What Is RESPA?
Part of the “American Dream” has always been owning a home. For a first-time home buyer, however, the home buying process can be a bit intimidating. After all, for the average person, purchasing a home will be the single largest purchase they make in their lifetime. Unfortunately, whenever large amounts of money are involved there is always the risk that unscrupulous companies and individuals will take advantage of the situation and engage in less than honest dealings. The Real Estate Settlement Procedures Act of 1974, or RESPA, was passed in an effort to prevent dishonesty and fraudulent dealings among the entities involved in the buying and selling of property, including lenders, construction companies, real estate agents, and title insurance companies. Because of the complex nature of RESPA it is in your best interest to work closely with a Pennsylvania real estate lawyer if you are planning to purchase real estate; however, a general overview of RESPA may also help you to better understand your rights as a buyer.
The Need for RESPA
RESPA was initially drafted and passed because entities involved in the buying and selling of real estate, including title agents, lenders, construction companies, and real estate agents, were known to engage in practices that resulted in artificially inflating the value of real estate. Specifically, “kickbacks” were relatively common in the industry as were “bait and switch” tactics, both of which resulted in victimizing buyers and sellers. Among the prohibited activities outlined in RESPA are:
- Giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan.
- Receiving unearned fees for services that were not actually rendered
Violation of the provisions found in RESPA can result in criminal prosecution and corresponding criminal penalties if convicted.
RESPA’s Purpose Today
Since its passage in 1974, RESPA has gone through a number of changes and updates, the most recent of which was in 2015. Today, RESPA has two primary goals:
- To help consumers become better shoppers for settlement services
- To eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services.
RESPA accomplishes these goals by requiring very specific practices and disclosures throughout the mortgage application and real estate closing processes.
RESPA Application Disclosure Requirements
Few potential buyers are able to finance the purchase of a home without taking out a mortgage loan. For a first-time buyer/borrower, the mortgage loan application process can be difficult to navigate. Buyers typically have no idea what “points” are, how much closing costs should be, or how their interest rate is determined. The financial aspect of buying a home can be daunting to even a seasoned buyer. To ensure that a prospective borrower understands what a lender is actually offering them, RESPA requires a lender to provide a borrower with a “Loan Estimate (LE)” form at the time the borrower applies for the loan, or within three business days thereafter. The LE is intended to simplify some of the more complex terms and figures involved in a mortgage loan. Specifically, the LE must include:
Costs at Closing
Sometimes, the information found on the original LE changes by the time the applicant gets closer to closing. Whenever anything on the LE does change, the lender is required to provide the borrower with a Revised LE within three business days, but generally no late than seven business days before consummation.
RESPA Consummation Disclosure Requirements
As a buyer/borrower gets closer to the actual closing, or “consummation,” date, RESPA calls for additional disclosures in the form of a Closing Disclosure. The Closing Disclosure, must be provide to a borrower at least three days prior to consummation of the loan. The purpose of the Closing Disclosure is to make sure the buyer understands exactly how much it will cost the borrower to borrow the funds being used to purchase the property. The cost of borrowing $250,000 in a 30 year mortgage loan, for instance, will ultimately be much more than $250,000. The final cost depends on the terms of loan, including the interest rate and the type of loan. The Closing Disclosure must tell the borrower how much borrowing the funds will cost in the end as well as how much in closing costs will be due from both the buyer and seller at closing.