The Real Estate Settlement Procedures Act has been around since 1974 — but the changes over the past few years, combined with the creation and implementation of the Consumer Financial Protection Bureau (CFPB), have caused some confusion in the industry.
What is the act? What does it mean for agents and for consumers?
Here’s what you need to know about RESPA — explained.
What is RESPA?
It’s the Real Estate Settlement Procedures Act, a consumer protection statute passed by the U.S. Congress in 1974.
The statute has two main purposes:
To help consumers become better shoppers for settlement services; and
To eliminate kickbacks and referral fees that may increase the costs of certain settlement services.
The consumer side of RESPA requires that borrowers receive disclosures at certain times during the mortgage loan transaction that plainly describe the terms of the loan, all settlement service charges associated with the loan and the business relationships between the lender and other settlement service providers, if any.
RESPA also addresses certain industry practices that have in the past been shown to increase the cost of settlement services. Specifically, it prohibits any person (or company) from giving or accepting anything of value in exchange for business referrals. It also prohibits a person from giving or accepting any portion of a charge for a service that wasn’t actually performed.
Where can I find RESPA?
RESPA is codified at Title 12, Chapter 27 of the United States Code, 12 U.S.C. §§ 2601-2617.
Why was RESPA enacted?
In the 1970s, Congress became concerned that mortgage loan applicants were being overcharged for settlement services. A 1972 study by HUD and the Administrator of Veterans Affairs (VA) found that most borrowers were not shopping around for their settlement service providers, and instead, their real estate brokers, closing attorneys and other professionals were referring them to lenders, title insurance companies and other providers.
Of particular concern to Congress was the report’s finding that there was little price competition for those services, and consumers were being overcharged by companies that were engaged in systematic kickbacks and referral fees schemes.
The HUD/VA report requested that Congress give the agencies the power to establish maximum allowable settlement charges and to require the use of uniform consumer disclosures.
This recommendation didn’t sit well with the real estate industry, so Congress instead opted to enact a statute that would give consumers more advance disclosure of their settlement costs and crack down on the practice of kickbacks and referral fees.
Who administers RESPA?
From the time RESPA was enacted in 1974 until 2011, HUD administered and enforced the act. In July 2011, those duties transferred to the Consumer Financial Protection Bureau (CFPB), a federal agency created in 2010 by the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act.
Most states also have laws similar to RESPA on the books. Some are even stricter than RESPA, creating a debate in some areas of the country about what business practices are deemed legal.
Regardless, most states have the authority to enforce their own versions of RESPA. There have been cases where companies simultaneously faced RESPA charges on both a federal level and a state level.
Sometimes states will “piggyback” on federal cases, especially if they believe the conduct at issue is a serious problem in their market. But state officials have sometimes initiated RESPA investigations and worked in tandem with federal officials, as well.
What kinds of loans are governed by RESPA?
RESPA applies to “federally related” mortgage loans that are secured by a mortgage loan on a one- to four- family residential property.
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 enterprise or made by any creditor who makes or invests in residential real estate loans aggregating more than $1 million per year.
RESPA governs purchase loans, assumptions, refinances, property improvement loans and lines of credit associated with those federally related mortgage loans.
How does RESPA define “settlement service provider”? Who, exactly, does this statute affect?
RESPA defines “settlement services” as “any service provided in connection with a real estate settlement including, but not limited to, the following:
Title searches
Title examinations
The provision of title certificates
Title insurance
Services rendered by an attorney
The preparation of documents
Property surveys
The rendering of credit reports or appraisals
Pest and fungus inspections
Services rendered by a real estate agent or broker
The origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing and the underwriting and funding of loans)
The handling of the processing, and closing or settlement”
Consumer disclosures
What were the consumer disclosures required under RESPA?
Much of RESPA concerns certain disclosures that were required to be given to borrowers at specific times during the mortgage transaction. These disclosures let the borrower know what to expect with regard to the terms of the mortgage loan, how the loan will be serviced and associated settlement costs.
The borrower must also be informed that he has the right to shop around for and choose his own settlement service providers, as well as about what, if any, business relationships his settlement service providers may have with each other.
