In 1974, the Real Estate Settlement Procedures Act (RESPA) was passed to protect consumers from unnecessary cost increases for settlement services, as well as to promote the shopping experience when using these services. The act covers loans that have been secured with a mortgage for one to four family residential properties, which is enforced by the Interstate Land Sales and HUD’s Office of RESPA. Most often, this includes loans, refinances, assumptions, property investment loans, and equality lines of credit.
The act requires borrows to receive disclosures at various times, such as the costs associated with the settlement. It may also include the lender servicing, escrow account practices and business relationships between settlement service providers. It also limits certain practices that will increase the cost of settlement services, such as requiring home buyers from purchasing title insurance from a particular company.
The disclosures are required at various times throughout the buying process, such as at the time of the loan application, before closing occurs and after the settlement. During the loan application process, the act requires mortgage brokers or lenders to provide borrowers with a Special Information Booklet, a Good Faith Estimate of settlement costs and a Mortgage Servicing Disclosure Statement.
Prior to closing, an Affiliated Business Arrangement Disclosure (AfBA) is required if a settlement service provider involved a RESPA covered transaction, referring the customer to a provider when an ownership or other beneficial interest is involved. The HUD-1 Settlement Statement may also be provided, which outlines all modifications involving the borrowers and sellers connection with the statement.
During the time of settlement, the HUD-1 Settlement Statement is provided to show settlement costs of the loan transaction, which can be provided on separate forms for the seller and borrower. The Initial Escrow Settlement is also provided to itemize the estimated taxes, insurance premiums and other changes that may have to be paid from the Escrow Account during the first twelve months of the loan.
After the settlement, the loan services must provide borrows with the Annual Escrow Statement each year to summarize the escrow account, including deposits and payments. It’s used to notify borrowers of any shortages or surplus of the account, as well as any action that needs to be taken,. Should the loan service sell or assign the servicing rights of the borrower’s loan to another service, a Servicing Transfer Statement is required.
For the full RESPA or for more information, visit U.S. Department of Housing and Urban Development.
If you'd like to learn more about RESPA, contact Steven Larson today!