RESPA Violations: Definition, Examples & How to Avoid Them
The Real Estate Settlement Procedures Act (RESPA) was established in 1974 by the US Congress to protect against unfair business practices and unnecessarily high costs associated with homeownership. RESPA strives to eliminate unethical practices like kickbacks, fees, and errors and ensures disclosures are provided to buyers and sellers while obtaining a mortgage. By knowing RESPA laws and regulations, all parties involved can avoid RESPA violations, penalties, and unethical business practices.
What Is RESPA in Real Estate: History & Coverage
History of RESPA
- 1974: The Real Estate Settlement Procedures Act (RESPA) was passed into law
- 1983: RESPA amended to extend coverage to controlled business arrangements
- 1990: Section 6 mortgage servicing requirements were added
- 1992: RESPA extended to all residential mortgage loans with a lien, disclosures in writing for an agent to mortgage referrals, and computer loan originations
- 1996: HUD removed compensation for referrals to affiliate companies and stricter payment rules
- 2002: Revised RESPA has greater disclosure, more consumer choices, and limited fees
- 2008: Implemented a standardized GFE (good faith estimate) for consumer costs
- 2010: Dodd-Frank Act mandated RESPA to shorten time limits, increase penalties, and provide amendments
- 2011: The Consumer Financial Protection Bureau (CFPB) took over RESPA regulatory duties
- 2012: New mortgage disclosure forms implemented
- 2020: Updated frequently asked questions addressing gifts and promotional activities
Why RESPA Started
RESPA violation penalties were implemented because individuals and companies associated with real estate transactions, like lenders, agents, and construction and insurance companies, received undisclosed kickbacks and referral fees for recommending a settlement service provider.
Kickbacks and increased fees ultimately resulted in higher costs for the homebuyer. RESPA seeks to ensure homebuyers have all the information about their transactions so they can make an educated decision on the vendors they choose to work with.
Who RESPA Involves
Unlike the rules listed in the Fair Housing Act, which seeks to prevent discrimination against those buying, renting, or selling homes, RESPA applies to all real estate settlement services. These services can be defined as agent services, services rendered by an attorney, the origination of a mortgage loan, and the settlement or closing process.
The act oversees all activities of a person or entity involved in the home purchasing, improvement, and closing process when a federally related mortgage loan is involved for one to four residential units. Although RESPA primarily seeks to protect consumers seeking to become eligible to obtain a federally insured mortgage loan, it benefits other parties involved. The required disclosures and honesty about upfront costs and fees provide benefits for the following parties:
- Sellers: They don’t have to decide which title insurance agency should be used.
- Real estate agents: Clients are treated fairly for smoother and faster transactions.
- Buyers: They understand all reasonable upfront costs involved in the buying process.
- Loan servicers: RESPA eliminates some competition, and clients can choose who they want to work with based on their personal evaluations.
RESPA Requirements
RESPA requires lenders, mortgage brokers, or home loan servicers to inform borrowers about any details regarding the real estate transaction, such as relevant consumer protection laws, settlement services, and any other information linked to the cost of the real estate settlement process. Additionally, any business relationships between closing service providers and other parties involved in the settlement process must be disclosed to the borrower.
What RESPA Does Not Cover
Real estate statistics indicate a seller’s market, where homes sell quickly. However, before rushing to close deals, it’s important to remember the protection RESPA provides. It ensures that transactions involving all-cash sales, rental transactions, and loans obtained by real estate for business purposes aren’t covered. Similarly, loans obtained to purchase vacant land are not covered as long as no proceeds from the loan are used to build any residential property.
6 Most Common RESPA Violations
The Consumer Financial Protection Bureau enforces RESPA violations, ensuring that all federally regulated mortgage loans, including purchase loans, refinances, home improvement loans, land contracts, and home equity lines of credit, are administered according to RESPA guidelines.
The general rule of thumb is to ensure all payments and fees are charged for services performed to avoid most violations. The RESPA violation statute of limitations is one year from the violation date. If consumers believe you have violated their rights under RESPA, they have one year to file a claim.
To help you avoid RESPA violation penalties, we’ve listed six common RESPA violations:
1. Kickbacks & Referral Fees
Section 8a of RESPA prohibits giving or receiving referral fees, kickbacks, or anything of value in exchange for referring business involving a federally related mortgage loan. The violation applies to verbal, written, or established conduct of such referral agreements. Items considered of value in exchange for business can be discounts, increased equity, trips, and even stock options.
