RESPA AND REG X

In 1974, Congress passed the Real Estate Settlement Procedures Act or RESPA. It is set forth at 12 U.S.C. Section 2601 et seq. The detailed regulations carrying out RESPA are called Regulation X. They are set forth in 24 C.F.R. 3500 et seg.

RESPA was passed for three reasons: (1) to compel better disclosure of settlement costs in real estate transactions, such as title searches, appraisals, escrow accounts and other services incurred in connection with a real estate closing; (2) to eliminate kickbacks and referral fees between and among real estate service providers; and (3) to regulate and reduce the amount of money which consumers can be required to put into loan escrow accounts.

RESPA and Regulation X apply only to consumer loans. They do not apply to loans intended for business, commercial or agricultural purposes. They do not apply to properties of more than 25 acres in size or to vacant land. They do not apply to temporary financing, loan conversions or loans sales on the secondary market. 24 CFR 3500.5.

The heart of RESPA and Regulation X are the disclosure requirements. When a loan application is made, lenders or mortgage brokers are required to provide the borrower with a good faith estimate of what the settlement services will cost. 24 CFR 3500.7. When a loan closed, lenders are required to provide borrowers with a Uniform Settlement Statement, which sets out in detail the exact, itemized costs incurred in connection with the real estate transaction. 12 U.S.C. 2603. If a lender transfers the loan to another lender or another servicing agent, the borrower must be given notice of this transfer. 12 U.S.C. 2605.

The second aspect of RESPA is its prohibition of kickbacks and unearned fees among real estate service providers. 12 U.S.C. 2607; 24 CFR 3500.14. Businesses, which provide real estate services, such as title companies, escrow companies and appraisals, are not permitted to pay brokers or others referral fees, kickbacks or any other unearned fees. There must also be full disclosure of any affiliated businesses, such as title companies owning escrow companies and so forth.

Finally, RESPA limits what consumer borrowers can be required to pay into escrow accounts. An “escrow account”, for this purpose, means the account, which the lender requires the borrower to make payments into, to be sure that property taxes, insurance and similar costs associated with the property are paid on time. A consumer can not be required to pay more than what is actually needed to make real payments on time. 12 U.S.C. 2609. In any given month, the consumer can not be required to pay more than 1/12th of the annual costs involved.

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