These home equity loans can be a source of cash for seniors, albeit an expensive one.
What is the Real Estate Settlement Procedures Act?
The Real Estate Settlement Procedures Act (RESPA) is a federal law that imposes controls on the way lenders of federally backed home loans operate. It requires lenders to provide you with a full disclosure of fees, costs, and their affiliated business arrangements. RESPA also prohibits various practices, such as kickbacks, referral fees, and unpaid fees, and it limits the use of escrow accounts.
The Real Estate Settlement Procedures Act went into effect in 1975. The primary purpose of it is to protect consumers from abusive lending practices that inflate settlement costs and to ensure adequate information is provided to consumers so they can make informed decisions. The act has been amended several times.
RESPA applies to the majority of mortgage loans for one- to four-family properties. The reason is that most loans have some form of federal loan guarantee from government entities such as Fannie Mae, Freddie Mac, the U.S. Department of Agriculture and the Department of Veterans’ Affairs.
The Department of Housing and Urban Development was initially tasked with ensuring compliance and circulated Regulation X, which implemented RESPA. In 2011, this responsibility was transferred to the Consumer Financial Protection Bureau.
When purchasing a property, RESPA mandates that you must be given the following information:
- A booklet that provides a good-faith estimate of the loan settlement costs, confirmation of whether the lender intends to transfer the loan to another lender, and requirements for documentation submissions.
- A declaration from the loan originator regarding affiliated business arrangements.
- A HUD-1 settlement statement showing all receipts, disbursements, charges, and fees; a loan originator must make this available the day before closing.
- A fully itemized escrow statement once a year.
- If your lender plans to transfer loan servicing, you must be given a servicing transfer statement 15 days before the transfer takes place; a new lender can’t penalize borrowers for payments made to the old loan servicing company for up to 60 days after the transfer date.
- A list of approved homeownership counseling services, no later than three business days after receiving your loan application
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The following activities are prohibited:
- Kickbacks, referral fees, and unearned fees.
- The seller can’t require you to use a nominated title insurance company.
- The lender cannot force you to make monthly escrow payments higher than one-twelfth of the annual disbursements, or require a cushion higher than one-sixth of the annual disbursement.
Examples of Real Estate Settlement Procedures Act
RESPA helps prospective buyers because it forces lenders to provide realistic information regarding lending rates, initiation fees, and other expenses. It also ensures that you’re informed of any special requirements, such as the need to use a particular settlement provider or insurer and whether the loan will be transferred to another lender. Additionally, the prohibition of kickbacks ensures you’re not prejudiced by any agreement between parties that may limit your choices or increase costs.
While initial estimates of settlement costs are based on good-faith estimates, the closing agent is obliged to provide you with the HUD-1 settlement statement at least a day before closing. This statement must include full details of all costs, your estimated property taxes, insurance premiums, and any other charges that will be paid from the escrow account.
Your lender may not demand excessively high escrow payments and cannot hold a cushion greater than two months’ worth of escrow payments. At least once a year, the lender must provide you with an itemized escrow statement detailing all transactions that occurred during the previous year.
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