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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Real Estate Settlement Procedures Act (RESPA)
When purchasing real estate, there are many laws that a lender has to follow to close on a mortgage.
These laws and acts are put in place to ensure that the borrowers are being treated fairly without any misguidance.
One such law is called the Real Estate Settlement Procedures Act (RESPA). In this post, we will understand what it is in detail.
What Is RESPA?
RESPA which stands for Real Estate Settlement Procedures Act was a bill initiated by congress in 1974 and was enacted on June 20, 1975.
Till 2011 this law was under the jurisdiction of Housing and Urban Development (HUD), however, after 2011 Consumer Finance Protection Bureau (CFPB) was given the responsibility to enforce rules and regulations for the RESPA act.
The act states that the lender has to disclose the closing or settlement cost to the borrowers three days before closing on the mortgage.
The act also prohibits any kickbacks from the service providers. It also puts control over how much money can be collected in escrow funds, regulates affiliated business arrangements, and protects on use of specific title insurance companies, and other documents that are required to be sent to the borrowers.
Understanding Real Estate Settlement Procedures Act In Detail
The RESPA has many prohibitions as listed below.
I - Prevent Kickbacks:
Kickbacks are referral fees that are agreed between the real estate service providers to get the transaction completed.
In this, all the service providers like lenders, mortgage brokers, appraisal companies, real estate agents, and inspection companies are prohibited to accept or give referral fees to each other to get their service included in the transaction.
For example, the lender agrees to give $200 to the real estate agent for each borrower he brings to the table for processing a mortgage.
This is the formation of the business is called a kickback which is illegal under the RESPA.
II - Title Insurance Choice Prohibition:
The Real Estate Settlement Procedures Act also provides freedom to the buyer to choose the title insurance company of his/her choice and prohibits being forced by the seller or the agent to go with a specific title insurance company.
III - Escrow Account Amount Limitation:
The escrow account is usually for the borrowers who prefer to pay their taxes and insurance along with their mortgage payments (Principal and Interest).
This money is held in a separate account known as escrow. Before the closing of the loan, the lenders have to keep taking some amount in reserve from you in the escrow so that you don’t fall short of taxes and insurance when they are due.
According to the Real Estate Settlement Procedures Act, the lender is only allowed to keep 1/6th of the amount that is needed to pay your taxes and insurance for the year.
If they have collected anything above that a refund needs to be initiated to the borrower.
IV - Time of Final Closing Disclosure (Closing Costs):
According to the RESPA, the lender should submit an initial loan application disclosing the closing cost to the borrower within three business days from the loan application.
The lender should also receive a CFPB closing cost booklet from the lender during the loan process.
Also, the lender should send the final closing disclosure disclosing the final closing costs to the borrower three days before the closing date.
V - Type of Loan:
Loans that fall under the Real Estate Settlement Procedures Act apply for one to four-unit family, primary, investments, or secondary residences.
The act applies to all federally related loans such as VA, FHA, and conventional.
VI - Affiliated Business Arrangements:
All the real estate service providers that are involved in a transaction should disclose their business affiliation with any other real estate service provider including the cost of that affiliate service.
For example, a lender uses an appraisal company name ‘XYZ Appraisals’ for the property appraisal in a transaction.
Under the RESPA law, the lender must disclose in writing to the borrower stating that he is using ‘XYZ Appraisals’ and would be charging $450 for the same.
Conclusion
The Real Estate Settlement Procedures Act was enacted for the buyers so that they don’t fall for the unethical practices by any of the real estate service providers like a lender, mortgage brokers, real estate agents, appraisal companies, or any other affiliate business involved in the transaction.
Home buying is one of the most intriguing processes that you would be going through, and knowing that everything is regulated may just be a little less stressful.
