Real Estate Settlement Procedures Act (RESPA)

Real Estate Settlement Procedures Act (RESPA)

Overview

The Real Estate Settlement Procedures Act (RESPA) is a federal consumer-protection law enacted to ensure transparency in real estate settlement costs and to eliminate abusive practices that can inflate those costs. Originally enforced by HUD, RESPA enforcement now falls to the Consumer Financial Protection Bureau (CFPB). It applies mainly to consumer mortgage transactions on one- to four-family residential properties.

What RESPA covers

RESPA generally applies to:
* Most purchase loans, loan assumptions, refinances, property-improvement loans, and home equity lines of credit (HELOCs).
* Mortgage lenders, mortgage brokers, and loan servicers involved in settlement and servicing.

RESPA does not apply to:
* Extensions of credit to the government, government agencies, or instrumentalities.
* Loans where the property is used primarily for business, commercial, or agricultural purposes.

Required disclosures

Lenders, brokers, and servicers must disclose information to borrowers about:
* Estimated total settlement charges (a good-faith estimate; actual costs may vary).
* Which party will service the loan — provided either at application or within three business days if another entity is expected to service the loan.
* Business relationships between settlement service providers and other parties involved in the transaction.

These disclosures are intended to help borrowers understand and compare settlement costs.

Prohibited practices

RESPA bans several practices that can increase settlement costs:

Kickbacks and referral fees
* Section 8 prohibits giving or receiving anything of value for referrals of settlement service business.
* Referral fees or incentives between lenders, brokers, real estate agents, title companies, and other settlement service providers are generally prohibited.

Unearned fees
* Charging for services not actually performed is barred.

Escrow account limits
* Loan servicers may not demand excessively large escrow accounts.

Affiliated Business Arrangements (AfBAs)
* If a real estate professional refers business to an affiliated settlement provider, they must disclose the affiliation, the charges, and the consumer’s freedom to choose another provider.
* Lenders may not require use of a particular affiliate, though they may offer financial incentives to use affiliated services.

Marketing, sponsorships, and rental arrangements
* Joint marketing is permitted only when payments reflect the fair value of the goods or services provided; overpayment for marketing is prohibited.
* Sponsorships that function as disguised referrals or marketing advantages can be prohibited.
* A settlement service provider may rent space from another only at fair market value.

Enforcement and remedies

Statutes of limitations and procedural rules cited in enforcement:
* Actions for kickbacks or improper referral behavior generally must be filed within one year.
* Certain claims against loan servicers may be brought within three years.
* Lawsuits may be filed in federal district court in the district where the property is located or where the alleged violation occurred.

Servicer dispute procedure
* Borrowers disputing servicing issues should send a written complaint to the loan servicer.
* The servicer must acknowledge receipt in writing within 20 business days and must investigate and respond or correct the issue within 60 business days.
* Borrowers should continue making required payments while a dispute is pending.

If you believe a RESPA violation has occurred, consult a real estate attorney to evaluate options and next steps.

Criticisms and reform proposals

Critics say some abusive practices persist despite RESPA, such as captive-insurance arrangements or informal referral mechanisms that steer consumers to affiliated providers. Reform proposals have included bundling services and having lenders pay settlement costs directly, forcing lenders to shop for the lowest-cost providers — an approach intended to reduce hidden markups arising from existing referral structures.

Practical takeaways

• RESPA exists to increase transparency in settlement costs and to curb referrals, kickbacks, and unearned fees.
• Review all settlement and affiliate-disclosure documents carefully; you are generally free to choose your service providers.
• If a servicer or settlement provider behaves improperly, use the servicer dispute process and consult legal counsel promptly given tight filing deadlines.