RESPA (Real Estate Settlement Procedures Act)
RESPA is a federal law that requires lenders to provide borrowers with clear disclosures about settlement costs and prohibits certain practices like kickbacks and referral fees that can inflate closing costs.
Exam Tip
RESPA = Settlement disclosure law. Loan Estimate within 3 business days. Closing Disclosure 3 days before closing. Section 8 = NO kickbacks.
What is RESPA?
The Real Estate Settlement Procedures Act (RESPA) is a federal consumer protection law enacted in 1974 that governs the mortgage loan settlement process. RESPA aims to protect homebuyers by requiring lenders to provide clear, standardized disclosures about loan terms and closing costs, and by prohibiting practices that could increase costs without benefit to consumers.
Key RESPA Requirements
| Requirement | Description |
|---|---|
| Loan Estimate | Must be provided within 3 business days of application |
| Closing Disclosure | Must be provided at least 3 business days before closing |
| Affiliated Business Disclosure | Must disclose any referral fee arrangements |
| Servicing Transfer Notice | Must notify borrowers of loan servicing transfers |
RESPA Disclosure Timeline
| Document | When Provided |
|---|---|
| Loan Estimate (LE) | Within 3 business days of application |
| Special Information Booklet | With Loan Estimate or within 3 days |
| Affiliated Business Disclosure | At or before referral |
| Closing Disclosure (CD) | At least 3 business days before closing |
Prohibited Practices Under RESPA
| Practice | Description |
|---|---|
| Kickbacks | Payments for referrals of settlement business |
| Fee Splitting | Sharing fees for services not actually performed |
| Excessive Escrow Deposits | Lenders can't require excessive reserves |
| Seller-Required Title Insurance | Sellers can't require specific company |
Section 8 - Anti-Kickback Provisions
RESPA Section 8 specifically prohibits:
- Kickbacks: Any fee, commission, or payment for referring settlement service business
- Unearned Fees: Charging fees for services not actually performed
- Fee Splitting: Splitting fees where no service is rendered
Exceptions: Payments for services actually performed and employer-employee compensation are permitted.
RESPA vs. TILA Comparison
| Aspect | RESPA | TILA |
|---|---|---|
| Focus | Settlement procedures and costs | Loan terms and cost of credit |
| Key Disclosure | Closing Disclosure | APR, finance charges |
| Main Purpose | Prevent settlement cost inflation | Enable credit comparison |
| Regulator | CFPB | CFPB |
Enforcement and Penalties
| Violation | Penalty |
|---|---|
| Kickback Violations | Up to $10,000 fine and/or 1 year imprisonment |
| Excessive Escrow | Refund excess amounts + interest |
| Disclosure Violations | Borrower may recover actual damages |
What RESPA Covers
RESPA applies to "federally related mortgage loans," which includes:
- Loans secured by 1-4 family residential properties
- Loans made by federally regulated lenders
- Loans insured by federal agencies (FHA, VA)
- Loans sold to Fannie Mae or Freddie Mac
Exam Alert
RESPA requires a Loan Estimate within 3 BUSINESS DAYS of application and Closing Disclosure at least 3 BUSINESS DAYS before closing. Section 8 prohibits kickbacks and fee splitting. RESPA is enforced by the CFPB.
Study This Term In
Related Terms
Closing (Real Estate)
Real EstateClosing is the final step in a real estate transaction where ownership transfers from seller to buyer, documents are signed, funds are exchanged, and the deed is recorded.
Title Insurance
Real EstateTitle insurance is a policy that protects property buyers and lenders against losses from defects in title, such as liens, encumbrances, or ownership disputes that existed before purchase.
Escrow
Real EstateEscrow is a neutral third-party arrangement where money or documents are held until all conditions of a real estate transaction are met.
TILA (Truth in Lending Act)
Real EstateTILA is a federal law that requires lenders to disclose key loan terms and costs to borrowers in a standardized format, including the APR, finance charges, and total payments, enabling consumers to compare credit offers.
Points (Discount Points)
Real EstatePoints are upfront fees paid to a lender at closing to reduce the interest rate on a mortgage, with each point equal to 1% of the loan amount and typically lowering the rate by 0.25%.