RESPA: What is it, and what do you need to know?

What it does: RESPA is a federal statute enacted to protect consumers of residential (one-four family properties) federal mortgages from deceptive trade practices. The focus of the rule is to reduce undue closing costs and promote transparency within settlement/closing procedures. It accomplishes this by improving disclosures, informing consumers of settlement costs, and eliminating referral fees.

RESPA prevents “kickbacks” for services. Example: A mortgage company attempts to pay a Realtor for directing clients to use the mortgage company’s services.

From NAR:

Section 8(a) prohibits referral fees between settlement service providers, which means that real estate professionals should never give or receive money or anything of value in exchange for a referral to or from another settlement service provider. For example, if you refer a client to a home inspector, and the home inspector sends you a gift card to your favorite restaurant as a thank-you, this would likely violate RESPA. Even if you don’t have a written agreement for the referral of business, your conduct can imply such an arrangement.”

It should be noted that transactions involving cash purchases, rentals, vacant land and commercial loans are not covered under RESPA regulations.

A settlement service typically includes services such as title searches, examinations, title insurance, services provided by attorneys, document preparation, property surveys, appraisals, home inspections, home warranties, real estate services, federal mortgage loans, and the closing process of purchasing a home.

  1. Requires loan cost disclosures
  2. Prohibits kickbacks and referral fees
  3. Regulates business affiliations
  4. Regulates escrow accounts
  5. Prevents preferred title insurance requirements
  1. Anything provided in exchange for a referral of business can violate the law. Referral means handing someone brochure documents that would lead them to hire certain professionals over others, and then subsequently, the agent receives some sort of benefit in return for promoting that professional.
  2. Violations of RESPA can lead to fines of up to $10,000 per violation and up to a year in prison.

Real estate agents can participate in “marketing service agreements” with other settlement service providers. Payment must be for said marketing agreements, and in no way for referral of business. Payment must also be for the fair value of the services. Example: a mortgage broker and a real estate agent team up to split marketing costs.

“Another exception is the affiliated business relationship. An affiliated business relationship is where two settlement service providers operate a settlement service together, such as a real estate brokerage and title company having common ownership interests. This is permitted as long as the consumer receives a written disclosure about the existence of the arrangement and a written estimate of the charges or range of charges no later than the time of referral. In addition, the consumer cannot be required to use any specific settlement service provider, and no payments, other than a return on investment, may be received under the arrangement,” from NAR.

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