Texas Real Estate Law

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2 Table of Contents MODULE 6: FEDERAL REAL ESTATE SETTLEMENT PROCEDURES ACT... 3 MODULE DESCRIPTION... 3 MODULE LEARNING OBJECTIVES... 4 KEY TERMS... 4 LESSON 1: REQUIRED DISCLOSURES LESSON TOPICS INTRODUCTION DISCLOSURES AT TIME OF APPLICATION DISCLOSURES BEFORE SETTLEMENT DISCLOSURES AT SETTLEMENT DISCLOSURES AFTER SETTLEMENT LESSON SUMMARY LESSON 2: APPLICABLE STATUTES LESSON TOPICS INTRODUCTION SECTION 2601: CONGRESSIONAL FINDINGS AND PURPOSE SECTION 2602: DEFINITIONS SECTION 2603: UNIFORM SETTLEMENT STATEMENT SECTION 2604: SPECIAL INFORMATION BOOKLETS SECTION 2605: SERVICING OF MORTGAGE LOANS AND ADMINISTRATION OF ESCROW ACCOUNTS28 SECTION 2606: EXEMPTED TRANSACTIONS SECTION 2607: PROHIBITION AGAINST KICKBACKS AND UNUSED FEES SECTION 2608: TITLE COMPANIES; LIABILITY OR SELLER SECTION 2609: LIMITATION ON REQUIREMENT OF ADVANCE DEPOSITS IN ESCROW ACCOUNTS. 32 SECTION 2610: PROHIBITION OF FEES FOR PREPARATION OF TRUTH-IN-LENDING, UNIFORMS SETTLEMENT, AND ESCROW ACCOUNT STATEMENTS LESSON SUMMARY LESSON 3: ENFORCEMENT OF RESPA LESSON TOPICS INTRODUCTION CIVIL LAWSUITS... 37

3 LOAN SERVICING COMPLAINTS OTHER ENFORCEMENT ACTIONS FILING A RESPA COMPLAINT LESSON SUMMARY LESSON 4: REAL ESTATE PRACTICE LESSON TOPICS INTRODUCTION CASE STUDIES... 41

4 Module 6: Federal Real Estate Settlement Procedures Act Module Description This module covers a broad range of issues related to the Federal Real Estate Settlement Procedures Act to help the student learn ways to help clients through this sometimes complicated process of closing or settlement. Settlement refers to the process that occurs as a buyer and a seller settle their costs and payments with one another and there are a vast number of disclosures required in conjunction with the process, as we will discuss. The course includes the following lessons: Required Disclosures Applicable Statutes Enforcement of RESPA 3

5 In addition, this module includes a final practice lesson. This concluding lesson presents real-world dilemmas and concrete applications of the information presented in the rest of the course. As the student completes this course, he or she should try to develop a broad picture of the Real Estate Settlement Procedures Act and how it fits into the larger practice of real estate. The last lesson will help with this process by presenting comprehensive content questions, practice problems and case studies. Module Learning Objectives By the end of this module, you should be able to: Recall which statutes pertain to real estate settlement procedure requirements. Know which disclosures must be made in the process of real estate settlement. Know when disclosures must be made in the process of real estate settlement. Define the parties involved in the real estate settlement process. Understand the penalties for failure to disclose information for federally related mortgage loans. Key Terms Affiliated Business Arrangement : An arrangement in which (A) a person who is in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of such person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent in a provider of settlement services; and (B) either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider. 4

6 Affiliate Relationship: The relationship among business entities where one entity has effective control over the other by virtue of a partnership or other agreement or is under common control with the other by a third entity or where an entity is a corporation related to another corporation as parent to subsidiary by an identity of stock ownership. Agreement or Understanding: An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by practice, pattern, or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business. Associate: One who has one or more of the following relationships with a person in a position to refer settlement business: (A) a spouse, parent, or child of such person; (B) a corporation or business entity that controls, is controlled by, or is under common control with such person; (C) an employer, officer, director, partner, franchisor, or franchisee of such person; or (D) anyone who has an agreement, arrangement, or understanding, with such person, the purpose or substantial effect of which is to enable the person in a position to refer settlement business to benefit financially from the referrals of such business. Creditor: In section 103(f) of the Consumer Credit Protection Act (15 USC 1602(f)), RESPA covers any creditor that makes or invests in residential real estate loans aggregating more than $1,000,000 per year. Dealer: In Regulation X dealer is defined in the context of home improvement loans, a seller, contractor, or supplier of goods or services. For manufactured home loans dealer means one who engages in the business of manufactured home retail sales. Dealer loans are covered by RESPA if the obligations will be assigned, before 5

