What is RESPA

The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, first passed in 1974. The purposes of RESPA are

to help consumers become better shoppers for settlement services and

to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services.

It was created because various companies associated with the buying and selling of real estate, such as lenders, realtors, construction companies and title insurance companies were often engaging in providing undisclosed kickbacks to each other, inflating the costs of real estate transactions and obscuring price competition by facilitating bait-and-switch tactics.

The Act prohibits kickbacks between lenders and third-party settlement service agents in the real estate settlement process (Section 8 of RESPA). Even reciprocal referrals among these types of professions could be construed in court as a violation of the law of RESPA. It requires lenders to provide a good faith estimate for all the approximate costs of a particular loan and finally a HUD-1 (for purchase real estate loans) or a HUD-1A (for refinances of real estate loans) at the closing of the real estate loan. The final HUD-1 or HUD-1A allows the borrower to know specifically the costs of the loan and to whom the fees are being allotted.

In addition to prohibiting kickbacks and creating required disclosures at the time of application and at and after loan settlement, RESPA also creates specific consumer protection practices.  These include providing the home buyer the right to choose their own title company for the purchase transaction and creating limits and on the amounts that a lender may require a borrower to put into an escrow account for purposes of paying taxes, insurance and other related charges.  These established practices also dictate how the loan servicer maintains the home owner’s escrow account.

For more information on RESPA, visit the US Housing and Urban Development’s RESPA information website.