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Real Estate Settlement Procedures Act and the Homebuyer

By Elizabeth R. Elstien

Real Estate Settlement Procedures Act (RESPA) was enacted and unanimously consented to by both the House of Representatives and Senate during Gerald Ford's tenure as U.S. president. This Act was put in place to address the out-of-control problem of kickbacks and service price increases in real estate, lending, title insurance, construction (for new homes) and related services. Originally monitored by U.S. Department of Housing and Urban Development (HUD), this Act has been administered and enforced by the Consumer Financial Protection Bureau (CFPB) since July 2011.

Until RESPA was in effect, undisclosed kickbacks and service price inflation were commonplace in real estate. For instance, a lender may say to a homebuyer that a mortgage loan is at a low 3.75 percent interest, but in order to get that low rate it will later be disclosed that the title insurance must be purchased from a certain title company at $3,000, which is at an inflated rate from the title company's normal $900 cost. The extra paid by the homebuyer gets pocketed. The main issues were not disclosing all compensation, lack of transparency in service pricing and unfair price competition.

The Act makes certain that buyers or sellers are not told to use a specific home warranty company, home inspector, title company or any other real estate-related service. In select cases, a real estate agent or service provider may get compensation for a service, but the compensation must be disclosed and agreed to in writing by both the buyer and seller. However, this practice is not recommended.

According to the government website, "the most recent RESPA Rule makes obtaining mortgage financing clearer and, ultimately, cheaper for consumers. The new Rule includes a required, standardized Good Faith Estimate (GFE) to facilitate shopping among settlement service providers and to improve disclosure of settlement costs and interest rate-related terms. The HUD-1 was improved to help consumers determine if their actual closing costs were within established tolerance requirements."

This means that settlement service providers should have standard mortgage or other settlement costs, fees or charges in place and available for viewing by buyers and sellers. These costs should then be reflected on the GFE, which is an estimated accounting of all settlement costs required to close the sale and take title. A buyer and seller may get more than one GFE if the loan or other factors change before closing. A HUD-1 (or HUD-1A for refinancing costs) is a form detailing accounting of actual costs due at closing of sale and is the final amount both the buyer and seller will need to bring to the closing table. As of January 2010, RESPA amendments restricted the amount that fees can increase between the GFE and HUD-1.

Regardless of the government's good intentions, it is common to find mistakes on the HUD-1 or HUD-1A. It is a good idea to thoroughly go over the HUD settlement forms with your real estate agent before you get to the closing table and alert the escrow company of any errors. That way they can be corrected before closing.

Learn how to properly read a HUD statement. A good agent will immediately catch mistakes, but a second set of eyes is always an asset. You may want to have a real estate attorney or other professional review the HUD settlement papers for complicated transactions or if there seems to be erroneous charges or fees. Understand RESPA to catch honest mistakes or downright fraud and better protect yourself.

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About The Author

Elizabeth R. Elstien has worked in real estate for over 15 years as a real estate...

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