The Real Estate Settlement Procedures Act (RESPA) was enacted in 1974. Compliance with and rule-writing authority for RESPA were originally assigned to the U.S. Department of Housing and Urban Development (HUD) as its Regulation X; however, in July 2011, rule-writing authority and oversight for Regulation X was transferred to the Consumer Financial Protection Bureau (CFPB). RESPA rules protect consumers by requiring creditors and other providers of residential loan and mortgage settlement services to make certain disclosures to consumers for transactions subject to real estate transaction settlement processes. It also prohibits settlement service providers from conducting or participating in certain acts or practices commensurate with business arrangements for consumer-purpose real estate transactions. RESPA generally does not cover open-end transactions secured by a dwelling if all of the disclosures required by Regulation Z – Truth in Lending Act (TILA) have been provided to the consumer.
RESPA guidelines cover:
- Mortgage Settlement Documents and Procedures – Pre-closing and closing documents about covered transactions; timing requirements for delivery of the documents; tolerance on required settlement costs; Good Faith Estimate of Closing Costs (GFE); HUD-1 and HUD-1A Settlement Statements; Settlement Booklets and Settlement Services Provider Disclosure;
- Escrow Accounts and Disclosures – Initial and subsequent disclosure of escrow amounts, including annual statements and requirements for surpluses, deficiencies, and shortages;
- Prohibition Against Kickbacks and Unearned Fees – Receiving or providing a thing of value for the referral of settlement business prohibited (without conducting certain settlement services identified in RESPA); penalties and liabilities include civil liability up to three times the amount in violation, costs of court proceedings may be recoverable, and punitive fine up to and including $10,000 or imprisonment for one year or less, or both;
- Disclosure of affiliated business arrangements – A loan originator must disclose certain affiliate or ownership relationships among settlement service providers for covered transactions; and
- Consumer protections for loss of home and transfers of service providers – A lender must disclose at application the availability of homeownership counseling organizations to assist the homeowner; certain disclosures of servicing transfers must be provided to the consumer to preclude payment processing issues.
RESPA violations of kickback, referral, and fee splitting prohibitions are subject to severe penalties including fines of up to $10,000 and one year in prison. Servicing violations may be allowed class action suits against servicers. Failure to submit an initial or annual escrow statement could result in a civil penalty of $75, with a limitation of $130,000 on the penalty imposed on one servicer for violations occurring within a consecutive 12-month period. Recent changes to RESPA requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) expose loan originators to increased risk for inaccurate or untimely RESPA disclosures and processes. Pre- and post-closing RESPA review procedures should include a comparison of the GFE and HUD-1/HUD-A Settlement Statement to ensure that charges, credits and fees reported at closing are consistent between the two documents. The process should also include a review of the Loan Pricing Agreement (LPA) and the Settlement Services Provider List (SSPL) to ensure that the proper loan terms and settlement providers are reflected on the closing documents. Particular attention should be paid to RESPA rules associated with the issuance of the initial and subsequent GFE’s based on the Changed Circumstance Rule during the pre- and post-closing process to mitigate risk of non-compliance.