NMLS SAFE MLO Test

The Real Estate Settlement Procedures Act, enacted in 1974, is a federal law designed to protect consumers in the real estate settlement process. RESPA applies to federally related mortgage loans, which include most residential mortgage transactions involving one-to-four family properties. The primary purposes of RESPA include providing borrowers with timely disclosures about the nature and costs of the settlement process, eliminating kickbacks and referral fees that unnecessarily increase settlement costs, and reducing the amounts held in escrow accounts.

RESPA is enforced by the Consumer Financial Protection Bureau (CFPB), which assumed regulatory authority from the Department of Housing and Urban Development (HUD) in 2011 under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

RESPA covers federally related mortgage loans secured by liens on residential properties containing one-to-four units. This includes purchase loans, refinances, home equity lines of credit, and reverse mortgages when they involve a federally regulated lender, are insured by a federal agency, are made in connection with federal housing programs, are intended for sale to Fannie Mae or Freddie Mac, or are made by a lender whose deposits are federally insured.

Transactions not covered by RESPA include loans for business, commercial, or agricultural purposes, temporary financing such as construction loans that will be replaced by permanent financing, loans on properties of 25 acres or more, assumptions without lender approval, and conversions of loans.

The Loan Estimate must be provided within three business days of receiving a loan application. This disclosure replaced the Good Faith Estimate and initial Truth in Lending disclosure under the TRID rule. It provides borrowers with estimated loan terms, projected payments, closing costs, and other loan features.

The Closing Disclosure must be provided at least three business days before consummation. This replaced the HUD-1 Settlement Statement for most transactions. It details final loan terms, closing costs, and a comparison with the Loan Estimate.

The Mortgage Servicing Disclosure informs borrowers whether the lender intends to service the loan or transfer servicing to another entity. The Affiliated Business Arrangement Disclosure is required when the loan originator refers business to a company with which it has an ownership or affiliate relationship.

Section 8 of RESPA prohibits giving or accepting any fee, kickback, or thing of value for the referral of settlement service business. This prohibition extends to fee-splitting arrangements where no actual services are rendered. Violations can result in criminal penalties including fines up to $10,000 and imprisonment up to one year. Civil penalties include liability to the borrower for three times the amount of the charge paid.

Permissible payments under Section 8 include bona fide compensation for goods or services actually performed, payments pursuant to cooperative brokerage and referral arrangements between real estate agents, and employer payments to employees.

Affiliated Business Arrangements are permitted if the person making the referral discloses the arrangement in writing, the consumer is not required to use the affiliated provider, and the only thing of value received is a return on ownership interest.

Section 10 of RESPA limits the amounts lenders may require borrowers to deposit in escrow accounts for payment of taxes, insurance, and other charges. At settlement, lenders may collect a cushion not exceeding one-sixth of the total annual disbursements from the account (equivalent to two months of payments). Monthly escrow payments are limited to one-twelfth of the total annual escrow disbursements plus the cushion amount.

Lenders must conduct annual escrow account analyses and provide statements to borrowers showing anticipated disbursements, actual account activity, and any surplus or shortage. Surpluses exceeding $50 must be refunded to borrowers within 30 days. Shortages may be collected from borrowers over a 12-month period, or borrowers may pay the shortage in full.

RESPA requires loan servicers to respond to qualified written requests from borrowers within specific timeframes. Upon receiving a qualified written request, the servicer must acknowledge receipt within five business days and provide a substantive response within 30 business days (which may be extended by 15 days if necessary).

Servicers must provide borrowers with annual escrow account statements. When servicing is transferred, both the old and new servicers must provide notice to borrowers at least 15 days before the transfer. During the 60-day period following a transfer, borrowers cannot be charged late fees if payments are made to the previous servicer.

RESPA prohibits sellers from requiring buyers to purchase title insurance from a particular company. Servicers may not charge fees for the preparation of payoff statements, RESPA-related documents, or escrow account statements unless permitted by law. No person may charge a fee for preparing documents required by RESPA.