Real Estate Settlement Procedures Act (RESPA)

January 1, 1 6 min read RESPA Mortgage Loans Real Estate Consumer Protection Settlement Costs Mortgage Transparency Closing Costs
The Real Estate Settlement Procedures Act (RESPA) is a federal law intended to provide greater transparency and knowledge to consumers about real estate transactions. It stipulates how mortgage lenders must treat applicants for federally-related real estate loans on properties containing 1–4 dwelling units. RESPA aims to eliminate unnecessary fees and ensure borrowers receive pertinent information to facilitate informed comparison shopping.
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Real Estate Settlement Procedures Act (RESPA)

Overview

The Real Estate Settlement Procedures Act (RESPA) was enacted in 1974 to help consumers become better shoppers in the home buying process and eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services. RESPA applies to mortgages on one-to-four-unit residential properties.

Examples

  1. Good Faith Estimate: Within three business days after a borrower submits a loan application, the lender must provide a Good Faith Estimate (GFE). This estimate outlines the key terms and estimated settlement costs for the mortgage. For example, if Abel applies for a mortgage on a house he wants to buy, the lender must send a GFE giving Abel a rough idea of his total closing costs.

  2. HUD-1 Settlement Statement: One day before closing, the borrower is entitled to review the HUD-1 Settlement Statement. This document itemizes all the charges that both the buyer and seller will encounter during the settlement process. For example, if Emily is purchasing a property and closing the next day, she has the right to review all settlement costs and terms beforehand.

Frequently Asked Questions

  1. What types of loans are covered under RESPA?

    • RESPA covers loans on residential properties where the funds are intended for the purchase, improvement, or refinancing of a property with one-to-four dwelling units.

  2. What disclosures are required by RESPA?

    • Key disclosures include the Good Faith Estimate, the HUD-1 Settlement Statement, the Title Insurance Policy, and the Special Information Booklet on RESPA.

  3. Are lenders allowed to charge any type of fee for these RESPA-required disclosures?

    • No, lenders cannot charge any fees for providing these required disclosures to borrowers.

  4. What are the penalties for violating RESPA?

    • Penalties for RESPA violations can include fines, enforcement actions, and the invalidation of certain contracts and agreements related to kickbacks and referral fees.

  5. How does RESPA benefit homebuyers?

    • RESPA allows homebuyers to receive detailed information on mortgage loan costs, enabling informed decision-making and preventing unnecessary charges from unearned fees.
  1. Good Faith Estimate (GFE) - A document provided by a mortgage lender that estimates the costs associated with obtaining a mortgage loan.
  2. HUD-1 Settlement Statement - A standardized form used to itemize services and fees charged to the borrower by the lender when applying for a loan.
  3. Kickback - Refers to the illegal practice of payments made in exchange for the referral of services involved in the loan closing.
  4. Title Insurance - Insurance that protects the lender or owner against legal claims to the property’s ownership.

Online Resources

  1. Consumer Financial Protection Bureau (CFPB) on RESPA
  2. HUD RESPA Information

References

  1. Consumer Financial Protection Bureau (CFPB). “Real Estate Settlement Procedures Act (RESPA).”
  2. U.S. Department of Housing and Urban Development (HUD). “A Consumers Guide to Buying a Home.”

Suggested Books for Further Study

  1. Real Estate Settlement Procedures Act: Law and Regulation by James H. Pannabecker
  2. The Home Mortgage Book: Insider Information Your Banker & Broker Don’t Want You to Know by Dale Vermillion

Real Estate Basics: Real Estate Settlement Procedures Act Fundamentals Quiz

### What is the primary goal of RESPA? - [x] To help consumers become informed shoppers in the home buying process. - [ ] To expedite the loan approval process. - [ ] To reduce home prices. - [ ] To eliminate long closing periods. > **Explanation:** RESPA's primary goal is to help consumers become informed about the home buying process to make wise financial decisions. It provides transparency in settlement costs and prevents unnecessary fees. ### Which document provides an itemized list of charges a borrower will face at closing? - [ ] Good Faith Estimate (GFE) - [ ] Closing Disclosure (CD) - [x] HUD-1 Settlement Statement - [ ] Mortgage Note > **Explanation:** The HUD-1 Settlement Statement provides an itemized list of charges a borrower will face during closing and is a crucial document for understanding total settlement costs. ### What is a borrower entitled to review at least one day before settlement? - [ ] The Good Faith Estimate - [ ] The mortgage note - [x] The HUD-1 Settlement Statement - [ ] The appraisal report > **Explanation:** One day before settlement, the borrower is entitled to review the HUD-1 Settlement Statement. This allows borrowers to understand all charges and resolve any discrepancies before closing. ### To how many residential units does RESPA apply regarding a mortgage loan? - [ ] 1-2 units - [x] 1-4 units - [ ] 2-6 units - [ ] 5-10 units > **Explanation:** RESPA applies to mortgage loans on residential properties containing one-to-four dwelling units, thus providing consumer protections for many standard home purchase scenarios. ### What key document must be provided to the borrower within three business days after applying for a loan? - [ ] HUD-1 Settlement Statement - [ ] Appraisal report - [ ] Title insurance policy - [x] Good Faith Estimate (GFE) > **Explanation:** The borrower must receive the Good Faith Estimate (GFE) within three business days after applying for a loan. The GFE outlines estimated costs associated with the mortgage loan. ### What type of fee is prohibited under RESPA? - [x] Kickbacks for referrals - [ ] Interest rate charges - [ ] Title insurance premiums - [ ] Origination fees > **Explanation:** RESPA strictly prohibits kickbacks or referral fees among parties involved in the real estate transaction to prevent unnecessary increases in settlement costs. ### What type of insurance is included in the disclosures under RESPA? - [x] Title Insurance - [ ] Life Insurance - [ ] Property Insurance - [ ] Health Insurance > **Explanation:** Title Insurance, which protects against claims on property ownership, is included in the disclosures required by RESPA. ### RESPA's objective includes preventing which of the following harms to consumers? - [ ] High appraisal values - [x] Unnecessary settlement costs due to unearned fees - [ ] Low credit scores - [ ] Inflation in property prices > **Explanation:** RESPA aims to prevent unnecessary settlement costs stemming from unearned fees or kickbacks, thereby protecting consumers from financial exploitation. ### RESPA applies to which type of property transaction? - [ ] Commercial property purchases - [ ] Vacant land deals - [ ] Timeshare agreements - [x] Federally related mortgage loans on residential properties > **Explanation:** RESPA applies to federally related mortgage loans for residential properties, specifically those involving one-to-four dwelling units. ### Which federal agency provides oversight and enforcement of RESPA? - [ ] U.S. Department of Justice - [x] The Consumer Financial Protection Bureau (CFPB) - [ ] Internal Revenue Service (IRS) - [ ] The Federal Reserve > **Explanation:** The Consumer Financial Protection Bureau (CFPB) oversees and enforces RESPA, ensuring compliance by lenders and protecting consumers in the mortgage market.
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