What is RESPA (Real Estate Settlement Procedures Act), what are its key requirements, and what practices does it prohibit?

Financing on the Real Estate Exam

RESPA protects consumers from predatory lending practices and hidden fees that can dramatically increase the true cost of borrowing. Real estate professionals must understand RESPA requirements because violations can result in significant fines, license suspension, and client liability. Understanding RESPA helps agents ensure their clients receive full transparency about costs and protects agents from inadvertently violating the law through kickback schemes or steering practices.

Understanding Financing: Key Concepts

What It Means

RESPA (Real Estate Settlement Procedures Act) is a federal law enacted in 1974 and administered by the Consumer Financial Protection Bureau (CFPB). RESPA applies to consumer loans secured by residential real property (one to four family residences). The primary purpose of RESPA is to ensure that borrowers receive accurate, complete information about the true costs of obtaining a mortgage loan and to prevent abusive practices in the mortgage settlement process.

Requirements

Key RESPA requirements include the Loan Estimate and Closing Disclosure. Under RESPA Regulation Z (Truth in Lending), a lender must provide a Loan Estimate within three business days of receiving a mortgage application. The Loan Estimate must clearly disclose the loan terms (amount, interest rate, principal and interest payment), estimated closing costs (broken down by category), and other material terms. The Loan Estimate must use a standard form to allow easy comparison across lenders. Shortly before closing (typically three days before), the lender must provide the Closing Disclosure, which shows all actual closing costs, the actual interest rate and payment, and confirms all material loan terms. The Closing Disclosure replaces the older Uniform Settlement Statement (HUD-1 form).

RESPA prohibits kickbacks, unearned fees, and certain steering practices. A kickback is a payment, split fee, or other thing of value given in exchange for a referral of a settlement service. RESPA prohibits kickbacks because they increase costs for consumers and incentivize the referral of unnecessary or overpriced services. For example, a real estate agent cannot receive a portion of the title insurance premium in exchange for referring a particular title company. A lender cannot pay a real estate agent for recommending its lending services. Unearned fees are charges imposed for services that are not actually performed or are grossly disproportionate to the service provided. An escrow account fee cannot be charged if no escrow account is opened. Steering refers to directing or discouraging borrowers from using particular settlement service providers based on affiliations or kickback relationships. A lender cannot steer a borrower toward an affiliated title company to generate fees for the lender.

Requirements

RESPA requires disclosure of affiliated business arrangements. If a settlement service provider has an affiliate relationship with a lender or real estate brokerage, the affiliated party must disclose the relationship and provide the borrower with a written Affiliated Business Arrangement Disclosure. This disclosure explains the relationship and allows the borrower to shop for alternative service providers if desired. RESPA also prohibits certain specific practices: charging excessive fees for preparation or filing of loan documents, giving borrowers gifts or discounts contingent on use of specific settlement service providers, and requiring borrowers to purchase title insurance from a particular provider as a condition of lending (though lenders can recommend providers).

RESPA also regulates lender escrow accounts (also called impound accounts or reserve accounts). Escrow accounts hold borrower funds to pay property taxes, homeowners insurance, and mortgage insurance premiums on behalf of the borrower. RESPA requires lenders to accurately estimate escrow amounts, prohibits excessive escrow balances, and requires lenders to provide an initial escrow statement and annual escrow statements accounting for how borrower funds are used. Violations of escrow account regulations can result in liability to borrowers.

Consequences and Enforcement

RESPA violations can result in significant penalties. The CFPB can assess civil penalties up to $5,000 per violation. State regulators (such as CalBRE in California) can take enforcement action against real estate licensees, including fines and license suspension or revocation. Borrowers also have the right to sue for damages and attorney fees for RESPA violations. Real estate professionals can face personal liability for violations even if they did not intend to violate the law; violations are typically strict liability matters.

Financing Rules by State

Each state has its own rules when it comes to financing. Here are a few examples of how requirements differ: