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The Real Estate Settlement Procedures Act (RESPA)
is a federal law which helps protect the buyer/borrower
during the settlement or escrow phase of federally related
mortgage loan transactions. These transactions include
most loans secured by a first or subordinate lien on
residential property, such as home purchase loans, refinance
loans, improvement loans, lender-approved assumptions,
and equity lines of credit. Regulations to implement
RESPA are issued by the U.S. Department of Housing and
Urban Development (HUD).
Settlement or escrow is a process whereby the ownership
of real property transfers from the seller to the buyer
and/or the property is encumbered by a secured loan
with the assistance of a settlement agent or an escrow
holder. RESPA provides detailed information on settlement
and escrow and its itemized costs so that the buyer/borrower
can shop around for settlement/escrow services and also
make informed decisions during the loan/sale transaction
and the settlement/escrow process. Major revisions to
the RESPA law occurred in 1996.
RESPA sets forth special disclosure requirements for
most lenders/creditors who provide such federally related
loans secured by one-to-four dwelling units, manufactured
housing, or a lot on which a residence will be built
or on which a manufactured home will be placed. Lenders/creditors
may also be subject to RESPA disclosures when a certain
volume of residential mortgages are made, whether or
not such mortgages are otherwise federally related.
Certain temporary financing and land contracts of sale
are not covered by RESPA.
Disclosure requirements are primarily the responsibility
of the lender/creditor. RESPA regulates specified disclosures
at the time of the loan application, and at or before
the time of settlement or closing of escrow, and servicing
disclosures after closing. Effective January 1, 1998,
real estate brokers who act as mortgage brokers no longer
have to deliver to the borrower a separate California-mandated
mortgage loan disclosure statement in federally related
loan transactions where the borrower receives a good
faith estimate (GFE) of settlement costs as required
under RESPA and all disclosures required by the Truth-in-Lending
Act and Regulation Z. This is provided that the documents
set forth the broker’s real estate license number,
contain a clear and conspicuous statement on the face
of the documents stating that the "good faith estimate"
does not constitute a loan commitment; and that a special
balloon payment disclosure is included if the loan contains
a balloon payment provision. Note: If a broker does
not provide the California mortgage loan disclosure
statement, he/she must provide a separate disclosure
of all the compensation he/she expects to receive for
arranging the loan.
In all nonfederally related brokered loans and in all
"Article 7" loans under California law (with
first trust deeds of less than $30,000 and junior loans
of less than $20,000, whether they are federally related
or not), mortgage brokers are still required to provide
the California Mortgage Loan Disclosure Statement to
the borrower.
Under RESPA, real estate brokers who act as mortgage
brokers must deliver to the intended borrower(s) a broker’s
GFE within three days of receipt of the written loan
application. The GFE disclosure must include a statement
that it "...is being provided by [name of mortgage
broker], a mortgage broker, and no lender has yet been
obtained. A lender will provide you with an additional
good faith estimate within three business days of receipt
of your loan application." While the HUD Special
Information Booklet (describing the settlement process
and costs) may be provided to the borrower(s) by either
the mortgage broker or the lender, the lender/creditor’s
GFE and other required federal disclosures and notices
of rights must be delivered by the lender or the authorized
exclusive agent of the lender.
Some RESPA requirements may affect the real estate
agent(s) involved in the transaction with respect to
any recommendations the agent(s) might make to a buyer/borrower
about the use of a particular lender, title company,
attorney, or other provider of settlement/escrow services.
When a transaction is subject to RESPA, the buyer/borrower
has the right to select the providers of such services.
Under the provisions of RESPA, the buyer/borrower is
entitled to receive the following:
• a copy of an informational booklet from Housing
and Urban Development (HUD) which explains RESPA, delivered
at the time the prospective borrower makes written application
for a loan, or not later than 3 business days after
either the lender/creditor or mortgage broker receives
the written loan application for senior financing;
• a broker’s Good Faith Estimate of settlement/closing
costs which the borrower is likely to incur at close
of escrow, delivered not later than 3 business days
after the mortgage broker who is not the authorized
exclusive agent of the lender/creditor receives the
written loan application;
• a lender’s Good Faith Estimate of settlement/closing
costs which the borrower is likely to incur at close
of escrow, delivered not later than three business days
after the lender/creditor or its authorized exclusive
agent receives the written loan application;
• an Affiliated Business Arrangement disclosure
where the lender/creditor follows the practice of designating
specific settlement or escrow service providers (as
a part of the good faith estimate), containing the name,
address, and phone number of each designated provider;
an estimate of settlement/closing costs; and whether
each designated provider has a business relationship
with the lender/creditor;
• an advance Truth-in-Lending disclosure statement,
to be provided by the lender/creditor, setting forth
the material loan disclosures as proposed and estimated
by the lender/creditor in accordance with Section 226.19
of Regulation Z; and,
• the HUD Uniform Settlement Statement, which
the lender/creditor must use in providing estimates
and the final actual disbursements of settlement/closing
costs. The borrower has the right to inspect the Uniform
Settlement Statement one business day prior to the close
of escrow;
• a Mortgage Servicing disclosure statement specifying
whether the lender intends to service the loan (handle
the receipt and disbursement of the monthly loan payments
and related matters) or transfer it to another lender,
and information about complaint resolution;
• after settlement or close of escrow, an Annual
Escrow Statement from the loan servicer;
• a Servicing Transfer Statement if the loan servicer
sells or assigns the servicing rights to a borrower’s
loan to another loan servicer, 15 days before the effective
date of the loan transfer, indicating when and where
the new loan servicer will begin accepting payments.
RESPA prohibits any "kickbacks" or the payment
of unearned fees to any person (including a real estate
broker) as compensation for referrals to any real estate
settlement/escrow service. This includes noncash inducement
offers to brokers such as trips. RESPA does not prohibit
a lender or settlement provider from offering an incentive
to a borrower, provided that the incentive is not based
on the borrower referring business to the lender or
provider. Written agreements between real estate brokers
to cooperate and share customary and reasonable commissions
may be acceptable if limited to compensation for the
sale transaction.
RESPA Regulations permit real estate brokers to be
reasonably compensated for work performed on behalf
of the borrower(s), including the use of Computerized
Loan Originations (CLOs). There is no longer an exemption
from RESPA for CLOs and a previously required separate
CLO disclosure format has been eliminated.
Generally, when a real estate broker receives customary
and reasonably earned commissions/fees for services
rendered and/or reimbursements for costs and expenses
actually incurred, it would not be in violation of RESPA
as long as such commissions/fees, costs and expenses
are fully disclosed. This includes anything the broker
receives directly or indirectly from the lender as well
as the borrower. The HUD-1 Settlement Statement must
also show any direct or indirect payments by the lender
to affiliated or independent settlement providers. If
they are paid outside of escrow, they must be shown
as "P.O.C." (paid outside of closing) on the
HUD-1. HUD/FHA is charged with the responsibility to
enforce RESPA and their General Counsel’s Office
or their Enforcement Section should be contacted for
further information and clarification.
12 U. S. Code Sections 2601 - 2617
24 CFR Part 3500 - Real Estate Settlement Procedures
Act, Regulation X
The Housing and Community Development Act of 1992
Business and Professions Code Sections 10176(a) and
(g))
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