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Know Your Rights: Real Estate Settlement and Procedures Act (RESPA)October 13, 2020 / by Michael McEldowney, J.D / 3 min read
If you're like most consumers, you have never given much thought to the federal Real Estate Settlement and Procedures Act (RESPA). You may never have heard of it. If it sounds dry and technical, that's because it is. But, it also provides important protections for people financing residential real estate.
Who is Protected by RESPA?
An attorney who is experienced in handling RESPA matters is the best source of information about whether you are protected and how RESPA may benefit you. However, the general rule is that federally insured home loans for residential property of 1 to 4 units are covered. In other words, most individual homeowners who have taken out a mortgage to pay for their houses are protected under RESPA.
Commercial or business loans, loans for the purchase of vacant land, large tracts of land and construction loans generally aren’t covered. But, there are some exceptions.
What Type of Protections Does RESPA Offer?
RESPA is a complex statute and we can’t cover all of its content in a single blog post. The general purpose of the statute is to eliminate kickbacks, self-dealing and upcharges that were common to the real estate industry, and to create a more transparent process for mortgage borrowers. RESPA was originally enacted in the 1970s, but the statute and regulations under which it is administered have been updated multiple times. The most recent revision simplified the loss mitigation process to allow servicers to process pandemic-related requests for relief more efficiently.Some of the key protections the statute provides include:
- Required disclosures during the application and loan generation and servicing process. RESPA contains an extensive list of disclosures that must be made to the borrower at various stages of the lending and servicing process, including cost disclosures, disclosure of intent to transfer the loan, and escrow accounting.
- Prohibitions on fee splitting and kickbacks: referral fees, percentage-based commissions and other payment for driving business to someone in the real estate settlement process are prohibited, including non-monetary “gifts.”
- Prohibitions on hidden or marked-up charges in connection with mortgage loans: that means a mortgage servicer can’t charge a premium for property inspections, insurance, credit reports and other services provided by third parties--this type of upcharge, despite the different structuring, has the same impact on the consumer as fee splitting.
- A prohibition on requiring that the borrower use a specific title insurance provider: a borrower who pays for title insurance may not be compelled to work with the provider of the lender’s choice.
- A process for addressing borrower concerns and providing requested information: anyone who has encountered problems with a mortgage loan knows it can be very difficult to get information or assistance from the servicer. RESPA creates a process with strict timelines for acknowledgement of complaints received and responses. In certain limited circumstances, requests may even require that pending actions are temporarily paused while the request is resolved
These provisions and others work together to help ensure that consumers have complete information about the costs of their loans and are not paying inflated fees for the benefit of servicers and their third-party providers. But, unfortunately, mortgage servicers don’t always play by the rules. And, consumers don’t always know when servicers and their providers break the law. That’s where a powerful tool called the Qualified Written Request (QWR) comes in. Borrowers can use QWRs to obtain detailed information about the servicing of their loans--information that often reveal violations such as false or inflated third-party fees, mishandling of escrow, improperly placed insurance, and more. These violations may be difficult for a borrower to identify, since they will simply appear as line items like “inspection fee” or payment applications. That’s why it’s important to have an attorney experienced with RESPA violations review the records.
Liability for RESPA Violations
RESPA violations are serious business. Some violations carry criminal penalties. Consumers who have fallen victim to RESPA violations may also have a private right of action. Damages vary depending on the violation. For example, compelling a buyer to use the lender’s preferred title insurance company may result in an award of three times the cost of the title insurance. Other types of violations provide for actual damages.
Like many other federal consumer protection statutes, RESPA also provides for attorneys’ fees, making it affordable for consumers to fight back.