One of the more notable federal laws governing mortgage lending is the Real Estate Settlement Procedures Act (“RESPA”). RESPA, also known as Regulation X, was passed to control loan settlement practices for consumer loans. Lenders, brokers, and title firms who provide loans for domestic, family, or personal use are primarily impacted by RESPA. It covers “federally associated mortgage loans,” a reasonably inclusive word. A “federally related mortgage loan” is any loan backed by residential property with one to four families. Despite this expansive description, many loans are eligible for RESPA exemptions.
The first change made by RESPA is the elimination of “kickbacks” or “referral fees,” which raise the settlement costs for house buyers. Second, RESPA lowers the escrow amounts that buyers of homes must deposit to cover real estate taxes and insurance premiums. Third, RESPA requires the HUD-1 to detail the fees levied against the buyer and seller. Finally, whether title insurance premiums cover the lender’s interest, the borrower’s interest, or both must also be included in the HUD-1.
The Good Faith Estimate (or “GFE”) is another criterion that RESPA implements. The GFE calculates the settlement expenses that are most likely to appear on the HUD-1, also known as the settlement statement. Therefore, a GFE and the standard GFE form must be submitted during the application phase in accordance with RESPA.
Private lenders who lack a sizable compliance department may find it challenging to comply with RESPA’s regulations. Thankfully, RESPA has been reduced with explicit exemptions that are reasonably simple to apply. The most popular of these exemptions is the Business Purpose exemption, in which loans explicitly serviced for business purposes are exempted from RESPA’s requirements. Thus, it is critical for lenders always to investigate the purpose of loan proceeds to ascertain this determination. To read more on this, click here.
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