Understanding the Real Estate Settlement Procedures Act (RESPA)

The Real Estate Settlement Procedures Act (RESPA) is federal law (found in 12 U.S.C.A. §§ 2601 et seq.) that pertains to transactions in which there is a “federally related mortgage loan.” RESPA places controls over the settlement process (close of escrow) for residential real estate transactions where the federally related mortgage proceeds are being used to finance the purchase of a unit that was designed principally for the occupancy of from one to four families. RESPA mandates that such loans must be made by a lender whose deposits or accounts are insured by the Federal Savings and Loan Insurance Corporation, the Federal Deposit Insurance Corporation, or any other agency of the federal government, or a lender who is regulated by the Federal Home Loan Bank Board or any other agency of the federal government.

The following types of loan transactions are exempt from the RESPA requirements:

• A loan on property of 25 acres or more;
• An extension of credit primarily for a business, commercial, or agricultural purpose;
• Temporary financing, such as a construction loan;
• Loans to finance the purchase of a vacant lot when no portion of the proceeds is used to construct a residential dwelling on, or to purchase a mobile home to be placed on, the lot;
• Any assumption in which the lender does not have the right to approve a subsequent person as the borrower on an existing federally related mortgage loan;
• Any conversion of a federally related mortgage loan to different terms that are consistent with provisions of the original mortgage, so long as a new note is not required; and (7) Certain bona fide transfers of a loan obligation in the secondary market.

RESPA was passed by Congress in an effort to implement reforms in the real estate settlement process in order to insure that consumers are provided with greater and more timely information on the nature and costs of the settlement process and that they are protected from unnecessarily high settlement charges caused by certain abusive practices that had developed. The provisions of the Act are designed to:

• Provide more effective advance disclosure of settlement costs to home buyers and sellers;
• Eliminate kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services;
• Reduce the amounts home buyers are required to place in escrow accounts established to insure the payment of real estate taxes and insurance; and
• Reform and modernize local record keeping of land title information.

In a real estate financing transaction that is covered by RESPA, a standard form of Statement of Settlement Costs created by the Secretary of Housing and Urban Development must be completed and delivered to the borrower before the close of escrow. Said statement describes the nature and amount of all costs to be incurred in the settlement process, and itemizes all charges to be imposed on the seller and borrower, including a description of the interests insured under any title policy to be issued in connection with the transaction.

RESPA also mandates that:

• The mortgage lender provide a special information booklet in a form prescribed by the Secretary of HUD that explains the nature and purpose of an escrow and each settlement cost, the choices available for the selection of persons who provide services incident to a settlement, and unfair practices and unreasonable charges to be avoided; and
• The lender provide a good-faith estimate of closing costs to every person from whom the lender receives or for whom it prepares a written application for a federally related mortgage loan that contains the dollar amount or range of each charge for a settlement service that the borrower is likely to incur.

Under RESPA, a seller in a covered transaction cannot require as a condition to selling property that title insurance be purchased from any particular title company. If the choice of a title company is stated in the agreement of sale, the seller must be sure the agreement reflects that it was solely the buyer’s choice. The specification of a particular escrow company is not prohibited as long as the buyer has a choice of where to buy the title insurance. Escrow can be handled by one title company while title insurance is issued by another. The penalty for a violation of the prohibition against the seller specifying the title company is three times the charges made by the title company for the title insurance. Under the Act, the seller, and not the title company, is liable for any violation. To be safe, the escrow instructions signed by the buyer should specify the buyer’s choice of title company. RESPA also places limitations on the types and amounts of escrow deposits that a lender can require from a borrower for a loan within the provisions of the act.

See attached complete copy: RESPA