7 the first payment is due, to any lender or creditor otherwise subject to the regulation. Federally Related Mortgage Loan: Any loan (other than temporary financing such as a construction loan) which: (A) is secured by a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from one to four families, including any such secured loan, the proceeds of which are used to prepay or pay off an existing loan secured by the same property; and (B) (i) is made in whole or in part by any lender the deposits or accounts of which are insured by any agency of the Federal Government, or is made in whole or in part by any lender which is regulated by any agency of the Federal Government; or (ii) is made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by the Secretary [of HUD] or any other officer or agency of the Federal Government or under or in connection with a housing or urban development program administered by the Secretary [of HUD] or a housing or related program administered by any other such officer or agency; or (iii) is intended to be sold by the originating lender to the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, or a financial institution from which it is to be purchased by the Federal Home Loan Mortgage Corporation; or (iv) is made in whole or in part by any "creditor," as defined in section 1602(f) of title 15 [Truth in Lending Act], who makes or invests in residential real estate loans aggregating more than $1,000,000 per year, except that for the purpose of this chapter, the term "creditor" does not include any agency or instrumentality of any State. 6

8 Lender: Financial institutions either regulated by, or whose deposits or accounts are insured by, any agency of the federal government. Referral: A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business. A referral also occurs whenever a person paying for a settlement service or business incident thereto is required to use a particular provider of a settlement service or business incident thereto. Required Use: A situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service. However, the offering of a package (or combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process. Safe Harbor Test: Generally, a safe harbor test means that if you meet certain standards or requirements, you can qualify for specific exemptions from rules or regulations. In the case of RESPA, HUD has established an exemption from the statute's anti-kickback provision when real estate practitioners and lenders establish joint ventures called affiliated business arrangements (AfBA). To take advantage of the AfBA exemption, partners must satisfy a safe-harbor test under Section 8(c)(4) of RESPA. 7

9 Section 8: Generally, Section 8 refers to the section of the RESPA statute which prohibits kickbacks and unearned fees. Specifically, RESPA's Section 8(a) states, "No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." RESPA's Section 8(b) states, "No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed." Settlement Services: Any service provided in connection with a real estate settlement including, but not limited to, the following: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans), and the handling of the processing, and closing or settlement. 8

10 Thing of Value: Any payment, advance, funds, loan, service, or other consideration. It includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person's expenses, or reduction in credit against an existing obligation. 9

11 Lesson 1: Required Disclosures Lesson Topics This lesson focuses on the following topics: Introduction Disclosures at Time of Application Disclosures before Settlement Disclosures at Settlement Disclosures after Settlement 10

12 Introduction The Real Estate Settlement Procedures Act of 1974 (12 USC ) became effective on June 20, The act requires lenders, mortgage brokers, or servicers of home loans to provide borrowers with pertinent and timely disclosures of the nature and costs of the real estate settlement process. The act also protects borrowers against certain abusive practices, such as kickbacks, and places limitations upon the use of escrow accounts. An important goal of RESPA is to provide information that will teach consumers to be savvy judges of these services proper costs, and thus eliminate referral fees and other questionable tacked-on fees that can unnecessarily increase the cost of closing and settlement services. RESPA is enforced by HUD's Office of RESPA and Interstate Land Sales. HUD promulgated Regulation X (24 CFR 3500), which implements RESPA. The National Affordable Housing Act of 1990 amended RESPA to require detailed disclosures for the transfer, sale, or assignment of mortgage servicing. It also mandates disclosures for mortgage escrow accounts at closing and annually, thereafter, itemizing the charges to be paid by the borrower and from the account by the servicer. More About: To view the text of Regulation X, please visit the following link: RESPA applies to most loans that are secured by a mortgage lien placed on a one- to four-family residential property. These loans include most purchase loans, assumptions and property improvement loans; they also generally include refinancing loans and equity lines of credit. The primary condition for a loan falling under RESPA is that it be what is called a federally related mortgage loan, defined broadly in RESPA as a loan that is directly or indirectly supported by federal 11

13 regulation, insurance, guarantees, supplements or assistance. This term also covers loans that the originating lender intends to sell to a federal program, such as Fannie Mae. This range of loans covers the majority of loans that are secured for home purchases. Disclosures at Time of Application When a potential borrower first applies for a mortgage loan, brokers or lenders are required to give the borrower several disclosure documents. Special Information Booklet Lender must provide the borrower with a copy of the Special Information Booklet either at the time a written application is submitted, or no later than three business days after the application is received. If the application is denied before the end of the three-business-day period, the bank need not provide the booklet. If the borrower uses a mortgage broker, the broker, rather than the bank, must provide the booklet. An application includes the submission of a borrower's financial information, either written or computer-generated, for a credit decision on a federally related mortgage loan. It must identify a specific property. The subsequent addition to the submission of an identified property converts it to an application for a federally related mortgage loan. The booklet need not be given for refinancing transactions, closed-end subordinate lien mortgage loans, and reverse mortgage transactions, or for any other federally related mortgage loan unintended for the purchase of a one-to-four family residential property. A bank that complies with Regulation Z (12 CFR 226.5b) for open-end home equity plans has conformed with this section. 12

14 Part One of the booklet describes the settlement process and the nature of charges, and suggests questions to be asked of lenders, attorneys, and others to clarify their services. It also contains information on the rights and remedies available under RESPA and alerts the borrower to unfair or illegal practices. Part Two of the booklet contains an itemized explanation of settlement services and costs, and sample forms and worksheets for cost comparisons. The Appendix of the Special Information Booklet contains a listing of government offices from which to obtain consumer information and literature on home purchasing and other related topics. Good Faith Estimate A bank must provide, in a clear and concise form, a good faith estimate of the amount of, or range of, settlement charges the borrower is likely to pay. The GFE must include all charges that will be listed in section L of the HUD-1 Settlement Statement. It must be provided no later than three business days after receipt of the written application. If the application is denied before the end of the threebusiness-day period, the bank is not required to provide the GFE. The GFE may disclose either an estimate of the dollar amount or a range of dollar amounts for each settlement service. The estimate of the amount or range for each charge must: Bear a reasonable relationship to the borrower's ultimate cost for each settlement charge. Be based upon experience in the locality in which the property involved is located. A bank that complies with Regulation Z (12 CFR 226.5b) for open-end home equity plans is deemed to have met the GFE disclosure requirement of 24 CFR

15 For no cost or no point loans, the GFE must disclose any payments to be made to affiliated or independent settlement service providers. These payments should be shown as POC (Paid Outside of Closing). For dealer loans, the bank must provide the GFE either directly or through the dealer. For brokered loans, if the mortgage broker is the bank s exclusive agent, either the bank or the broker shall provide the GFE within three business days after the broker receives or prepares the application. When the broker is not the bank s exclusive agent, the bank is not required to provide the GFE if the broker has already done so, but the funding lender must ascertain that the GFE has been delivered. When the bank requires the use of a particular settlement service provider and the borrower to pay all or a portion of the cost of those services, the bank must include with the GFE: A statement that the use of the provider is required and the estimate is based on the charges of the designated provider. The name, address, and telephone number of the designated provider. A description of the nature of any relationship between each such provider and the bank. A relationship exists if: The provider is an associate of the bank, as defined in 24 CFR (c)(1) (12 USC 2602(8)); The provider has maintained an account with the bank or had an outstanding loan or credit arrangement with the bank within the last 12 months; or The bank has repeatedly used or required borrowers to use the provider's services within the last 12 months. The statement that, except for a provider that is the bank's chosen attorney, credit reporting agency, or appraiser, if the bank is in a controlled business 14

16 relationship with the provider, it may not require use of that provider (24 CFR ). If the bank maintains a controlled list of required providers (five or more for each discrete service) or relies on a list maintained by others and at the time of application has not decided which provider will be selected, the bank may comply with this section by: Providing a written statement that the bank will require a particular provider. Disclosing in the GFE the range of costs for the required providers and on the HUD settlement statement the name of the specific provider and the actual cost. If the list is less than five providers of service, the names, addresses, telephone numbers, costs, and the business relationship are required. To view a sample good faith estimate, go to the following link through the HUD Web site: Mortgage Servicing Disclosure Document A bank that receives an application for a federally related mortgage loan is required to disclose to the borrower at the time of application, or within three business days after its submission: Whether the servicing of the loan may be assigned, sold, or transferred. The percentages (rounded to the nearest quartile (25 percent)) of loans made by the bank in each of the last three calendar years for which servicing has been assigned, sold or transferred or, in the alternative, a statement that the bank has previously assigned, sold, or transferred the servicing of federally related mortgage loans. 15

