Focused on keeping homebuyers safe from bogus closing expenses and settlement procedures, the Real Estate Settlement Procedures Act or RESPA for short, was enacted in 1974. Administered by the Consumer Financial Protection Bureau (CFPB), RESPA was created with the general purpose of making sure borrowers are better informed when it comes to taking out a mortgage, particularly in regard to closing costs.
What unnecessary costs does RESPA protect against?
RESPA helps protect borrowers from charges that result from practices like kickbacks. A kickback, in this context, would be an extra step in the process of closing on a mortgage that results in the borrower’s paying for services that were not needed. For example, a mortgage lender might tell a borrower that they must use an affiliated title insurance company to receive a special interest rate — but the service fee for the title insurance company is abnormally high. The title company would then “kick back” a portion of the fee to the lender. Thanks to RESPA, such practices are illegal.
RESPA also requires that borrowers get periodic disclosures about closing costs and settlement procedures throughout the mortgage process. These disclosures will detail every cost associated with a settlement, describe the practices of loan servicers, and draw attention to the relationships between settlement service providers.
What are some components of RESPA?
The most recent update to RESPA added a requirement that a standardized Good Faith Estimate, known in its updated, simplified form as Know Before You Owe, must be provided to help mortgage shoppers select the best service providers. Shared at the time of the loan application, Know Before You Owe also makes settlement costs and interest rates easier for borrowers to understand. Ideally, these estimates will result in borrowers spending less when getting a mortgage. As part of the update, HUD-1 Settlement Statements were also changed so borrowers could be better able to tell whether their closing costs are within established guidelines.
In addition to Know Before You Owe and HUD-1 Settlement Statements, RESPA requires borrowers be given an Affiliated Business Arrangement Disclosure before closing on a mortgage, an Initial Escrow Statement that lists individual expenses (such as taxes and insurance premiums) at the time of closing, and an Annual Escrow Statement that summarizes escrow account deposits and payments each year after closing. If the servicing rights of a borrower’s loan are ever transferred to a servicer other than the original, a Servicing Transfer Statement should also be provided.
