The Real Estate Settlement Procedures Act & Consumers' Legal Rights
The Real Estate Settlement Procedures Act is a federal law that is meant to protect people who are trying to become eligible for a mortgage loan. Congress designed RESPA to help consumers understand settlement costs and prevent abuses in the real estate industry. It covers mortgage loans for residential properties for one to four families, including most purchase loans, refinances, equity lines of credit, and property improvement loans. The Consumer Financial Protection Bureau holds the primary responsibility for enforcing this law.
Lenders, mortgage brokers, and mortgage loan servicers must provide certain disclosures to borrowers. These include informing borrowers about settlement services and costs, the laws that protect their rights, and any business relationship between a closing service provider and any other entity involved in the settlement process. RESPA also forbids kickbacks and certain other practices, including referrals and unearned fees. Additional provisions of this law govern escrow accounts. RESPA has faced criticisms for falling short of its goals and creating incentives for less obvious types of abuses. The law has been adjusted many times, and proposals for further amendments continue to be discussed.
Key Disclosures Under RESPA
A lender or mortgage broker must provide a borrower with a good-faith estimate of the total settlement service charges. (The actual figure may differ without violating RESPA.) If the lender or mortgage broker expects that a loan servicer will collect the payments under the mortgage, they must disclose this information in writing within three business days after a borrower applies for a loan.
Sometimes a lender or broker refers a borrower to an affiliate company for a service related to a real estate settlement. An affiliate company is controlled by the same corporation as the referring entity. When this happens, the referring entity must provide the borrower with an Affiliated Business Arrangement Disclosure.
A borrower also must be allowed to inspect their HUD-1 Settlement Statement one business day before settling their loan. This allows them to review every charge and credit in the mortgage transaction.
Claims Based on RESPA Violations
When a RESPA violation such as a kickback occurs, a consumer generally has one year to bring a lawsuit. However, they may have three years to bring a claim against their loan servicer based on certain violations. The lawsuit should be filed in a federal court in the district where the violation occurred or where the property related to the violation is located.
Distinctive procedures apply to a claim against a loan servicer. Before filing any lawsuit, the consumer must send a letter to the servicer that describes the problem. The servicer will have 20 business days (about four weeks) to respond after receiving the letter. It must fix the problem within 60 business days (about 12 weeks) or explain why it believes that the grievance is unfounded. Throughout this process, a borrower must make the required payments under the loan.
