Federal Law Protects Home Buyers from Excess Charges

The Real Estate Settlement Procedures Act (RESPA) was enacted to help protect consumers when they buy and sell real estate, and to teach them to be better shoppers. Enforced by the Department of Housing and Urban Development (HUD), RESPA requires that consumers receive disclosures at various times in the transaction, and prohibits “kickbacks” that increase the cost of housing.

RESPA covers loans secured with a mortgage placed on a one- to four-family residential property. These include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit.

“The purpose of the law is to clarify and outline the settlement process and fees to consumers,” said Julie Fagan, HUD’s Field Office Director in Hartford. “The law also eliminates illegal activity such as referral fees among settlement providers.”

RESPA requires lenders and others to give borrowers estimates that make it easier to compare loans and services. Some of the requirements include:

Good Faith Estimate of Settlement Costs
When borrowers apply for a loan, the lender is required to give them a Good Faith Estimate of the loan-related expenses that will be due at closing. The estimate must be provided within three days of the loan application.

The amounts on the Good Faith Estimate are just that – estimates – not guarantees of actual closing costs. Borrowers are encouraged to compare the Good Faith Estimate to the actual closing costs, and ask their lender to explain any discrepancies.

Servicing Disclosure Statement
RESPA requires the lender or mortgage broker to tell the borrower in writing whether or not someone else will collect payments after closing.

Affiliated Business Arrangements
This disclosure is required if the lender, real estate agent, or other person involved with the transaction refers the borrower to another individual or business that is owned or controlled by the same parent company. The form will include a reminder that the borrower is not required to use the suggested individual for the service.

HUD-1 Settlement Statement
The HUD-1 is a form used by the closing agent to itemize all charges imposed upon a borrower and seller for a real estate transaction. It gives each party a complete list of their incoming and outgoing funds. RESPA statutes require that the HUD-1 be used as the standard real estate settlement form in all transactions in the United States that involve federally related mortgage loans.

Last year, HUD announced two related settlements involving allegations that several Tulsa area homebuilders, real estate companies, and title companies were attempting to skirt the anti-kickback provisions of the RESPA. Combined, the companies agreed to pay $450,000 and cease their business practices that triggered HUD's investigation. HUD claimed that the parties violated Section 8 of RESPA, which prohibits anyone from giving or accepting a kickback in exchange for referrals of settlement service business. In addition, HUD alleged that one of the title companies violated RESPA by marking up charges to some consumers for services and recording fees.

Borrowers who believe a settlement service provider has violated RESPA can file a complaint. For more information, consumers can call HUD at 202-708-1112 and ask for the RESPA Office, or visit online at www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm