RESPA Compliant Settlement and Closing Procedures
HISTORY OF RESPA
In 1932, the federal government established the Federal Home Loan Banks (“FHL Banks”) to provide a stable supply of low-cost funds to American financial institutions for home mortgage loans. The FHL Banks and other government-sponsored enterprises, the Federal National Mortgage Association (Fannie Mae) (est. 1938), the Government National Mortgage Association (Ginnie Mae) (est. 1968) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (est. 1970), provide funds to residential mortgage lenders for long-term mortgage loans so that ordinary citizens have an opportunity to gain full ownership of their homes. The FHL Banks introduced 15-year (and later 30-year) 80% loan-to-value mortgages that supplanted the 3, 5, and 7-year balloon loans that had previously been used to finance home purchases. As a result, savings and loan associations sprung up all across the United States and home ownership rates soared.
RESPA was enacted in response to Congressional concerns that consumers were being overcharged for services related to mortgage loan closings (a/k/a “settlements”). (12 U.S.C. § 2601(a). In 1970, Congress directed the Secretary of Housing and Urban Development (HUD) and the Administrator of Veteran’s Affairs (VA) to undertake a joint study and make recommendations to Congress regarding proposals to reduce and standardize borrowers’ settlement costs. The joint HUD/VA Report issued in 1972 found that there was no price competition for most settlement services and that settlement charges were inflated by a widespread and elaborate system of kickbacks and referral fees. (Senate Report No. 93-866 1974). Most borrowers did not shop for settlement service providers. Instead, borrowers were referred to lenders, title insurance companies and other settlement service providers by real estate brokers, closing lawyers and other professionals who had no economic incentives to minimize costs, a phenomenon described as “reverse competition.” (Barron, Federal Regulation of Real Estate and Mortgage Lending, &2.04 at 2-25 (3d ed. 1992).
The HUD/VA Report recommended that Congress grant HUD and the VA the power to proscribe maximum allowable settlement charges and to require the use of uniform settlement statements. (1974 U.S. Code Cong. Admin. News 6546) The real estate industry bitterly opposed the HUD/VA proposals. In lieu of price controls, Congress opted for a statute designed to provide for more “advance disclosure to home buyers and sellers of settlement costs” and the elimination of “kickbacks or referral fees.” (See 12 U.S.C. ‘ 2601(b)(1) and (2). RESPA was also intended to reduce the amounts home buyers were required to place in escrow accounts and to reform and modernize local record keeping of land title information. (12 U.S.C. § 2601(b)(3) and (4).
APPLICABILITY OF RESPA: “FEDERALLY RELATED” MORTGAGE LOANS
RESPA applies to “federally related” mortgage loans that are secured by a lien on residential real estate designated principally for the occupancy of from one to four families. The term “federally related” refers to loans made by any lender whose deposits or accounts are insured by any agency of the federal government, loans that are intended to be sold to any of the GSEs, and loans made by any creditor who makes or invests in residential real estate loans aggregating more than $1,000,000 per year.
RESPA applies to purchase money mortgages, refinancings, property improvement loans, lines of credit, first mortgages and subordinate liens. (12 U.S.C. § 2602(1)(A). Excluded from the applicability of RESPA are: temporary financing such as construction loans (12 U.S.C. § 2602(1), loans made by governmental entities (12 U.S.C. §§ 2602(1) and 2606(A), and loans that are primarily for business, commercial, or agricultural purposes. (12 U.S.C. § 2606(A). HUD is responsible for enforcing RESPA. (12 U.S.C. § 2602(1)(A).