How Does RESPA Affect the Real Estate Industry?
In 1974, the Real Estate Settlement Procedures Act (RESPA) was created to ensure that kickbacks, referral fees and improvement disclosure techniques would become a part of every legal real estate transaction. Lenders and construction companies as well as real estate agents were drowning the consumer in unnecessary expenditures involving the inflation of real estate costs and kickbacks.
RESPA officials are watchdogs when it comes to the real estate settlement process and they not only forbid bribes between lenders and third party settlement agents; they also question reciprocal referral payments among real estate professionals.
In November of 2008, HUD issued a ruling concerning good faith estimates (GFE), which went into effect on January 1, 2010. At the closing of the real estate loan, all lenders must provide to RESPA a good faith estimate concerning approximate costs for a particular loan, and in the instances of purchasing or refinancing real estate loans a HUD-1 and a HUD-1A form respectively. The finalized versions of these forms act as watchdogs for fraud, as they allow the borrower to know exactly how much the loan cost and to whom the specific fees are allotted.
The following example illustrates the effects of this ruling. Someone applies for a loan from an unscrupulous lender who promises a 5% interest rate, but when the time comes to apply, the applicant is forced to use the lender’s title insurance company which charges the exorbitant price of $5,000 for that which should cost $1,000. The illicit profit of $4,000 is assured to the lender’s title company. This type of transaction becomes too noticeable to pull off with a GFE. Honest price competition based on consumer demand, which hopefully will bring prices down, must prevail and the GFE insures that all prices for all services are distinctly stated.
Lenders must also furnish RESPA with periodic disclosures and may never undertake any service that will increase the ultimate cost presented to the consumer. Home sellers cannot, under any circumstances, dictate to homebuyers where they must buy title insurance. RESPA’s influence is far reaching and extends to most purchase loans, assumptions, refinancings, property management loans and equity lines of credit.
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