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  4. Background and Summary of the Real Estate Settlement Procedures Act and CFPB’s Regulation X

Background and Summary of the Real Estate Settlement Procedures Act and CFPB’s Regulation X

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The Real Estate Settlement Procedures Act of 1974 (RESPA) (12 U.S.C. 2601) became effective on June 20, 1975. The purpose of the act is to provide borrowers with pertinent and timely disclosures regarding the nature and costs of real estate settlements. Also, the act prohibits certain abusive practices, such as kickbacks, and places limitations on the use of escrow accounts. The Real Estate Settlement Procedures Act Amendments of 1975 (RESPA Amendments) became effective on June 30, 1976 and made major substantive changes in the existing law.
Historically, RESPA was implemented in Regulation X (24 CFR 3500) of the Department of Housing and Urban Development (HUD). The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) amended a number of consumer financial protection laws, including RESPA, and transferred rulemaking authority for RESPA to the Consumer Financial Protection Bureau, effective July 21, 2011. Pursuant to the Dodd-Frank Act and RESPA, as amended, the Bureau established a new Regulation X (Real Estate Settlement Procedures), 12 CFR 1024, implementing RESPA.
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COVERAGE (§ 1024.5*)

*
Cites are to 12 CFR 1024, unless otherwise noted.
RESPA is applicable to all “federally related mortgage loans,” with coverage being restricted to first mortgage loans for one- to four-family residential properties (including manufactured home properties and individual condominium and cooperative units).
Exempt transactions include:
  • a home-improvement or home-equity loan
  • any loan not secured by a first lien on the property
  • temporary financing, such as a construction loan, except when it is to be used as, or converted to, a permanent loan to finance transfer of title to the first user
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SPECIAL INFORMATION BOOKLET (§ 1024.6)

Either the lender or the mortgage broker is required to deliver or mail a copy of the special information booklet to the borrower within three business days after that application is received. The mailing requirement is satisfied by mailing the booklet to the known address, unless the borrower has expressly designated a revised address.
Part one of the booklet describes the settlement process and the nature of charges, and suggests questions to be asked of lenders, attorneys, and others to clarify what services will be provided for the charges quoted. It also contains information on the rights and remedies available under RESPA and alerts the borrower to unfair or illegal practices. Part two of the booklet contains an itemized explanation of settlement services and costs, and sample forms and worksheets for cost comparisons. Appendix A has a listing of consumer literature on home purchasing, maintenance, protection, and other topics.
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GOOD FAITH ESTIMATES OF SETTLEMENT SERVICES (§ 1024.7)

The lender or any mortgage broker who is not the exclusive agent of a lender must provide a clear and concise good faith estimate (GFE) of the dollar amount or range for each settlement charge the borrower is likely to incur (all items listed in section L of the uniform settlement statement no later than three business days after the written application is received. The estimate of the amount or range for each charge must be (1) related to the borrower’s actual cost and (2) based upon similar settlements in the area where the property is located.
Although the estimates need not exactly match the actual charges, they should approximate them. Lenders may use existing worksheets, or develop new ones, to make the disclosures, provided that the disclosures comply with section 1024.7 of Regulation X.
If a lender selects the provider and requires the borrower to pay all or a portion of the legal service, title examination, title insurance, or settlement costs, it is required to provide, as part of the GFE:
  • the name, address, and telephone number of the designated provider and the services to be rendered
  • a statement that the estimate is based upon the charges of the provider
  • a statement disclosing the existence and nature of any business relationship between the lender and the provider.
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UNIFORM SETTLEMENT STATEMENTS (HUD-1 and HUD-1A)

Use of the Statements (§ 1024.8)
A settlement statement must be completed by the person conducting the settlement and must conspicuously and clearly itemize all settlement charges imposed upon the borrower and the seller, except those that the borrower or seller contracts to pay for separate from the settlement. The form must also indicate whether any title insurance premium included in the charges covers the lender’s interest in the property, the borrower’s interest, or both. The copy supplied to the seller need not contain the information relating to the borrower’s transaction, nor must the copy supplied to the borrower contain the information relating to the seller’s transaction. The HUD-1 statement should be used for transactions in which there is a borrower and a seller. For transactions in which there is a borrower but no seller, either the HUD-1A statement or the borrower’s side of the HUD-1 should be used.
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Reproduction of the Statements (§ 1024.9)

Lenders have numerous options for the layout and format of HUD-1 and HUD-1A statements that do not require prior Bureau approval, such as size, tint, or color of pages; size and style of print; vertical and horizontal spacing; printing on separate pages, front and back of a single page, or on one continuous page; use of multicopy tearout sets; printing on rolls for computer purposes; addition of signature lines; and translation into any language. Other changes may be made only with the approval of the Bureau.
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One-Day Advance Inspection and Delivery of the Statement; Recordkeeping (§ 1024.10)

