The Real Estate Settlement Procedures Act, was an act passed by the United
States Congress in 1974. It is codified at Title 12, Chapter 27 of the United
States Code, 12 U.S.C. §§ 2601–2617. Purpose
It was created because various companies associated with the buying and selling
of real estate, such as lenders, real estate agents, construction companies
and title insurance companies were often engaging in providing undisclosed
kickbacks to each other, inflating the costs of real estate transactions and
obscuring price competition by facilitating bait-and-switch tactics.
For example, a lender advertising a home loan might have advertised the loan with
a 5% interest rate, but then when one applies for the loan one is told that
one must use the lender's affiliated title insurance company and pay $5,000
for the service, whereas the normal rate is $1,000. The title company would then
have paid $4,000 to the lender. This was made illegal, in order to make prices
for the services clear so as to allow price competition by consumer demand and
to thereby drive down prices. On July 21, 2011, administration and
enforcement of the Real Estate Settlement Procedures Act was
transferred from the Department of Housing and Urban Development to the
Consumer Financial Protection Bureau. Restrictions
The Act prohibits kickbacks between lenders and third-party settlement
service agents in the real estate settlement process. Even reciprocal
referrals among these types of professions could be construed as a
violation of RESPA. It requires lenders to provide a good faith estimate for all
the approximate costs of a particular loan and finally a HUD-1 or a HUD-1A at
the closing of the real estate loan. The final HUD-1 or HUD-1A allows the
borrower to know specifically the costs of the loan and to whom the fees are
being allotted. Beginning January 1, 2010, amendments to RESPA restrict the
amount that fees can increase between the GFE and HUD-1 or HUD-1A. Origination
charges are not allowed to increase, while certain third party service
providers' fees can increase by no more than 10%.
Account Inquiries — "Qualified written request"
If the borrower believes there is an error in the mortgage account, he or she
can make a "qualified written request" to the loan servicer. The request must
be in writing, identify the borrower by name and account, and include a
statement of reasons why the borrower believes the account is in error. The
request should include the words "qualified written request". It cannot
be written on the payment coupon, but must be on a separate piece of paper.
The Department of Housing and Urban Development provides a sample letter.
The servicer must acknowledge receipt of the request within 5 business days. The
servicer then has 30 business days to take action on the request. The servicer
has to either provide a written notification that the error has been
corrected, or provide a written explanation as to why the servicer
believes the account is correct. Either way, the servicer has to provide the
name and telephone number of a person with whom the borrower can discuss the
matter. The servicer cannot provide information to any credit agency
regarding any overdue payment during the 60 day period.
If the servicer fails to comply with the "qualified written request", the
borrower is entitled to actual damages, up to $2,000 of additional damages if
there is a pattern of noncompliance, costs and attorneys fees.
Criticisms However, critics say that kickbacks
still occur. For example, lenders often provide captive insurance to the title
insurance companies they work with, which critics say is essentially a
kickback mechanism. Others counter that economically the transaction is a zero
sum game, where if the kickback were forbidden, a lender would simply charge
higher prices. One of the core elements of the debate is the fact that customers
overwhelmingly go with the default service providers associated with a
lender or a real estate agent, even though they sign documents explicitly
stating that they can choose to use any service provider.
There have been various proposals to modify the Real Estate Settlement
Procedures Act. One proposal is to change the "open architecture" system
currently in place, where a customer can choose to use any service provider for
each service, to one where the services are bundled, but where the real estate
agent or lender must pay directly for all other costs. Under this system,
lenders, who have more buying power, would more aggressively seek the lowest
price for real estate settlement services.
While both the HUD-1 and HUD-1A serve to disclose all fees, costs and charges to
both the buyer and seller involved in a real estate transaction, it is not
uncommon to find mistakes on the HUD. Both buyer and seller should know how to
properly read a HUD before closing a transaction and at settlement is not the
ideal time to discover unnecessary charges and/or exorbitant fees as the
transaction is about to be closed. Buyers or sellers can hire an
experienced professional such as a real estate agent or an attorney to protect
their interests at closing. Sources
External links Full text of the act from the Legal
Information Institute U.S. Department of Housing & Urban
Development page on RESPA