If you’ve ever purchased a home or participated in a real estate closing, most likely you were overwhelmed with the amount of paperwork involved. You may have been even more dismayed with the extra costs involved.
Between the costs for attorneys’, brokers, title companies and lenders, real estate fees can get extremely high. Also, many times the fees change throughout the transaction. To protect consumers, the Real Estate Settlement Practices Act, known as RESPA, was created.
What is RESPA?
Congress first enacted RESPA in 1974 make sure consumers knew their settlement costs and to reduce the costs of closing by eliminating referral fees and kickbacks. Before this act, many companies that bought and sold real estate, including lenders, realtors, construction companies and title insurance companies, often sent kickbacks or bribes to each other. This resulted in increased real estate transactions costs and reduced competition. RESPA passed to make prices clear, which then resulted in more competition and drove down prices.
While useful, problems still existed. Many times customers were still encouraged to use specific lawyers or agents, who raised their fees at closing.
In late 2008, the US Department of Housing and Urban Development (HUD) announced reforms to RESPA to simplify and improve the process of obtaining mortgages and to reduce consumer costs.
The RESPA Reforms
The 35-plus-year-old RESPA undergoes major reforms on January 1, 2010. The reforms attempt to provide consumers with less confusion when buying homes and obtaining loans. These reforms regulate how lenders, closing attorneys and title companies determine loan and closing costs.
Among the changes, the most important require a new and substantially revised Good Faith Estimate (GFE) (PDF) where lenders disclose loan and closing costs to borrowers, and the HUD-1 Settlement Statement (PDF), which details financial breakdown of the entire real estate transaction signed at closing.
What are the Main Changes?
The RESPA reforms require the following:
- A standard GFE must be provided to borrowers showing the key loan terms and total closing costs. The last page will have a worksheet and can be used to compare different loans and terms.
- The charges quoted on the GFE will be used on the HUD-1.
- Lenders must give borrowers a standard origination charge for the loan that must include all fees and costs: Appraisal, credit, and application fees, administrative, lender inspection, wire and document preparation fees.
- Lenders have the option of giving borrowers a list of recommended service providers, including closing attorneys and title insurance companies. However, the fees quoted for loan origination can’t change later in the process. Also, these service providers’ fees for title and closing costs cannot change by more than 10%.
- If the borrowers select their own service providers, the fees then can increase by any amount.
- The charges quoted on the GFE will be used on the HUD-1 Settlement Statement to ensure that the prescribed tolerances are met.
- Controversial lender payments to mortgage brokers, known as yield-spread premiums, must be disclosed.
The ultimate goals of these reforms give consumers more information when closing on a home. Also, the reforms create an incentive for lenders to use competitively priced service providers.
Will the Reforms be Active on January 1, 2010?
While the reforms were scheduled to take effect on January 1st, the government is giving the industry time to settle into the new requirements. HUD announced that the Mortgage Review Board (MRB) and other state and federal agencies will be less strict in enforcing the new reforms. However, lenders must demonstrate they’re making a good faith effort to comply with RESPA's new requirements.
Ultimately, even though final execution may be delayed, the government believes RESPA reforms will save home-buyers $700 in mortgage costs by improving the evaluations received when applying for a mortgage and by encouraging comparison shopping.
Questions For Your Attorney
- Can I sue a real estate broker for violating the new RESPA reforms?
- Will I get paid if a service provider violates RESPA?
- Am I bound by a Good Faith Estimate that changes before closing?