A RESPA Refresher for Real Estate Agents
The Real Estate Settlement Procedures Act (or RESPA) governs settlement practices in residential property purchases — specifically, those of one to four units.
It’s a law that applies to a wide range of real estate professionals, including agents, mortgage lenders, title companies, mortgage brokers, home warranty companies, appraisers, and more.
The law’s thorough, too, spanning a whopping 88 pages and all kinds of topics, including escrow accounts, servicing transfers, settlement forms, and even foreclosure sales. So having a good handle on it? That’s critical to both complying with the law and protecting your clients’ best interests.
How long has it been since you studied up on your RESPA rules? Use this RESPA refresher to make sure you’re on top of things.
4 RESPA rules to remember
1. You can’t receive any sort of kickback from a settlement provider.
If you refer clients to a certain title company, mortgage broker, or another service provider, you can’t receive any “thing of value” for that referral. This can mean any number of things, including cash, gift cards, free lunches, and anything that’s not a payment for a direct service actually provided.
If a service is provided, only a fair market value may be charged. Anything above that qualifies as a “kickback” under RESPA and would be a violation.
A quick note here: This rule also goes the other way around, so as a settlement provider yourself, you also can’t offer any kickbacks. A good example would be if a loan officer sent a customer your way. While it can be tempting to send them a gift card for the business, it would also count as a “thing of value” under RESPA’s rules.
2. You have to disclose any sort of affiliated business relationship before you make a referral.
Referrals are a part of an agent’s everyday line of work, but you need to be careful about which professionals you refer and how you refer them. For example, if you refer a mortgage broker who just so happens to be your spouse — meaning you have some sort of financial gain there — this needs to be disclosed. Clients also need to know that they are not required to use that referred provider’s services.
This also goes for any business you have a stake in, so if you own stock in a title company or mortgage lender, this will need to be spelled out in an Affiliated Business Arrangement Disclosure. Consumers must know they’re not required to use these services in order to finalize their transactions.
3. Your clients can’t be charged an excessive amount for escrow.
Escrow accounts have their purposes, but if a settlement provider is requiring more than the client actually needs for their estimated closing costs — including taxes and insurance — then that’s a violation of RESPA.
Under the law, servicers/lenders can only charge a monthly sum of 1/12 the total annual escrow payments estimated, plus one-sixth of the total annual estimate as a cushion. Servicers must offer both an initial escrow account statement (within 45 days of closing) and an annual one, which breaks down that year’s payments, the total amount paid toward taxes and insurance, and the remaining balance. It should also include estimates for the following year.
4. Your clients should receive a number of disclosures along the way.
RESPA requires various consumer disclosures to ensure your clients are aware of their full charges, as well as where those costs stem from. They should be given a Good Faith Estimate, which should be issued just after applying for a loan, as well as a Servicing Disclosure Statement. This lets the consumer know if the lender plans to transfer servicing rights to the loan after closing. Clients should also receive a Closing Disclosure at least three days before their closing date.
At closing, consumers should get various Escrow Account Operation & Disclosures and a HUD-1 Settlement Statement, which breaks down the buyer’s full itemized list of charges.
The bottom line about RESPA
RESPA is one of the many legal protections out there for buyers and sellers, so make sure you’re up to date on its provisions and requirements. If you’re not sure an activity you’re participating in is in line with RESPA rules, consider speaking to a real estate attorney just to be safe.