RESPA is about closing costs and settlement procedures
The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, first passed in 1974 designed to help homebuyers be better shoppers in the home buying process, and is enforced by US Department of Housing and Urban Development.
RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.
RESPA also prohibits certain practices that increase the cost of settlement services. RESPA prohibits a person from giving or accepting any thing of value for referrals of settlement service business related to a federally related mortgage loan. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company.
Sections 8 and 9 are most important to Real Estate Professionals…Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or any thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed.
Section 9 of RESPA prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance.
Who is a “settlement service provider?” A settlement service provider is one who provides services in connection with the purchase/sale of a property that are paid for, directly or indirectly, out of the funds at settlement. A settlement service includes any service provided in connection with a real estate settlement including, but not limited to, title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate broker or agent, the origination of a federally related mortgage loan and the handling of the processing and closing or settlement. This list is broad but not all-inclusive. Anything listed on a HUD-1 form could be a settlement service and the company providing it a settlement service provider.
The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.
RESPA does not prevent joint advertising between two settlement service providers, such as a mortgage banker and a real estate broker advertising their services on the same brochure or newspaper ad. However, each advertising party must pay for his share on a proportionate basis. When a real estate broker equally shares ad space with a title company, each party must pay 50 percent of the ad cost. Paying more than the pro-rata share can be considered by the Department of Housing and Urban Development (HUD) as “accepting a thing of value” for the referral of business, which is a violation of RESPA’s Section 8 anti-kickback provision. There is a small exception to Section 8 Anti-kickback Provision. An example would be a title company can provide a real estate agent with note pads and pens with the title company’s name as long as it is a normal promotional item. However, it is a RESPA violation if the tile company provides a real estate agent with note pads and pens with the real estate agent’s name on the products for marketing realty services to clients.
An affiliated business arrangement exists when a person in a position to refer settlement business, such as a real estate broker, or an “associate” of such person has an affiliate relationship with, or a direct or beneficial ownership interest of more than one percent in, an entity to which business is referred, such as a joint venture title or mortgage entity.
Department of Housing and Urban Development, a State Attorney General or State insurance commissioner may bring an injunctive action to enforce violations of Section 6, 8 or 9 of RESPA within three (3) years. Violators of RESPA face harsh penalties including triple damages, fines, and even prison. While many may think enforcement of RESPA has been lax, over the past 18 months HUD has stepped up it’s enforcement. HUD hired new staff and entered into contract with an investigation firm to conduct on-site reviews and monitor conformity with RESPA. As of October 2006 HUD’s enforcement actions had resulted in $2 million in settlements. One case cases involved paying kickbacks for referrals and another involved captive title reinsurance. Enforcement actions have been against both real estate brokers and settlement service providers.