RESPA empowers home buyers and consumers

HousingAlthough the Real Estate Settlement Procedures Act (RESPA) is one of those laws that you don’t hear much about, it’s a consumer protection statue that has been around for while.  Enacted in 1974, RESPA was intended to help home buyers be better shoppers by requiring the disclosures regarding the nature and costs related to the real estate settlement process.  Keeping RESPA relevant, there have been modifications and clarifications through the years, most notably the change of administration and enforcement in 2011 from HUD to the Consumer Finance Protection Bureau (CFPB).

RESPA is generally known for empowering consumers in the real estate process by allowing consumers (in most cases) to choose service providers, and prohibiting kickbacks (e.g., unearned fees) for referrals.  Section 8 of RESPA prohibits real estate service providers from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage. While Section 9 prohibits a home seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale.

RESPA also requires the disclosure of affiliated business arrangements associated with a real estate closing.  An affiliated business relationship is considered to exist when there is a direct or indirect referral from a service provider to another provider of settlement services when there is an affiliate relationship or when there is a direct or beneficial ownership interest of more than one percent.  The disclosure of such a relationship must specify the following: the nature of the relationship (explaining the ownership and financial interest) between the provider and the loan originator; and the estimated charge or range of charges generally made by such provider. This disclosure must be provided on a separate form at the time of the referral (or at the time of loan application or with the Good Faith Estimate if referred from a mortgage lender).  In most cases, you’re not required to use the referred affiliated businesses.

RESPA violations are serious, and penalties can be severe.  For example, HUD (hud.gov) lists the penalties for violations of Section 8 “… anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.

The real estate industry takes RESPA very seriously; the industry educates service providers about empowering consumers, as well as regulation compliance.  And although modifications of RESPA are to keep up with the real estate industry; some still claim that there are sections of RESPA that remain vague, as demonstrated by the Supreme Court opinion of Freeman v. Quicken Loans, and further clarifications (such as the RESPA Home Warranty Clarification Act of 2011).

In the past, RESPA violations were pursued vigorously by HUD; resulting in settlements as well as criminal investigations.  Today, the CFPB (consumerfinance.gov) has taken over the reins, and continues the pursuit of RESPA violations with the same if not increased vigor.  More information and guidance about RESPA can be obtained from the CFBP (consumerfinance.gov).

by Dan Krell ©
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. This article was originally published the week of February 24, 2014 (Montgomery County Sentinel). Using this article without permission is a violation of copyright laws. Copyright © Dan Krell.

  • Not going there

    I keep seeing all of these actions against lenders in the news but it’s the Realtors that really push for this stuff. For example, my husband works as a loan officer in a small town with very high-dollar transactions, and the real estate agents there actively solicit lenders to pay for their catering at open houses, to cover their advertising, and more. If he says that he can’t do that, they just go with a broker who flagrantly pays for huge spreads, buys them gifts, takes them golfing, etc. If he complains, the Realtor board will blacklist him — no one has the slightest interest in paying for their own stuff. So he loses opportunities and business because he won’t break the law, the buyers pay more because the other guy is way more expensive, and nothing is done. Why isn’t there enforcement on the real estate side instead of just the lending side?