“RESPA”) came into effect since June 20, 1975. The law is bulky and a code into web of accountability all the parties to the real estate settlement transactions viz. mortgage brokers, servicers of home loans or lenders, thereby protecting innocent borrower through periodic disclosures with respect to nature and costs of the real estate settlement process by the aforementioned parties. The law takes cognizance of unethical financial conduct in the real estate business such as fee sharing, kickbacks, etc and impose limitation on the amount that a borrower needs to pay during the course of transaction such as payment into escrow account. RESPA has empowered the Department of Housing and Urban Development (HUD) as the supervisory body with respect to implementation of this law and HUD promulgated Regulation X to implement RESPA.
The Real Estate Settlement Procedures Act facilitates and helps the borrower who is desirous to purchase a property, to make an informed decision with respect to the transaction i.e. whether to go forward with the closing deal or negate and decline the proposition of the seller in light of the facts that borrower knows. RESPA mainly is regulatory law that regulates mortgage loans that are focused for one-to-four family residential properties. It moreover encompasses majority of assignments, refinances, equity lines of credit, purchase loans, and property enrichment/improvising loans.
Prior to the enactment of RESPA, several companies were dealing in the real estate business that included constructors, contractors, lenders, agents and title insurance entities. These parties often acted in collusion to gain in a group a financial gain and support each other through hidden kickbacks and which consequently inflated settlement cost and hindered price competition in unfair manner. The law was passed to prohibit these abusive practices and safeguard the interests of the borrowers against such practices.
Under this very law, the mortgage broker, real estate agent, home loan creditor/servicer are under obligation to hand over the buyer information related to consumer protection law recourses, settlement service and cost of real estate settlement information. The business parties also must be They also need to disclose if there are any existing business relationships between the service providers and other parties involved in the settlement process.
RESPA prohibits kickbacks, referrals and unearned fee and restrains the sellers from mandating a title insurance company for the settlement. It also prohibits the loan servicers from demanding excessively large escrow account for real estate settlement. If a kickback or any other abuse occurs during a settlement process the complainants are allowed to file a lawsuit within one year of the incident.
The recent amendment in 2014, also introduced provision of private cause of action for consumers to sue for indiscretions and arbitrary decisions the banks as well as the mortgage servicers. But to summarize in order to understand that how RESPA protects the consumers in cases such as:
- failure to transfer loan modification to new servicer or recognize existing loan modification.
- failure to acknowledge loan modification request despite receiving complete file within 30 days.
- Initiate sale or foreclosure even if client is under process of loan modification review.
- Wrong payment calculation
- Failure to inform missing documents and then rejecting
- Failure to provide all loss mitigation options available.
- Requesting documents that are NOT required for evaluation or requesting documents that you are not required to file
- Mortgage statements which are inaccurate
- Not honoring a permanent modification after trial payments have been made
RESPA’s four critical provisions that the home/real estate buyers and the settlement providers require to be conscious of before initiation of residential real estate transaction are as follows:
I. RESPA Section 6
Section 6 is significant in the sense that it provides for protection of homeowners in relation to servicing of the home loans and its subsequent abuses. The Section 6 lays down the rule that if the borrower of loan approached the creditor/lender with a problem debt servicing and submits a written explanation for the same then the loan servicer or the lender is under legal duty to acknowledge the receipt of complaint within 20 business or working day.
Once the receipt of written request is acknowledged, the loan servicer shall resolve the issue that gave rise to the or if refusing then written reasons for the refusal of the same. The debtors or borrowers must ensure payment of all required legit amount until the complaint is resolved from creditor’s end.
Section 6 also has provision of class action suit in case there is large group of aggrieved borrowers who are victimized by the same loan servicer. Additionally, the debtors who face damages due to loan servicer serious breach/ contravention of this Section, they are entitled to file for actual damages and also for additional damages if there has been a consistent pattern of non-compliance.
II. RESPA Section 8
Section 8 is for most individuals and businesses the most important aspect of RESPA and this is the most significant legal provision of the RESPA for the real estate businesses as well as the individuals as the maximum contentious cases arise from this provision.
Section 8 explicitly lays down prohibition against three widespread irregular financial practices observed amongst the real estate settlement providers viz. kickbacks, unearned fees and fee splitting. Section 8 reads as “none shall advance or accept kickback, fee or any value or token in exchange for the referral during the course of real estate settlement business”. Further, it also explains that it would be illegal for real estate business dealer to ask for fees for RESPA-related service and then onwards share the portion with an unconnected third party which doesn’t require or owe any service for the fee.
The contravention of Section 8 by the individuals and business shall be liable for both civil as well as criminal penalties. The criminal punishment for the violation of this section provides for imprisonment up to 1 year in addition to fines up to $10,000. Section 8 provides for private civil lawsuits to the individuals who are victims and they can recover their losses, attorneys’ fees, treble damages and court costs.
III. RESPA Section 9
The section mentions that it prohibits a home seller from promoting/advertising/forcing the buyer to take loan from specific insurance company. If the HUD finds contravention of this provision by the seller, the buyer of the home has all right to institute a suit against the home seller and recover damages that is equivalent to three times the insurance fees that would be paid by the buyer.
IV. RESPA Section 10
This section provides for a cap on the amount that borrower may deposit in the escrow account on requirement of the mortgage lender so as to pay the real estate taxes, other charges or home onwer’s insurance. Also, while the term of mortgage loan this section prohibits excessive charges from the borrowers in case mortgage lenders charge excessive amount to maintain escrow account. As per the law, the maximum amount that the lender may make mandatory to be deposited in the escrow account by the borrower 1/12th of total of every disbursement that is payable during the year in addition to amount that would be required to pay for shortage in such account. The law states that annually the mortgage-lender shall conduct escrow account analysis and inform borrower of any shortage. In case, there is any excess of US $ 50 or more it shall be returned to borrower. Further, the Section 10 empowers HUD to levy civil penalties on loan providers who fail to submit annual escrow account statements to their respective borrowers.
The steps to file lawsuit against a loan company or lender by the borrower/debtor is laid down in the RESPA. The procedure to initiate the legal action is as follows:
- Borrower must communicate in writing the issue to lender.
- Lender must respond in writing within a period of 20 days after receiving it
- Lender must address the issue within 60 business days or explain reasons in case they validate their account.
- The lender needs to provide name and contact information of a person with whom the borrower can discuss the matter.
- Borrower under the law must in all circumstances continue to pay to the creditor/lender until the controversy is resolved.
The limitation period under RESPA for filing complaint against the mortgage servicer is three years in case the mortgage servicer has violated the provisions of the law. The lawsuit can be filed in any federal district court, either in the district where the property is situated or in the district where the violation occurred.
The RESPA and its regulations are much complex than what can be described under the scope of this article but the two crystalline facts are that RESPA made it mandatory certain disclosures to be made while real estate transaction is in process with one party being a desirous home purchaser. Secondly, certain unlawful practices such as commission, kickback fees, etc. that unnecessarily increase salary of settlement cost for retail property purchasers.