Section 8b of RESPA prohibits giving or receiving any portion or percentage of a fee received for real estate settlement services unless it’s for services performed. These fees must be split between two or more persons for it to be a direct violation of the law.
John, the mortgage broker, has developed an extensive network of real estate agents who have referred business to him throughout the years. John begins a competition with his network and gives out nice prizes for the agent who referred the most buyers to him. This is a direct violation of RESPA, as no party should receive anything of value for referring a business for a residential mortgage loan.
The penalty for violating section 8 of RESPA is a fine of up to $10,000 and possibly one year of jail time. In some cases, the RESPA violator may also be charged in a private lawsuit to pay the borrower up to three times the charge for settlement services.
Clients may ask you for your opinion on settlement service providers, and you can provide them with recommendations as long as it’s not under the condition that you receive anything in return from the vendor you recommend. A couple of tips include:
Sharing a list of several trustworthy vendors but allowing the client to make their own decision about who to work with.
Include a written disclaimer in the vendor document that it’s the borrower’s responsibility to review vendors and select the best one that fits their needs.
Suggest to clients that they interview each vendor before deciding who they work with.
Be honest with clients and provide them with an Affiliated Business Arrangement Disclosure disclosing that you receive a promotional fee in return for referring the business.
2. Requiring Excessively Large Escrow Accounts Balances
Section 10 of RESPA provides rules and regulations to protect borrowers with escrow accounts. This section limits the amount of money a borrower may be required to keep in the escrow account to cover payments for things like taxes, flood insurance, private mortgage insurance, and other costs related to the property. While not every borrower will be required to have an escrow account, if they do, it is limited to approximately two months of escrow payments.
Jamie is a lender involved in a federally related mortgage loan for a young couple. Jamie establishes an escrow account to pay the couple’s taxes and insurance. The escrow account is funded through a portion of the couple’s mortgage payment. Jamie determines their escrow amount by taking a monthly average of their anticipated insurance and taxes for the year.
After one year, their insurance premiums were reduced, but Jamie kept withdrawing the same amount without analyzing the account. By the end of the second year, the couple’s escrow account has an excess of four months of escrow payments. Jamie needs to perform an annual analysis of the escrow account and return any amount exceeding two months of escrow payments to the couple, or he will be in violation.
For loan servicers who violated section 10 of RESPA, penalties are up to $110 for each violation. The law does impose a maximum amount of $130,000 for violations within 12 months.
Lenders should understand the nuances associated with escrow accounts. A cushion within an escrow account may not exceed one-sixth of the amount that needs to be disbursed for the year. A lender must also analyze the escrow account once a year and notify borrowers if any shortages are present. If there are excess funds in the account of more than $50, then that must be returned to the borrower.
3. Responding to Loan Servicing Complaints
Section 6 of the RESPA protects borrowers’ consumer protection rights regarding their mortgage loans. If a borrower has an issue with their servicer, they can contact their servicer in writing. The servicer must acknowledge the complaint within 20 days of receipt and resolve it within 60 days. To resolve the complaint, they must do so with either a correction or a statement providing reasons for its defense.
Jenny had an escrow account with a mortgage lender and noticed that she was charged a late fee for a payment that she believed was not sent in late. Jenny sends a written notice to her lender that includes her name, loan account information, and a written explanation of the error she believes was incorrect.
The mortgage lender receives her notice and responds to her within 20 days of receiving notice of the possible error. The mortgage lender noticed it was an accounting error and removed the late fee from her account. This is a violation of RESPA because the mortgage lender must reply to Jenny in writing within five days of the correction to let her know it has been fixed.
Borrowers can file a private lawsuit within three years for violating this section of RESPA and may be awarded damages in court.
Loan servicers should have strong processes to ensure all written requests are opened and addressed within the required time. Here are a few tips to ensure responses are made promptly:
- All incoming letters and packages should be time-stamped with the date of receipt and scanned into internal customer relationship management (CRM) software.
- When logging paperwork into the CRM, each staff member should be assigned a task requiring them to complete an acknowledgment receipt along with a final date for responding to the error.
- Once response letters are mailed, the lender should mark the tasks as complete to add additional electronic time stamps if the dates are disputed in the future.
It’s also important to note that within the 60 days provided to resolve the claim, the loan servicer cannot provide a credit reporting agency with information about any overdue payments if they exist during the period of a written request.