Upon request by the borrower, the HUD-1 or HUD-1A statement must be completed and made available for inspection, setting forth those items that are known at the time by the person conducting the settlement. This must be done during the last business day preceding the day of settlement.
The completed statement must be mailed or delivered to the borrower, the seller (if one), or their agents, at or before settlement. The borrower may waive the right of delivery at or before settlement. When the borrower, or the borrower’s agent, does not attend the settlement, the transaction is exempt from inspection and delivery requirements. In such cases, however, the completed statement must be mailed to both borrower and seller as soon as practicable after settlement. The mailing requirement is satisfied by mailing the documents to the known address, except when the borrower has expressly designated a revised address (§ 1024.11). No fee may be charged for the preparation and distribution of the required statements (§ 1024.12).
The lender must keep each completed statement for five years or until it disposes of its interest in the mortgage and does not service the mortgage. The statement should be part of any files transferred to another owner or servicer.
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TITLE COMPANIES (§ 1024.16)

If the lender holds legal title to the property being sold, the lender (seller) is prohibited from requiring the borrower, either directly or indirectly, to use a particular title company.
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ESCROW ACCOUNTS (RESPA § 10)

The amount of money that the lender can require a borrower to place in an escrow account is limited to the first full payment of taxes, insurance premiums, and other charges, plus one-sixth of the charges to be paid during the following 12 months. Any monthly escrow payment can be no larger than one-twelfth of the amount anticipated to be paid for such charges during the following 12 months, plus the amount necessary to maintain a balance not to exceed one-sixth of the amount of charges to be paid during that period.
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IDENTITY OF PERSON RECEIVING BENEFIT (RESPA § 11(a))

When the borrower is an agent, trustee, nominee or other person acting in a “fiduciary capacity,” the identity of the person receiving the beneficial interest of the loan must be revealed to the bank.
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RELATIONSHIP TO STATE LAWS (§ 1024.13)

State laws and regulations shall not be affected by the act, except to the extent they they are inconsistent, and then only to the extent of the inconsistency. The Bureau is authorized, after consulting with the appropriate federal agencies, to determine whether such inconsistencies exist.
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PROHIBITION AGAINST KICKBACKS AND UNEARNED FEES (§ 1024.14)

Any person who gives or receives a fee or a thing of value (payments, commissions, fees, gifts, or special privileges) for the referral of settlement business is in violation of RESPA section 8. Payments in excess of the reasonable value of goods provided or services rendered are considered kickbacks. This section was misunderstood when RESPA was first enacted. Regulation X defines terms and gives examples to clarify the prohibitions. Also, appendix B of the regulation provides additional guidance.
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Affiliated Business Arrangement (§ 1024.15)

A controlled business arrangement does not violate the prohibitions against kickbacks and unearned fees so long as—
  • the relationship between the parties giving and receiving the referral, and the estimated charges for the referred business, are disclosed;
  • the use of a particular provider is not required (except in specific exceptions); and
  • neither the referring party nor an associate receives a thing of value beyond a return on ownership interest, a return on franchise relationship, or payment otherwise permissible under section 8(c) of RESPA.
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PENALTIES AND LIABILITIES (RESPA §§ 8 and 9)

Penalties are provided for violating the prohibition against kickbacks and unearned fees. RESPA provides for the following:
  • civil liability equal to three times the amount of the referral fee, kickback, or unearned fees
  • the possibility that court costs and attorney fees can be recovered
  • a fine of not more than $10,000 or imprisonment for not more than one year, or both
The liability for violating the provision that a bank (seller) cannot require a borrower to use a particular title company is three times that of all charges made for the title insurance. Any other penalty imposed on the bank would fall within the scope of the regulatory authority of the Federal Reserve bank serving the District in which the state member bank is located.
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MORTGAGE-SERVICING TRANSFERS (RESPA § 6)

Mortgage lenders are required to give applicants information about the likelihood thattheir mortgage servicing will be transferred. This information must be in a disclosure statement given to and acknowledged by the applicant at the time of application. Before a loan is extended, the lender must have in its files a disclosure statement signed by each applicant.
Not less than 15 days before a mortgage-servicing transfer becomes effective, the current mortgage servicer must notify all borrowers in writing.
During the first 60 days after the transfer occurs, a payment may not be considered late and a late fee may not be imposed if payment is received by the previous rather than the new servicer. After a mortgage servicer receives from the borrower a written request about a payment dispute, the servicer may not, for the next 60 business days, provide to any consumer reporting agency any information concerning any disputed payment.
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