17 The best available estimate of the percentage of loans to be made by the bank that may be assigned, sold, or transferred during the 12-month period beginning on the date of origination. A summary of the information that will be provided to the borrower if the loan is transferred. A disclosure of the duty of the bank to: o Provide a written acknowledgment of the borrower's qualified written request for information relating to the loan within 20 business days. o Make corrections, if necessary, or provide a written explanation of why the account is correct, within 60 days of notice. o Withhold, during the 60-day period, information about any overdue payment to a credit reporting agency. A written acknowledgment that the applicant has read and understood the disclosure, evidenced by the signature of the applicant. Servicers Must Respond to Borrower's Inquiries A bank servicer must respond to a borrower's qualified written inquiry and take appropriate action within established time frames after receipt of the inquiry. Generally, the bank must provide written acknowledgment within 20 business days and take certain specified actions within 60 business days of receipt of such inquiry. During the 60-business-day period following receipt of a qualified written request from a borrower relating to a disputed payment, a bank may not provide information on any overdue payment, or relating to this period or the qualified written request, to any consumer reporting agency. 16

18 Disclosures before Settlement Affiliated Business Arrangement Disclosure If the bank has either an affiliate relationship or a direct or beneficial ownership interest of more than 1 percent in a provider of settlement services and the lender directly or indirectly refers business to the provider, it is a controlled business arrangement. That arrangement does not violate section 8 of RESPA and section of Regulation X, if: The bank discloses on a separate piece of paper either at the time of loan application or with the GFEs: o The nature of the relationship (explaining the ownership and financial interest) between the provider and the bank. o The estimated charge or range of charges generally made by such provider. The bank does not require the use of such a provider, with the following exceptions: the bank may require a buyer, borrower, or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the bank to represent its interest. The bank receives only a return on ownership or franchise interest or payment otherwise permitted by RESPA in section (g). HUD-1 Settlement Statement The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement (as discussed below). The HUD-1 and HUD-1A must be completed by the person conducting the closing (settlement agent) and must conspicuously and clearly itemize all charges related to the transaction. The HUD-1 is used for transactions in which there is a borrower and seller. For transactions in which there is a borrower and no seller (refinancing 17

19 and subordinate lien loans), the HUD-1 may be completed by using the borrower's side of the settlement statement. Alternatively, the HUD-1A may be used. However, no settlement statement is required for open-end home equity plans subject to the Truth in Lending Act and Regulation Z. Appendix A of 24 CFR 3500 contains the instructions for completing the forms. Printing and Duplication of the Settlement Statement (24 CFR ) Banks have numerous options for layout and format in reproducing the HUD-1 and HUD-1A that do not require prior HUD approval, such as size of pages; tint or color of pages; size and style of type or print; spacing; printing on separate pages, front and back of a single page, or on one continuous page; use of multi-copy tear-out sets; printing on rolls for computer purposes; addition of signature lines; and translation into any language. Other changes not specifically listed in 24 CFR may be made only with the approval of the Secretary of Housing and Urban Development. One-Day Advance Inspection of the Settlement Statement (24 CFR ) Upon request by the borrower, the HUD-1 or HUD-1A must be completed and made available for inspection during the business day immediately proceeding the day of settlement, listing those items known at that time by the person conducting the closing. Delivery The completed HUD-1 or HUD-1A must be delivered to the borrower, the seller, and the lender at or before settlement. However, the borrower may waive the right of delivery by executing a written waiver at or before settlement. The HUD-1 or HUD- 1A shall be mailed or delivered as soon as practicable after settlement if the borrower or borrower's agent does not attend the settlement. 18

