Real Estate Settlement Procedures Act of 1974

Settlement is the process by which ownership in a home passes from seller to buyer. It usually requires the services of professionals. The Real Estate Settlement Procedures Act of 1974 (RESPA; Pub. L. No. 93-533; 88 Stat. 1728) regulates the conduct of service providers when a single-family home is bought with a loan from a federally insured depository institution or a federally regulated lender, is insured by a federal agency, or will be sold to Fannie Mae (formerly, the Federal National Mortgage Association), Ginnie Mae (Government National Mortgage Association, or GNMA), or Freddie Mac (Federal Home Loan Mortgage Corporation, or FHLMC). In practice, nearly all single-family mortgages are covered.

The stated purposes of RESPA are (a) “more effective advance disclosure to homebuyers and sellers of settlement costs,” (b) “elimination of kickbacks or referral fees” among service providers “that tend to increase unnecessarily the costs of certain settlement services,” (c) “reduction in the amounts home buyers are required to place in escrow accounts,” and (d) “significant reform … of local record keeping of land title information” (http://www.fdic.gov/regulations/laws/rules/6500-2530.html, Sec. 2).

The main substantive provisions are contained in the following (http://www.fdic.gov/regulations/laws/rules/6500-2530.html, Sec. 4–10):

• Section 4: HUD must prescribe a standard form for the statement of settlement costs. The person conducting the settlement (usually an attorney or escrow agent) must give it to the borrower at settlement or, on request, one day before.
• Section 5: The lender must provide a good-faith estimate of the settlement costs the buyer is likely to incur.
• Section 6: The lender must tell the borrower at application if the lender will service the loan or sell it to another firm. The borrower must receive certain written notice in the event of such transfers and has a right to written answers about the loan account within 20 days. If the lender demands escrows for taxes and insurance premiums, the lender must pay those bills as they come due.
• Section 8: No person may give or receive a kickback, fee, or any other thing of value in return for referring business to a settlement provider. The penalty for violating this provision is a fine of up to $10,000 or a prison term of not more than one year. The prohibition does not apply to payments for services actually performed. For example, a lender may pay a mortgage broker for qualifying a loan applicant, and real estate agents may split fees among themselves. Controlled business arrangements may or may not be permitted; it matters, for instance, whether the buyer knew of the relationship between the parties or could choose other service providers and whether the owners’ profit represented normal return on investment.
• Section 9: No property may be sold with a requirement that title insurance must be purchased from any particular company.
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• Section 10: Lenders may not require excessive escrow payments. If a balance represents more than two months’ taxes and insurance premiums, payments are excessive. Lenders must give borrowers itemized annual statements of their escrow accounts.

Evaluations of RESPA must be tentative. Research is emerging on the following aspects:

• Advance disclosure. The good faith advance estimate (GFE) and actual settlement cost disclosure seem to be routinely provided. Shroder (2007) in small sample and Collins (2010) in much larger sample find that the typical GFE if anything overstates title and lending fees but that there are pockets of the market where the fees tend to be understated, and these pockets may be of particular concern to policymakers. It is not clear that these measures have changed buyer behavior or market outcomes. Bunce, McFarlane, Reid, and Usowski (2009) summarize a series of consumer studies showing that consumer understanding of costs as reported in the GFE is highly sensitive to form design. The form has recently been overhauled. In a very large sample of FHA-insured loans, Woodward (2008) finds enormous variation in settlement fees that are probably unrelated to the costs of delivering the services.
• Elimination of kickbacks and referral fees. The classic kickback is from a title insurance company to a real estate agent or broker. The Department of Housing and Urban Development (HUD) periodically brings class-action suits against title insurers, real estate brokers, and others for systemic violations. RESPA has probably reduced the prevalence of grosser forms of kickback but has not affected the economic incentives for service providers to pay them. It may therefore have stimulated more subtle forms of kickback arrangements. It may be far from simple for a regulator or a court to determine whether a fee was “earned” or not. Yoch (2008) has some illustrative cases.
• Reduction of escrow payments. HUD regulations implementing the ban on escrow balances in excess of two months of taxes and premiums were only issued in October 1997 (HUD, 2010). It appears to have standardized the practices of loan servicers without much controversy.
• Reform of land title recordation. No progress has been made toward this goal.

One common complaint against RESPA is that it adds more paperwork to settlement. If many consumers do not understand the forms, they do little good, and providers have to fill them out, which raises settlement costs. Another criticism is that the referral fee prohibition inhibits innovative market arrangements and joint ventures that would reduce cost to consumers.

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