It's hard to take a step without hearing something about TILA-RESPA. Why is that? A big part of understanding why is first knowing what RESPA is. In this article, we run through what you should know about the statute.
If you want more information after reading about RESPA, talk with an attorney who specializes in TILA-RESPA or real estate cases. You can visit the Consumer Financial Protection Bureau’s website for updates and information too.
So, what is RESPA?
RESPA is a consumer protection statute that:
- Helps consumers become better shoppers for settlement services and
- Stops kickbacks and referral fees that increase the costs of settlement services.
What does RESPA cover?
"RESPA applies to 'federally related' mortgage loans that are secured by a mortgage loan on a one- to four-family residential property," wrote Amy Swinderman, a staff writer with Inman.
- Some purchase loans
- Property improvement loans
- Equity lines of credit
How It Applies to You
RESPA affects you in some way. And while RESPA is a federal statute, some states have their own version.
According to Inman, some are stricter than the federal statute. And, the state's version can follow federal charges depending on the situation.
If you work in the mortgage or real estate industry, RESPA plays some role in how you go about your business.
RESPA, From the Top
Congress passed the Real Estate Settlement Procedures Act (RESPA) in 1974. The statute went into effect in June 1975. It was updated within the past few years.
One of the main goals of the statute is to help consumers become better shoppers. To do this, lenders must give borrowers certain disclosures at specific points in the loan settlement process. These disclosures talk about the settlement, lender servicing and escrow account practices, and business relationships.
This is to make the process clearer and easier to understand. Transparency and clarity are key themes in the statute.
The statute prohibits "certain practices" that increase the cost of settlement services, according to the US Department of Housing and Urban Development (HUD). RESPA made referral fees and kickbacks illegal.
A part of RESPA going into effect was because of a report by HUD and the Administrator of Veteran Affairs (VA), according to an article in Inman.
The report found that applicants weren’t shopping around. Instead the applicants’ brokers, closing attorneys and others involved referred them to their associates. That included lenders and title companies, Swinderman wrote.
This roundabout referral system inflated settlement service costs, going against the consumer.
Section 8 of RESPA prohibits people from giving or accepting anything of value for business referrals involving a federally related mortgage loan. The statute also prohibits charging for services not actually performed. In section 9, home buyers cannot be required to buy title insurance from a specific company.
Again, it's all done to help the consumer.
RESPA, Present Day
The Consumer Financial Protection Bureau (CFPB) enforces the act, having taken over responsibility in 2011. This came with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly known as the Dodd-Frank Act).
The Dodd-Frank Act made it so the CFPB could bring in new rules by 2012. This combined RESPA’s disclosures and the requirements of the Truth In Lending Act (TILA), Swinderman explained in her report.
These moves were put in motion to simplify the mortgage loan settlement process. Since then, the process continues to become clearer with more additions being made.
In October 2015, the CFPB’s rule TRID went into effect. This stands for TILA-RESPA Integrated Disclosure, otherwise known as the “Know Before You Owe” rule.
“TRID is designed to make sure all mortgage lenders’ disclosures are clear, correct, and easy for buyers to understand," according to Mountain West Financial Inc.
This gave borrowers more time to review disclosures. It also brought new forms, which are:
- The Loan Estimate (LE)
- The Closing Disclosure (CD)
“The Loan Estimate (LE) will replace the Good Faith Estimate (GFE) and initial Truth-In-Lending Disclosure (TIL),” Mountain West wrote. These forms outline the cost, risk, changes to terms, and penalties in a simple way.
The borrower must have the Good Faith Estimate form within three business days of submitting an application.
An application has been received when this information has been collected:
- Social Security Number
- Property address
- Estimated value of the property
- Mortgage loan amount sought
Borrowers have up to 10 days to continue with the loan or drop it. The LE expires after 10 days.
The CD replaces the HUD-1 statement. The replacement brings the HUD-1 and Truth-In-Lending Disclosures together. This has the total cost of the loan – not estimates.
“The form is designed to be easy to compare to the LE to see how the actual costs compare to the estimated cost of the loan,” Mountain West wrote.
Borrowers must have this form at least three days before the loan closing. A revised CD must be delivered within 30 days of the signing if there are changes in loan costs.
Summing up Section 8
Any agreement that involves a federally related mortgage loan is covered. This pertains to mortgage loans for one- to four-family residential properties in particular.
Businesses and individuals cannot give or accept anything of value in exchange for referrals. Section 8 covers splitting fees: You cannot charge for a service that wasn’t performed.
Wait, what is a ‘federally related mortgage loan?’
“A federally related mortgage loan is one made by any lender whose deposits or accounts are insured by any federal agency, intended to be sold to any of the government-sponsored enterprises or made by any creditor who makes or invests in residential real estate loans aggregating more than $1 million per year,” Swinderman wrote.
How about a ‘thing of value?’
A recurring piece of verbiage in section 8 is the phrase a “thing of value.” It’s an umbrella term, covering anything that can be argued or interpreted as valuable.
That includes paid trips and gifts. It also deals with subtle “things of value.” These could be educational seminars or training sessions, open houses, luncheons, or promotional items.
TILA-RESPA covers marketing and advertising too. Lenders who want to partner with real estate agents must stay aware of everything going out to clients and the public.
So, you and your partner created a flyer? That’s great. Is it compliant?
Every pixel must be accounted for when totaling the cost.
When you split the cost, it must be done in pro rata shares. That means the exact amount of space you’ve taken up is what you pay for.
Leaving off on Part One
There is a lot to cover when it comes to TILA-RESPA.
What you should know after this article:
- Congress passed RESPA to protect consumers.
- The CFPB enforces the statute and tries to make it easier to understand.
- RESPA affects everybody in the mortgage and real estate industries. Some key points:
- You can’t accept a thing of value for business referrals.
- You can’t charge for services not actually performed.
- Co-marketing shares must be proportional.
In our next article, we start digging deeper into the statute. We'll look at co-marketing and how to stay compliant with TILA-RESPA. Check back soon for more.