In the mortgage process, you’ll come across a lot of acronyms — ARM, FHA, PMI and more. While some of these terms won’t impact your specific experience, there’s one acronym that all borrowers should know: RESPA.
What is the Real Estate Settlement Procedures Act (RESPA)?
RESPA stands for the Real Estate Settlement Procedures Act, a federal law in place since 1975. While Congress has made changes to RESPA since its enactment, at its core, the purpose of the law has remained the same: to keep consumers safe and informed when they are buying and selling real estate.
“Buying a home can be a little scary at times, mainly because it’s the largest purchase a person is usually involved in, and buying a home is not something someone does every day,” explains Mark J. Schmidt, broker associate with RE/MAX Country in New Jersey. “That’s where the Real Estate Settlement Procedures Act comes in. RESPA is there to protect consumers throughout the home-buying process.”
Buying a home involves lots of parties — real estate agents, appraisers, attorneys, home inspectors, loan officers, loan underwriters and title insurance company reps. Part of RESPA’s aim is to oversee that entire ecosystem.
What does RESPA cover?
There’s a lot involved in RESPA, but three key areas matter for you: it offers a transparent look at your loan costs, eliminates kickback fees and regulates escrow accounts.
1. Settlement costs
There are a range of closing costs you’ll need to pay before a home is officially yours. These are also known as settlement costs, and they include transfer taxes, title insurance, recording fees, origination charges and more.
RESPA requires that you receive estimates of these costs, along with complete information on your interest rate, your monthly payments and other details. This is documented in the loan estimate, which RESPA requires you receive within three days of applying for a loan. Then, at least three days before you’re scheduled to close your loan, RESPA requires you receive a closing disclosure from your lender to verify how much you’ll actually pay and other details pertaining to your mortgage.
When you’re buying a home, you buy many other services, too. If you’re a first-time homebuyer, this can be especially overwhelming — you’ve never paid for title insurance before, so where do you start?
You’ll get recommendations about which companies to work with from your real estate agent, your lender or another party. RESPA ensures that these recommendations don’t involve behind-the-scenes money changing hands.
“One of the ways that RESPA protects consumers is by outlawing kickbacks, referral fees and unearned fees,” Schmidt says. “This means that, throughout their purchase, a buyer can feel confident that they are not being overcharged, or being convinced to use a certain provider — like a title company or attorney — simply because the agent would get a fee for referring them.”
3. Escrow accounts
In addition to making your mortgage principal and interest payments each month, your lender will likely have you pay additional funds set aside for homeowners insurance and property taxes. These funds are held in escrow and paid out when they’re due. RESPA ensures that you don’t have to overpay or maintain a larger-than-normal cushion in this account. The law stipulates that each payment can include an amount equal to one-twelfth of the total yearly costs of insurance and taxes, with the ability to charge no more than one-sixth of those yearly costs as a buffer.
Examples of RESPA violations
There are a number of scenarios that could potentially violate RESPA, such as:
- A mortgage lender pays a real estate agent $500 for referring the agent’s client to the lender.
- Your real estate agent refers you to an attorney and gets a portion of the fee you pay for those legal services.
- An appraiser gives a mortgage broker courtside tickets to a basketball game in exchange for business.
- Your loan servicing company requires an additional $300 per month for escrow, even though your annual property tax bill will be $2,000.
- A mortgage broker fails to send you an affiliated business disclosure form that acknowledges his company is also part of a network of another company that conducts title searches.
- Your mortgage lender sells your mortgage to another servicer after closing, but it does not inform you of the change.
How RESPA is enforced
Today, the Consumer Financial Protection Bureau (CFPB) is in charge of enforcing RESPA, and violating the law can result in hefty fines. For example, HomeStreet Bank, based in Seattle, paid $1.35 million for RESPA violations in 2019.
Individual fines can be much smaller. The CFPB charges $94 per penalty, but those can add up to an annual maximum of nearly $190,000.
What RESPA means for you
RESPA’s main purpose is to provide you with some peace of mind as you’re buying a home. It can be challenging to know who to trust in an industry that sometimes lacks clear price tags on fees, along with occasional aggressive tactics to push you toward a big purchase. RESPA provides some guardrails to keep you protected and informed, from first making an offer to the final stage of getting the keys to your new home.
Hiring a real estate attorney is one of the best ways to make sure that all parties involved in your transaction are compliant with RESPA. An experienced real estate lawyer will be able to identify any warning signs of illegal behavior.
It’s not just the attorney’s job, though. Read through all your RESPA-required paperwork thoroughly — your loan estimate, closing disclosure and any affiliated business disclosures. Do your research on the typical costs of those settlement fees to make sure that the price you’re paying is fair.
If you have reason to believe that a party in the process of buying a home violated RESPA, you can submit a complaint directly through the CFPB’s website.