John Reed remembers a story told by his parents shortly after he entered the market to purchase a home.
“Mom and Dad talked a lot about how a real estate agent and a bank tried to drive up the price of a property they wanted to buy outside of Denver. This happened in 1962. When I said I wanted to purchase a home about 20 years later, my parents told me to read up on the Real Estate Settlement Procedures Act (RESPA).”
Before the passage of the Real Estate Settlement Procedures Act (RESPA) in 1972, homebuyers had to deal with home price collusion practices implemented by agents, brokers, and banks. The primary objective of RESPA is to educate homebuyers about real estate services, as well as prevent kickbacks and referral fees that substantially increase the cost of buying a home or parcel of land.
RESPA requires lenders and real estate agents to ensure homebuyers receive timely disclosures of every cost involved in the purchase of a home or property. The important real estate law that protects consumers also prohibits the costly practice of dual tracking and sets limits on the use of escrow accounts for down payments.
RESPA Gains More Legal Power
Originally under the legal auspice of the Department of Housing and Urban Development (HUD), RESPA became the legal responsibility of the Consumer Financial Protection Bureau (CFPB) in 2011. The Dodd-Frank Wall Street Reform and Consumer Protection Act prompted the change in the legal domain of RESPA. Formed as the result of the 2007-2008 financial meltdown, the CFPB published new rules that strengthened RESPA. The Dodd-Frank bill mandates that the CFPB publishes a single comprehensive disclosure form for every mortgage transaction that includes all of the disclosure requirements covered by the Truth in Lending Act (TILA). Regulation Z of RESPA presents all of the forms, as well as the timing required to file the forms under the CFPB.
Collusion No Longer Allowed
For decades, lenders, real estate agents, title insurance forms, and construction companies engaged in giving kickbacks that inflated the costs of buying a home or commercial property. The players involved in completing real estate transactions also implemented bait and switch pricing tactics that lured homebuyers into purchasing a home for far more than it was worth. RESPA legally establishes requirements that lenders must adhere to for offering mortgages secured by federally backed loans. The guidelines enforced by RESPA include refinancing, reverse mortgages, and home purchase loans.
Here are some other legal provisions of RESPA:
- Follow established escrow accounting practices
- Allow consumers to compare the GFE to the HUD-1/1a settlement statements at closing
- Prohibits kickbacks or referral fees for service providers
- Prevent home foreclosure when borrowers submit applications for loss mitigation options
Settlement Costs in Good Faith
For every closed-end reverse mortgage, lenders and brokers must provide homebuyers with the government approved Good Faith Estimate (GFE) form. The three-page document presents costs a homebuyer can expect to pay during the home buying process. Costs presented within a GFE form include title insurance, insurance premiums, credit report fees, and origination charges.
If you are in the market to buy a home or parcel of land, consider consulting with a licensed attorney experienced in handling complex real estate transactions. At the very least, you receive an overview of RESPA and the most recent reforms that protect consumers against price manipulations implemented by lenders and real estate agents. You do not have to deal with the blatant kickback schemes that John Reed’s parents had to deal with in 1962, but you still have to be aware of potential illegal price increases in the purchase of a home.