RESPA (Real Estate Settlement Procedures Act)

The Real Estate Settlement Procedures Act (RESPA) is a federal law designed to protect consumers during the home buying and mortgage process. Originally enacted in 1974, RESPA has been updated multiple times, most significantly through the TILA-RESPA Integrated Disclosure (TRID) rule in 2015.

Purpose and Scope

RESPA was enacted to:

• Eliminate kickbacks and referral fees that unnecessarily increase settlement costs
• Reduce closing costs by requiring disclosure of all costs in advance
• Inform borrowers about the settlement process
• Establish standards for escrow account management

Covered Transactions

RESPA applies to federally related mortgage loans secured by a lien on residential real property containing 1-4 family dwelling units:

A loan is "federally related" if:

• Made by a federally regulated lender
• Insured, guaranteed, or supplemented by any federal agency
• Sold on the secondary market to Fannie Mae, Freddie Mac, or other GSEs
• Made by a lender with $10 million or more in loan originations per year

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Disclosure Requirements

Loan Estimate (LE)

Lenders must provide a Loan Estimate within 3 business days of receiving a loan application. The LE includes:

• Loan terms (amount, interest rate, monthly payment)
• Projected payments over the life of the loan
• Estimated closing costs itemized by category
• Cash to close calculation
• Comparisons to help borrowers shop

Servicing Disclosure Statement

At the time of application or within 3 business days, lenders must disclose:

• Whether the servicing of the loan may be assigned, sold, or transferred
• The percentage of loans the lender has transferred in the past 3 years

Affiliated Business Arrangement (AfBA) Disclosure

When referring borrowers to affiliated settlement service providers, the referrer must:

• Provide written disclosure of the affiliate relationship
• Provide an estimated charge for the service
• Inform the borrower they are not required to use the affiliate

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Section 8: Prohibited Practices

Section 8 is one of the most heavily tested areas on the MLO exam. It prohibits three main categories of conduct:

1. Kickbacks and Referral Fees (Section 8(a))

No person shall give or accept any fee, kickback, or thing of value for the referral of settlement service business.

"Thing of value" includes:

• Money, commissions, fees
• Stock, dividends, partnerships
• Credits toward transactions
• Special discounts or reduced rates
• Trips, entertainment, gifts
• Anything else of value

2. Fee Splitting (Section 8(b))

No person shall give or accept any portion of a settlement service charge except for services actually performed.

Example violation: A title company pays 40% of its title insurance premium to a real estate broker who did nothing to earn it.

3. Unearned Fees (Section 8(b))

No person shall charge for settlement services not actually performed.

Penalties for Section 8 Violations:

• Criminal penalties up to $10,000 fine and/or 1 year imprisonment
• Civil liability equal to 3 times the amount of any fee charged
• The person who paid the fee can sue to recover the fee plus costs and attorney's fees

Safe Harbors and Exceptions

Certain payments are NOT RESPA violations:

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Servicing Transfer Requirements

When mortgage servicing is transferred, both the old and new servicer must notify the borrower:

60-Day Grace Period

After a servicing transfer:

• Borrower cannot be charged a late fee if payment sent to the old servicer within 60 days of the transfer
• Credit cannot be adversely reported for late payments during this period

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Qualified Written Request (QWR)

Borrowers have the right to send a Qualified Written Request to their servicer to:

• Dispute servicing errors
• Request account information
• Report problems with the servicer

Servicer Requirements upon Receiving QWR:

Servicer Restrictions During Investigation:

• Cannot report adverse credit information related to the disputed matter
• Cannot pursue collection activities on disputed amounts

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Escrow Account Rules

RESPA limits how much servicers can collect and hold in escrow accounts:

Initial Escrow Deposit

At settlement, the lender may collect:

• Amounts necessary to pay items that will come due before the first payment would cover them
• A 2-month cushion (maximum)

Monthly Escrow Payments

• Must be calculated using an escrow account analysis
• Borrower must receive annual escrow account statement
• Surplus of $50 or more must be returned within 30 days

Escrow Shortage and Deficiency

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RESPA Enforcement

Primary Enforcement

The Consumer Financial Protection Bureau (CFPB) has primary enforcement authority for RESPA since July 2011.

Other Enforcers

Private Right of Action

Borrowers can sue for:

• Section 8 violations (3x damages)
• Escrow account violations (actual damages + $2,000 for pattern of violations)
• Servicing violations (actual damages + $2,000 for pattern of violations)

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Key Terms for the Exam

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Key Takeaways

• RESPA protects borrowers in residential mortgage transactions for 1-4 family properties
• Section 8 prohibits kickbacks, referral fees, and unearned fees
• Borrowers must receive Loan Estimate within 3 business days of application
• Servicing transfers require 15-day advance notice from both old and new servicer
• Escrow cushion limited to 2 months of payments
• CFPB is the primary enforcement agency for RESPA violations