The Real Estate Settlement Procedures Act, or RESPA, was first passed in 1974 to help protect consumers during the settlement, or closing, of a mortgage. It requires disclosures at certain times and eliminates kickbacks and referral fees that unnecessarily raise the costs of settlement services.
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Disclosures
Time of application. Within three days, the lender must provide the buyer with a Special Information Booklet about various real estate settlement services. The lender must also give a Good Faith Estimate of settlement costs, which describes the estimated charges the buyer will have to pay at closing. The lender must also provide a Mortgage Servicing Disclosure Statement that states the intention to service or transfer the loan.
Before closing. Before a settlement service provider refers the buyer to another service provider, the first provider must give an Affiliate Business Arrangement Disclosure if they have an ownership or beneficial interest in the referred provider. This describes the business arrangement between them and estimates the cost. The buyer can request the HUD-1 Settlement Statement one day before closing that clearly shows all charges for the buyer and seller in connection with the settlement.
At settlement. The lender must have the HUD-1 Settlement Statement as well as the Initial Escrow Statement that itemizes taxes, insurance premiums, and other charges that will be paid from the Escrow account.
After settlement. The buyer should receive an Annual Escrow Statement with the summary of all deposits and payments from the account, as well as balances. If the lender transfers the mortgage, the buyer should receive a Servicing Transfer Statement 15 days before the effective transfer date.
Prohibited Practices
RESPA prohibits settlement service providers from giving or receiving anything of value for settlement service business referrals. A seller cannot require a buyer to use a particular title insurance company. Lenders may not require the buyer to pay more than 1/12 of the total payments out of the escrow account during the year.
While RESPA has helped cutback closing costs, it can't replace an informed borrower. Remember to keep a watchful eye during the closing process.