The Real Estate Settlement Procedures Act (RESPA) was originally passed by Congress in 1974. According to the
U.S. Department of Housing and Urban Development (HUD), the purpose of RESPA is "to help consumers become better shoppers for settlement [mortgage closing] services" and "to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services." In recent years, it has been amended to provide further protection for borrowers in the housing market.
Kickbacks
The original intent of RESPA was to prevent lenders, realtors, construction companies, and title insurance companies from ganging up on borrowers through unethical practices. A lender, for instance, requiring you to overpay for title insurance from a company that has bribed them to do so became illegal once RESPA was put into effect. There are so many services associated with closing on your house that these kickbacks became a problem in the market, driving prices up by not allowing competition between providers.
Disclosures
More so recently, RESPA requires that a lender provide the borrower with certain disclosures at different points of the mortgage process. Among these is a Good Faith Estimate of closing costs, which may not line up exactly with what the borrower ends up paying, but which should pretty accurately represent that final amount. The borrower should also receive a special information booklet detailing closing services, and should be informed if the lender intends to take care of the loan themselves, or to transfer it to another agency.
Other disclosures include:
- Affiliated Business Arrangement (AfBA) Disclosure – This details the business relationships between the lender and any third-party settlement services. It should also estimate the cost of the services.
- HUD-1 Settlement Statement – This form delineates all the charges levied for the borrower and the seller as a result of the loan. The lender must have it ready at least one day before closing.
- Initial Escrow Statement – This statement estimates taxes, insurance charges, and other fees that will be taken from the escrow account.
- Annual Escrow Statement – The borrower will continue to receive these each year. All deposits and payments from the account are detailed.
Lenders are prohibited by law from refusing you any of the rights outlined in RESPA. It is also worth mentioning that you are free to shop around yourself for title insurance providers, and you are protected from absurd charges for escrow accounts. Knowing this information will allow you to make informed decisions that can save you money and protect you from being hoodwinked.