Article by Michael Guzman
The Real Estate Settlement Procedures Act of 1974 stipulates that all real estate transactions must accomplish a HUD-1 Settlement Statement. RESPA is a Consumer Protection law enforced by the federal Housing and Urban Development Department (HUD).
The HUD-1 Settlement Statement contains all information regarding costs involved in the sale of any property. A settlement statement is typically prepared by either a lender or a third party known as an escrow agent, who must follow the regulations set forth in the RESPA.
Before the enactment of RESPA, the secondary costs in real estate transactions eat up a huge amount of money both for the seller and the buyer. These secondary costs include broker’s fees and appraiser’s fees, some of which are required by lenders in real estate deals. Unfortunately, in every transactions, the buyer or the seller do not have an estimate on the cost of these secondary expenses or hidden costs. In the early 1970s, there was a huge clamor to change the law to remove these hidden costs and the secretary of HUD and the administrator of the Veterans’ Affairs lobbied Congress to reform the then real estate law to reduce the costs on the consumers.
RESPA has four distinct functions. The first is to improve advance disclosure of settlement costs to home buyers and sellers. Second, to eliminate corruption such as kickbacks or referral fees that unfairly inflate settlement costs. Third, to reduce the amounts home buyers are required to deposit in an escrow account-in this case, a bank account established to ensure the payment of real estate taxes and insurance. Finally, Congress wished to modernize an outmoded system of local record keeping of land title information.
RESPA also requires lenders to keep settlement statement for five years or until such time the loan has been disposed, as well as to provide full accounting of sales costs. While there is no provision for civil penalties to lenders who will not properly disclose information, Section 8 of the HUD-1 Settlement Statement, provides anti-corruption measures that spell out criminal and civil liabilities for illegal referral fees. The provision was set to prevent intermediaries in the deal from cheating consumers with any hidden costs.
Congress further expanded the scope of RESPA’s powers in the 1990s. The amended RESPA law expanded to include refinances and subordinate loans, instead of just covering home purchase loans. The revisions were contained in the passage of the Housing and Community Act of 1992. These changes took effect in 1994 after HUD amended its rules (24 C.F.R. pt. 3500). As a result, lenders providing Equity or second mortgage loans, home improvement financing, and mobile home financing came under the regulation of RESPA.
But the expansion of RESPA powers generated reactions from the finance industry which complained of excess regulation. However, the signing by then President George W. Bush of the Housing and Community Development Act, signaled the administration’s reversal of policy from its usual anti-regulatory stance to the benefit of consumes in regulating costs in real estate transactions.
About the Author
Michael Guzman is an entrepreneur and leading provider of various online marketing strategies. He has authored a number of articles in several online sites to promote the businesses of his various clients.