The Real Estate Settlement Procedures Act, or RESPA, protects consumers against practices that make it difficult to understand the cost of settlement services and that raise the cost of these services. RESPA accomplishes this by requiring that lenders disclose their relationships with settlement service providers; disclose estimated closing costs; prohibit or limit certain fees; and create a process by which borrowers may file complaints against lenders who violate RESPA rules.

1. RESPA Coverage

   • RESPA applies to home mortgage loans for one- to four-family residences. Covered loans include new mortgages; assumed, or transferred loans; home equity loans and lines of credit; and property rehabilitation loans such as the Federal Housing Administration’s 203b rehab program. The U.S. Department of Housing and Urban Development enforces RESPA.

   RESPA Exclusions

   • RESPA doesn’t limit or prohibit fees that lenders, settlement companies or others charge borrowers for the services they perform, nor does it address fees charged by sellers. In fact, the sales contract lists charges the seller imposes on the buyer, such as a per diem in the event that the buyer extends the closing date. The buyer accepts these charges when she signs the contract.

   RESPA — Required Disclosures

   • At the onset of the loan application process, the lender must give the buyer a special information booklet that explains the real estate settlement process. The lender also prepares a good faith estimate of closing costs, which gives the borrower a close approximation of how much cash he needs to close. In addition, RESPA requires that the lender inform the buyer about whether the lender will administer the loan or transfer it to another lender. If the lender has a business relationship with the settlement company or other service providers, it must disclose the nature of the relationships. The buyer must have the option of choosing his own settlement company.

   Limited and Prohibited Fees

   • RESPA prohibits kickbacks, which it defines as “anything of value in exchange for referrals of settlement service business,” for mortgages backed by the federal government. Such mortgages include those insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. It also prohibits service providers from charging fees unless they’ve actually provided services. Further, RESPA limits the amount that lenders can require borrowers to place in escrow accounts for fees such as property tax and homeowner’s insurance. This is true even when the lender requires escrow for these items.