First, there was the Good Faith Estimate of Settlement Costs, or GFE.
This was given to the borrower within three business days of applying for a loan. The GFE explained what settlement service charges the borrower was likely to pay — but those charges were exactly what the form says: A “good-faith estimate” of what the borrower may have to pay, and not a guarantee, as changing market conditions can affect prices.
Next, there was the Servicing Disclosure Statement, in which the lender or mortgage broker informs the borrower whether it expects someone else will be servicing the loan after it closes.
Perhaps the most talked-about RESPA disclosure form was the Affiliated Business Arrangement Disclosure, which reminded borrowers that they were not required (with certain exceptions) to use the affiliates of a lender, real estate agent/broker or other participant in the settlement.
If they did choose to use the providers recommended by their real estate agent/broker or lender, any affiliations between the companies — whether they were owned or controlled by a common corporate parent or simply had some sort of affiliated business arrangement — had to be disclosed, and the borrower acknowledged with his signature that he understood those relationships.
Next was the HUD-1 Settlement Statement, a form that itemized the services provided to the borrower and the actual fees charged to him. This form was required to be delivered or mailed to the borrower one day before settlement.
Finally, there were the Escrow Account Operation & Disclosures forms. The entity servicing the loan was required to give the borrower an initial escrow account statement at settlement or within the next 45 days. This form showed all of the payments that were to be deposited into an escrow account, as well as all of the disbursements that were to be made from the escrow account for the first year.
The lender/servicer also reviewed the escrow account annually and was required to report to the borrower once per year about the prior year’s activity and any adjustments that the borrower may have to make in the next year.
How were these disclosures impacted by the TILA-RESPA Integrated Disclosures (TRID) rule?
In 2010, Congress, through passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, created the CFPB and transferred HUD’s RESPA authority to the bureau. The Dodd-Frank Act mandated that the CFPB propose new rules by 2012 that would combine RESPA’s disclosures with those required under the Truth in Lending Act (TILA) into a single, streamlined disclosure to make the homebuying process easier and simpler for consumers (Click here for our TRID explainer page).
The CFPB’s new rule, TRID, took effect on Oct. 3, 2015, and made significant changes to the disclosures that were formerly required under RESPA. However, it’s important to note that TRID didn’t replace RESPA in its entirety; aside from the changes in required consumer disclosures, the other portions of the statute are still very much in effect.
The first major change is that the GFE and the early Truth in Lending (TIL) statement became the Loan Estimate (LE), which provides a summary of the key loan terms and estimated loan and closing costs. Lenders must provide the LE to consumers within three days after they submit a loan application.
The other major change is that the HUD-1 Settlement was combined with the final TIL statement and became the Closing Disclosure (CD), which provides a detailed accounting of the mortgage loan transaction. Borrowers must receive the CD three business days before closing a loan. Any significant changes to loan terms require the lender to issue a revised CD, triggering a new three-business-day review period.
Prohibited activities
What industry practices does RESPA prohibit?
Namely, offering kickbacks, referral fees and fee-splitting with other settlement service providers in exchange for the referral of business, and charging consumers fees for services that were not actually rendered. This is the “meat” of RESPA and the portion of the statute that affects the real estate industry the most.
Section 8(a) of RESPA, which pertains to business referrals, states: “No person shall give and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”
Put more plainly, Section 8(a) means that no settlement service provider may pay — or receive — fees or other items with the understanding or agreement that business will be sent their way.
Section 8(b), which pertains to splitting charges, states: “No person shall give and no person shall accept any portion, split or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”
Section 8(b) concerns any splitting or sharing of fees by and between the person who performs the legitimate service, as well as the person who provides the referral.
What is a “referral”?
It’s an agreement, understanding or expectation that you will send business to someone, or they will send it to you. And while referring borrowers to companies you have previous experience with or engaging in affiliated business arrangements and other partnership structures are longstanding, legal business practices in the real estate industry — and have been proven by some studies to have consumer benefits — RESPA prohibits you from doing certain things in connection with referring business or receiving business referrals from others.
What is a “kickback”?
A kickback is an illegal fee or rebate paid to someone in order to gain that person’s decision or recommendation for the award of business.