Pipedrive customizing pipeline (Source: Pipedrive)
A real estate CRM that can assist professionals with this time-sensitive process is Pipedrive. Pipedrive allows you to create tasks and send automatic reminders and emails and has built-in digital signature and document tracking features. These features will ensure you prioritize everyone in your pipeline and remain compliant with RESPA laws.
4. Inflating Costs
In section 4 of RESPA, mortgage lenders and brokers cannot charge clients an inflated cost of third-party services beyond the original service cost. This violation is specific to settlement costs itemized in HUD-1 and HUD-1A settlement statements, where costs cannot exceed the amount received by the settlement service.
A mortgage broker informed Jo, the buyer, that the cost of pulling their credit would be $30. However, when Jo received the settlement statement, they discovered an additional charge of $20 for the credit report due to third-party administrative services. This is a clear violation of RESPA, which prohibits mortgage brokers from charging clients any amount above the initially stated fee for the credit report, in this case, $ 30.
The United States Department of Housing and Urban Development is the agency that typically issues the violation when notified. Companies that violate this rule can be fined as much as several hundred thousand dollars in damages.
To avoid violations for inflated costs, ensure proper bookkeeping of fees paid for service and bill clients appropriately. You can develop relationships with your third-party vendor to set a standard amount for specific services based on your volume of clients, so there are no discrepancies in the amount paid and the amount charged. However, be careful not to ask for monetary kickbacks in return from your vendors if you’re getting a bulk discount.
5. Not Disclosing Estimated Settlement Costs
Mortgage lenders and brokers are required to provide an itemized statement of settlement costs to their clients. These costs are presented in a Good Faith Estimate (GFE) form. The form shows the estimated costs the borrower should incur during the mortgage settlement process, such as origination fees, estimates for services, title insurance, escrow deposits, and insurance costs.
A lender receives an application from John, the potential borrower. The lender must give John a GFE by hand delivery, mail, or electronic form no later than three days after receiving the application. Until John accepts the GFE and indicates he wants to proceed with the loan, the lender cannot charge John any fees other than the cost of a credit report.
The fine for violation of this RESPA law is $94 for an accidental violation but can increase to a few hundred thousand for intentional violations.
Lenders should provide estimated costs to the borrower within three days of their application by hand delivery, mail, fax, or other electronic means. If a document is mailed, ensure it has signature tracking and that the applicant receives the costs within three days after it is sent to avoid any RESPA violation penalties.
However, lenders do not have to provide the estimation of fees if the lender denies the application or if the borrower withdraws their application. In the GFE, lenders may not charge any additional fees until the borrower has received the estimation and indicates they want to proceed.
6. Demanding Title Insurance
Under RESPA section 9 violations, sellers of a property purchased with a federally related mortgage loan cannot require, directly or indirectly, that the buyer purchase title insurance from a particular company. Sellers should not list this as a condition of the sale of a property.
Becky is a real estate agent, and her sister just started a job at a title agency. Becky wants to give her sister as much business as possible to get her end-of-year bonus. For all her sellers, Becky decides to include in the condition of the sale that they must get title insurance from Becky’s sister’s title agency for an offer to be accepted. This is a direct violation of RESPA.
If this section of RESPA is violated, buyers may bring a lawsuit against the seller for up to three times the charges for the cost of title insurance.
There are a few scenarios where you can avoid this penalty. Sellers should not list a title company as a property sale condition. If a title company is suggested, ensure you are providing multiple options and fine print for buyers to do their own research. However, sellers can pay for the title insurance at no cost to the buyer if those costs are not added to other fees.
Frequently Asked Questions (FAQs)
RESPA covers all federally regulated mortgage loans, including purchase and home improvement loans, land contracts, refinances, and home equity lines of credit (HELOCs).
RESPA Section 8(c) specifies acceptable payments and arrangements, including attorney fees for services rendered, fees paid by a title firm covering services executed, and fees paid by a mortgage lender covering services performed.
RESPA was enacted to restrict the utilization of escrow accounts and disallow unfair conduct in the real estate sector, such as kickbacks and referral fees.
Bottom Line
RESPA was created to ensure homebuyers and sellers receive fair and honest treatment during the real estate process. Even the newest real estate agents should understand what RESPA is in real estate and its nuances to avoid accidentally receiving a violation. Although each party involved in settlement services is not responsible for each other’s RESPA violations, by understanding all forms of RESPA violations for realtors, you can help protect your client’s interest while also ensuring you’re involved in ethical business practices.