20 Retention (24 CFR (e)) The bank must retain each completed HUD-1 or HUD-1A and related documents for five years after settlement, unless the bank disposes of its interest in the mortgage and does not service it. If the loan is transferred, the bank shall provide a copy of the HUD-1 or HUD-1A to the owner or servicer of the mortgage as part of the transfer. The owner or servicer shall retain the HUD-1 or HUD-1A for the remainder of the five-year period. Disclosures at Settlement HUD-1 Settlement Statement The HUD-1 Settlement Statement shows the actual settlement costs of the loan transaction. Separate forms may be prepared for the borrower and the seller. Where it is not the practice that the borrower and the seller both attend the settlement, the HUD-1 should be mailed or delivered as soon as practicable after settlement. Initial Escrow Statement After analyzing each escrow account, the servicer must submit an initial escrow account statement to the borrower at settlement or within 45 calendar days of settlement for escrow accounts that are established as a condition of the loan. The initial escrow account statement must include the monthly mortgage payment; the portion going to escrow; itemized estimated taxes, insurance, premiums, and other charges; the anticipated disbursement dates of those charges; the amount of the cushion; and a trial running balance. 19

21 Disclosures after Settlement Annual Escrow Statement A servicer shall submit to the borrower an annual statement for each escrow account within 30 days of the completion of the computation year. The servicer must conduct an escrow account analysis before submitting an annual escrow account statement to the borrower. Annual escrow account statements must contain the account history; projections for the next year; current mortgage payment and portion going to escrow; amount of last year's mortgage payment and the portion going to escrow; total amount paid into the account during the past year; amount paid from the account; balance at the end of the period; explanation of how the surplus, shortage, or deficiency is being handled; and, if applicable, the reasons why the estimated low monthly balance was not reached. If the new servicer changes the payment or accounting method, it must provide an initial escrow account statement within 60 days of the date of servicing transfer. When a new servicer provides an initial escrow account statement upon the transfer, it shall use the effective date of the transfer of servicing to establish the new escrow account computation year. Pre-rule accounts remain pre-rule accounts upon the transfer of servicing to a new servicer as long as it occurs before the conversion date. Servicing Transfer Statement The disclosures related to the transfer of mortgage servicing are required for first mortgage liens of federally related mortgage loans, including all refinancing transactions of such loans. HUD has exempted from the requirements of this section any subordinate lien and has excluded all open-end lines of credit (home equity plans), whether secured by a first or subordinate lien, that are covered under the Truth in Lending Act and Regulation Z. In addition, these requirements shall not 20

22 apply when the application for credit is denied within three business days after receipt of the application. When the servicing of a federally related mortgage loan is assigned, sold, or transferred, the transferor servicer (present servicer) must provide a disclosure not less than 15 days before the effective date of the transfer. The same notice from the transferee servicer (new servicer) must be provided not more than 15 days after the effective date of the transfer. Both notices may be combined into one notice delivered to the borrower not less than 15 days before the effective date of the transfer. The disclosure must include: The effective date of the transfer of servicing. The name, address for consumer inquiries, and toll-free or collect-call telephone number of the transferee servicer. A toll-free or collect-call telephone number for a person employed by the transferor servicer that can be contacted by the borrower to answer servicing questions. The date on which the transferor servicer will cease accepting payments relating to the loan and the date on which the transferee servicer will begin to accept such payments. These dates must either be the same or consecutive dates. Any information about the effect of the transfer on the availability of optional insurance and any action the borrower must take to maintain coverage. A statement that the transfer does not affect any other terms or conditions of the mortgage, except as related directly to servicing. During the 60-day period beginning on the date of transfer, no late fee can be imposed on a borrower who has made the payment to the wrong servicer. 21

23 The following transfers are not considered an assignment, sale, or transfer of mortgage loan servicing for purposes of this requirement if there is no change in the payee, address to which payment must be delivered, account number, or amount of payment due: Transfers between affiliates. Transfers resulting from mergers or acquisitions of servicers or subservicers. Transfers between master servicers, when the subservicer remains the same. Lesson Summary There are several disclosures required at the time of application. One of them is the special information booklet which includes information that a prospective borrower would need to inform him or her of settlement service procedures and costs. A good faith estimate must also be given at this time which estimates the charges the borrower is likely to pay. The mortgage servicing disclosure document must be given for first mortgage liens of federally related mortgage loans, including refinancing transactions of such loans. This disclosure stipulates when and by whom servicing statements and disclosures must be submitted. Before settlement, affiliated business arrangement disclosures must be made if the bank has either an affiliate relationship or a direct or beneficial ownership interest of more than 1 percent in a provider of settlement services and the lender directly or indirectly refers business to the provider. The HUD-1 Settlement Statement must be given at or before settlement and clearly shows all charges imposed on borrowers and sellers in connection with the settlement. Other disclosures given at settlement include the initial escrow statement which includes the monthly mortgage payment; the portion going to escrow; itemized estimated taxes, insurance, premiums, and other charges; the anticipated disbursement dates of those charges; the amount of the cushion; and a trial running balance. 22