What is a “markup”?
A markup is an increase in price above a third-party vendor’s normal fee — and the parties that are referring business to each other may split the difference as a reward for the referral.
For example, an appraiser may normally charge a lender $300 for an appraisal, but in a transaction where the lender refers business to the appraiser, the lender may charge the consumer $400 for the appraisal fee — and one of those providers may keep the extra $100, or the two parties may split it.
This obviously flies in the face of what Congress intended to do with RESPA, because it involves charging consumers a higher fee than they would normally pay, with no extraordinary work being performed to justify the price increase, and the providers collecting the profit on the wrongly inflated fee.
What is a “thing of value”?
It may sound like a mere transfer of money, but it actually means any type of consideration made in exchange for the referral of business — and under RESPA, it’s illegal for a real estate agent or broker to give or receive a thing of value contingent on the referral of business, even if the referral agreement is informal and not in writing, and even if it’s disclosed to the consumer.
Examples of “thing of value” include, but are not limited to:
Money/fees
Discounts
Duplicate payments of a charge
Stock, dividends or distribution of profits
Credits to be paid at a later date
The opportunity to participate in a moneymaking program
Retained or increased earnings
Increased equity in a parent or subsidiary entity
Special bank deposits or accounts, or special or unusual banking terms
Services of all types at special or free rates
Lease or rental payments
Trips, cruises and vacations
Gifts and prizes
Payment of another person’s expenses
Reduction in credit against an existing obligation
Educational seminars, programming and training sessions
Advertising/marketing goods and services
Luncheons and open houses
Swag, tchotchkes and other promotional items
One more important thing to know about a thing of value: RESPA doesn’t place dollar values on things of value, but some states have their own limits on the amounts you can give someone who is in a position to refer business to you.
So while federal regulators may not feel the need to prosecute you for paying for a title agent’s cup of coffee, some states may not allow it, depending on how much you spend.
Wait a second! This makes it sound like I am not allowed to network, work or connect with mortgage, title and other settlement service providers at all. Real estate is a relationship-driven business. Am I really not allowed to give any of these items to settlement service providers? Not even a pen with my company’s name on it?
When enacting RESPA, Congress acknowledged some of the business referrals that occur in the settlement service industry do not harm consumers, and said it’s OK for real estate, mortgage and settlement service providers to pay fair and reasonable fees for normal marketing and advertising efforts.
You don’t have to avoid settlement service providers entirely to comply with RESPA. You can give or receive “things of value” in the course of doing business — you just can’t do it with the expectation of business referrals, and you can’t defray another provider’s expenses if they are in a position to refer business to you.
So you can give a title company some pens with your brokerage’s name inscribed on them, but there must not be an agreement that they will send you business for doing so. And you can’t give the title company pens with their name on them, because you’d be offsetting their expenses.
In another scenario, you can host a “lunch and learn” for a local title agency, but the title company shouldn’t reimburse your firm for the cost of the luncheon. If the title company makes a presentation or markets its services, however, making such payments may be permissible under RESPA, as long as they represent the value of the marketing done by the title company.
And in another scenario, you can rent a desk in your office to a mortgage broker to prequalify mortgage applicants, but you must charge them fair market value for the portion of your office that desk takes up, as well as any supplies they use.
What is “fair market value”?
It’s the general market value for a good or service that a non-settlement service provider would pay for that good or service. When demonstrating to attorneys, compliance experts and regulators that you are providing a thing of value at fair market value, you must show that the value of the good or service is commensurate with what anyone would expect to pay for it today.
The whole idea is that providers aren’t paying you a higher or lower rate for goods or services with the expectation that you will be referring business to each other as a reward.
How to calculate fair market value
However, calculating fair market value can sometimes be tricky. If, for example, you are providing office or desk space to another settlement service provider, you could measure what percentage of your total office space is comprised of that area, and calculate what portion of your own rent this may be.
This amount would be what you’d charge anyone — not just a settlement service provider — to rent that space, and what people in your neck of the woods would expect to be charged for renting a similar space.
The amount to be paid must not be tied in any way with the expectation of business referrals, and especially not to a specific number of transactions. Whether that provider brings you two or 20 transactions per month, that provider’s rent payments should always be the same.
