Real Estate Settlement Procedures Act (RESPA)

The Real Estate Settlement Procedures Act of 1974 is the federal statute, codified at 12 U.S.C. 2601 and following, that regulates the settlement (closing) of residential mortgage loans and the servicing of those loans afterwards. Congress stated its purpose as protecting home buyers "from unnecessarily high settlement charges caused by certain abusive practices", and listed four aims: better advance disclosure of settlement costs, "the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services", smaller required escrow deposits, and modernized local land-title records.

The statute is implemented by Regulation X, 12 CFR part 1024, which the Consumer Financial Protection Bureau issues. Regulation X is the rule rather than a second name for the law, but in practice the two are cited together: a servicer's duty or an escrow limit is usually a Regulation X paragraph resting on a RESPA section.

What RESPA reaches. Coverage turns on the defined term "federally related mortgage loan" in 12 CFR 1024.2. The loan must be secured by a first or subordinate lien on residential real property holding a structure designed for one to four families (the definition expressly includes "individual units of condominiums and cooperatives") or a manufactured home, and it must have a federal connection. The list of connections is wide: a lender regulated by, or with deposits insured by, a federal agency; a loan insured, guaranteed or assisted by HUD or another federal agency; a loan intended for sale to Fannie Mae, Ginnie Mae or Freddie Mac; or a creditor making more than $1,000,000 a year of residential real estate loans. Regulation X then exempts several categories at 1024.5(b): credit primarily for a business, commercial or agricultural purpose; temporary financing such as a construction loan (with exceptions where the loan converts to permanent financing); a bridge or swing loan; a loan on vacant land unless a home will be built or placed on it with the loan proceeds within two years; an assumption the lender has no right to approve; and a loan conversion that requires no new note.

Section 8: the referral and unearned-fee ban. This is the provision most people mean when they say "a RESPA violation." Section 8(a), 12 U.S.C. 2607(a), says: "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." Section 8(b) separately bars splitting a settlement charge "other than for services actually performed." Regulation X fills in each phrase. A "thing of value" includes discounts, trips, stock, rental payments based on the business referred and "services of all types at special or free rates" (1024.14(d)). The agreement "need not be written or verbalized but may be established by a practice, pattern or course of conduct" (1024.14(e)). And a charge "for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee" (1024.14(c)).

What section 8 permits. The statute lists exceptions at 2607(c): fees to attorneys for services actually rendered; payments by a title company to its agent, or by a lender to its agent, for work actually performed; a bona fide salary or payment for goods, facilities or services actually furnished; cooperative brokerage arrangements between real estate agents and brokers; and affiliated business arrangements. Regulation X reads the brokerage exception as reaching only fee divisions "when all parties are acting in a real estate brokerage capacity", so it does not cover a payment between a real estate broker and a mortgage broker (1024.14(g)(1)(v)). An affiliated business arrangement, where a referrer owns part of the provider it refers to, is lawful only if the borrower gets a written disclosure of the relationship with an estimate of the provider's charges, is not required to use that provider, and the referrer's only return is on its ownership interest. Regulation X also says plainly that "High prices standing alone are not proof of a RESPA violation" (1024.14(g)(2)): the statute polices how business is steered, not what a service costs.

Section 9: the seller cannot pick the buyer's title insurer. 12 U.S.C. 2608 bars a seller from requiring, "as a condition to selling the property," that the buyer purchase title insurance "from any particular title company." A seller who does so is liable to the buyer for "three times all charges made for such title insurance." The rule binds the seller and reaches title insurance only.

Remedies and deadlines. A section 8 violator faces a criminal fine of up to $10,000, up to one year in prison, or both, and is "jointly and severally liable to the person or persons charged for the settlement service involved in the violation in an amount equal to three times the amount of any charge paid for such settlement service" (2607(d)). The Bureau has primary enforcement authority, and state attorneys general and insurance commissioners may also sue to stop violations. A private suit must be brought within 1 year of the violation under section 8 or 9 and within 3 years under section 6, the servicing section (12 U.S.C. 2614); government enforcers get 3 years in every case. Section 6 is what gives a borrower a claim against a servicer that ignores a notice of error or a request for information, with actual damages plus up to $2,000 in additional damages where there is a pattern or practice of noncompliance.

What lives elsewhere. RESPA is the source of several rules taught on their own pages: the escrow-account cushion and annual analysis (escrow account), servicer transfers, error resolution and force-placed insurance notices (mortgage servicer), the timing limits on starting a foreclosure, and the integrated Loan Estimate and Closing Disclosure, which combine the older RESPA and Truth in Lending disclosures. The Truth in Lending Act is the companion statute: TILA governs what credit costs and how it is disclosed, while RESPA governs the settlement process around the loan and the servicing that follows.

RESPA works through three separate channels, and which one applies decides who you deal with and how long you have. At closing, sections 8 and 9 govern the people around the loan: lenders, title companies, real estate agents, appraisers and settlement agents. The question there is whether anyone was paid for steering your business, or charged you for work nobody did. During the loan, section 6 and Regulation X's servicing rules govern the company collecting your payments: transfer notices, error resolution, information requests, escrow handling and loss-mitigation timing. Enforcement comes from the Bureau, state officials and private suits, each with its own deadline under 12 U.S.C. 2614.

An example of how section 8 damages are measured: Renata pays a title agency $1,500 for settlement and title services on her purchase. It later emerges that the agency paid the real estate agent who recommended it $300 for each referral. The statutory measure is three times "the amount of any charge paid for such settlement service", so her claim is 3 × $1,500 = $4,500, not 3 × $300 = $900. The provider and the referrer are jointly and severally liable, so she can recover the full amount from either. The clock matters as much as the multiplier: a private section 8 suit must be filed within one year of the violation.

RESPA is a statute rather than a product, so what follows is what it does and does not do for a borrower.

What it gives you

• A ban on referral fees and unearned fees that reaches the whole settlement chain, not only the lender, and that cannot be avoided by calling the payment something else.
• Treble damages measured on the full charge you paid, which can make a modest kickback expensive for both parties to it.
• A seller cannot make your purchase conditional on using the seller's choice of title insurer.
• Enforceable servicing rights during the loan, including error resolution and escrow limits, with a private right to sue.

What it does not give you

• It does not cap prices. A high fee with no referral payment behind it is not a RESPA violation.
• The one-year deadline for section 8 and 9 claims is short, and kickbacks are often discovered later than that.
• Several common loans fall outside it, including business-purpose credit, bridge and swing loans, and construction loans that will not become permanent financing.
• An affiliated business arrangement is lawful when properly disclosed, so a referral to a related company is not automatically a violation.