During the homebuying process, federal law mandates that consumers are provided with a number of financial disclosures to avoid unnecessary and unforeseen closing or settlement costs.
In addition, the Real Estate Settlement Procedures Act (RESPA) was introduced to protect consumers against kickbacks that may increase the cost of settlement services. RESPA was also designed to help homebuyers be better shoppers, according to the U.S. Department of Housing and Urban Development (HUD). Today, RESPA is administered and enforced by the Consumer Financial Protection Bureau (CFPB).
As a result of RESPA, certain disclosures are required before, during and after the mortgage process.
According to HUD, an Affiliated Business Arrangement (AfBA) Disclosure is required whenever a settlement service provider involved in a RESPA-covered transaction refers the consumer to a provider with whom the referring party has an ownership or other beneficial interest.
To increase consumer transparency during closing, a second disclosure, the HUD-1 Settlement Statement, will be replaced by the Closing Disclosure and the Loan Estimate beginning this month. These changes create a more uniform disclosure process and provide overall financial accounting.
The Initial Escrow Statement reflects the estimated taxes, insurance costs and other charges that are paid from the escrow account during the first 12 months of the loan. Additionally, an Annual Escrow Statement must be provided to the borrower each year.
“These disclosures help mandate how much money can be collected for escrow,” said Harold Perkins, president of Galaxy Lending Group. “It requires a written accounting of escrow for every year, the amount that was collected, what was dispersed and how much was held without exceeding a certain limit.”
Other real estate transaction costs associated with title, escrow, appraisal, inspection and lender fees such as underwriting, processing and origination points are also mandated by RESPA.
“We research those fees on the consumer’s behalf,” said Eric Wright, senior mortgage loan officer and branch manager at AmeriFirst Financial. “There can be no more than a 10 percent variance in what was disclosed to the borrower at the time of the application or when the interest rate was locked on the loan.”
Good Faith Estimate
One of the most recent changes to RESPA was to standardize the Good Faith Estimate (GFE) in an effort to help consumers obtain a mortgage more easily and affordably by improving disclosure of settlement costs and interest rate related terms, according to HUD.
“The GFE must be disclosed to the consumer within three days of receiving a loan application,” Perkins, of Galaxy Lending Group, said. “This protects consumers by making sure there is full understanding of the terms of the loan at closing time.”
RESPA strictly enforces prohibitions related to the giving or receiving of kickbacks and/or unearned fees by realtors, lenders, builders, title companies and other businesses or agencies involved in a real estate transaction. “This ensures that no one is getting paid for services that were not rendered and that nothing of value was given,” Wright, of AmeriFirst Financial, said.
Kickbacks might include such things as commissions, marketing materials, consumer information or origination in exchange for business referrals. Violating the rules against kickbacks may result in criminal and civil penalties, fines up to $10,000 and one-year imprisonment, according to HUD.