lenders to send you an Annual Escrow Statement that gives an itemized account of all payments and deposits on your escrow account. At that time, you will be refunded any overpayments, or be required to make up any shortages in your escrow account. You also are entitled to a Servicing Transfer Statement at any time that your lender sells or otherwise transfers the servicing of your loan to another company.
Finally, RESPA prohibits any kickbacks, fee-splitting, or other unearned fees that might unfairly increase your settlement costs. Violations of these provisions of RESPA can result in both civil and criminal penalties. Additionally, RESPA places limits on escrow accounts and outlaws lenders from requiring that you use a particular title company.