Calculating fair market value for other items like marketing services gets a bit hairier. If a real estate brokerage and a title company decide to take out a joint ad in a newspaper, both parties must pay fair market value for the portion of the ad containing their company’s content (such as logo, contact information, etc.)
If your brokerage’s content takes up about 75 percent of the ad’s total space, and the title company’s content takes up about 25 percent of it, you should be paying 75 percent of the cost of that ad, and the title company should pay for 25 percent of it.
You could allow a title company to place a web banner ad on your website, but you should charge that title company a fee that reflects the amount of space the banner takes up on the page, how often it appears, the size of the audience it reaches, etc. — and that amount must be what similar websites would charge for that same kind of banner.
There are three general rules that most compliance experts advise you to keep in mind when calculating fair market value:
Put it in writing: Document all agreements in formal, legally binding contracts that spell out exactly what each party’s responsibilities are.
Obtain third-party valuations: You may think you know how to calculate how much to charge for a web banner, but other people in the e-commerce world may have a different approach. Seek out an expert on these matters — someone who is in no way connected to your business or line of work — to provide an unbiased, objective value of the goods and services you wish to provide.
Periodically revisit these charges and fees to make sure they are still fair, reasonable and in line with general market value.
What are some examples of RESPA-compliant interactions I can have with settlement service providers?
The National Association of Realtors (NAR) has issued quite a bit of RESPA compliance guidance to its Realtor members over the years, and here is a short list issued by the association of some common interactions that are legal under RESPA:
RESPA allows a title agent to pay for your dinner when business is discussed, as long as those dinners are not a regular occurrence.
RESPA allows a home inspection company to sponsor association events when representatives from that company also attend and to post a sign identifying its services and sponsorship of the event.
RESPA allows a lender to pay you fair market value to rent a desk, copy machine and phone line in your office to prequalify applicants.
RESPA allows a title agent to provide, during an open house, a modest food tray in connection with the title company’s marketing information indicating that the refreshments are sponsored by the title company.
RESPA allows you to jointly advertise with a mortgage broker if you pay a share of the costs in proportion with your prominence in the advertisements.
RESPA allows a hazard insurance company to give you marketing materials such as notepads, pens and desk blotters which promote the hazard insurance company’s name.
Are there scenarios that are absolutely illegal under RESPA?
We’ve all undoubtedly seen some of these activities at some point, and some of them may have been the subject of lawsuits or regulator penalty. Here are just a few examples of flagrant RESPA fouls:
Giving settlement service providers vacations, sporting event or concert tickets, raffle tickets, gift certificates, bottles of wine or other things of value as a reward for referring business;
Hosting cruises with free food, alcohol and door prizes for those who have referred business to you or may be in a position to do so in the future;
“Sponsoring” the food served at another settlement service provider’s “lunch and learn,” but not making any kind of presentation or offering some kind of marketing at the event that matches the value of the sponsorship;
Leasing a desk or office space to a mortgage broker, and giving that mortgage broker a discount on rent and supplies if they bring a certain number of transactions your way.
You may be wondering why some people or companies seem to engage in these practices and fly under the RESPA radar. But don’t fall into the foolish trap of thinking you’ll be able to escape scrutiny, too. Any of these activities warrant a knock on the door from the RESPA police.
How do I know if something I am doing is legal under RESPA?
RESPA is not black and white; it’s actually pretty gray. There are hundreds, if not thousands, of possible scenarios and business practices that real estate agents and brokers need to make sure are legal under RESPA.
Some of these scenarios may need to be reviewed on a case-by-case basis, and you will most likely need to provide extensive documentation to show that you made every effort to comply with RESPA.
If you aren’t sure if something you are doing can pass the RESPA smell test, you should consult with an attorney, preferably one who specializes in RESPA compliance. And it’s always a good idea to keep up on the latest case law and other legal happenings to see how different courts and regulators are interpreting RESPA and deeming certain activities to be legal or illegal — because since RESPA was enacted, some of those interpretations have conflicted with others, creating confusion about what’s legal and what’s not.
Email Amy Swinderman