24 After settlement, an annual escrow statement, much like the initial escrow statement must be submitted to the borrower. In the event that the servicer changes, a statement of transfer must be submitted to the borrower from both the old and new servicer. 23

25 Lesson 2: Applicable Statutes Lesson Topics This lesson focuses on the following topics: Introduction Section 2601: Congressional Findings and Purpose Section 2603: Uniform Settlement Statement Section 2604: Special Information Booklets Section 2605: Servicing of Mortgage Loans and Administration of Escrow Accounts Section 2606: Exempted Transactions Section 2607: Prohibition against Kickbacks and Unused Fees Section 2608: Title Companies; Liability or Seller Section 2609: Limitation on Requirement of Advance Deposits in Escrow Accounts 24

26 Section 2610: Prohibition of Fees for Preparation of Truth-in-Lending, Uniforms Settlement, and Escrow Account Statements Introduction Real estate settlement procedures comprise Chapter 27 of Title 12, Banks and Banking, of the U.S. Code. We will go through each section of RESPA, discussing the main points of the act and where you can find them. To view the Real Estate Settlement Procedures Act in its full form, please visit the following link: Section 2601: Congressional Findings and Purpose Section 2601 concerns Congress s determination that significant reforms in the real estate settlement process are needed to effect the following changes: More effective advance disclosure to buyers and sellers of settlement costs Elimination of kickbacks or referral fees which increase costs of some services Reduction of amounts buyers must place in escrow accounts Reform and modernization of local recordkeeping of land title information Section 2602: Definitions Federally Related Mortgage Loan: Any loan (other than temporary financing such as a construction loan) which A. is secured by a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from one to four families, including any such secured loan, the proceeds of which are used to prepay or pay off an existing loan secured by the same property; and (i) is made in whole or in part by any lender the deposits or accounts of which are insured by any agency of the Federal 25

27 Government, or is made in whole or in part by any lender which is regulated by any agency of the Federal Government, or (ii) is made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by the Secretary or any other officer or agency of the Federal Government or under or in connection with a housing or urban development program administered by the Secretary or a housing or related program administered by any other such officer or agency; or (iii) is intended to be sold by the originating lender to the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, or a financial institution from which it is to be purchased by the Federal Home Loan Mortgage Corporation; or (iv) is made in whole or in part by any creditor, as defined in section 1602(f) of title 15, who makes or invests in residential real estate loans aggregating more than $1,000,000 per year, except that for the purpose of this chapter, the term creditor does not include any agency or instrumentality of any State; Thing of Value: Any payment, advance, funds, loan, service, or other consideration. Settlement Services: Any service provided in connection with a real estate settlement including, but not limited to, the following: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan 26

28 processing, and the underwriting and funding of loans), and the handling of the processing, and closing or settlement. Title Company: Any institution which is qualified to issue title insurance, directly or through its agents, and also refers to any duly authorized agent of a title company. Person: Individuals, corporations, associations, partnerships, and trusts. Secretary: The Secretary of Housing and Urban Development. Affiliated Business Arrangement: An arrangement in which: A person who is in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of such person, has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent in a provider of settlement services; and Either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider. Associate: One who has one or more of the following relationships with a person in a position to refer settlement business: A spouse, parent, or child of such person; A corporation or business entity that controls, is controlled by, or is under common control with such person; An employer, officer, director, partner, franchisor, or franchisee of such person; or Anyone who has an agreement, arrangement, or understanding, with such person, the purpose or substantial effect of which is to enable the person 27

29 in a position to refer settlement business to benefit financially from the referrals of such business. Section 2603: Uniform Settlement Statement This section stipulates that the Secretary must develop and prescribe a standard form for the statement of settlement costs for all transactions involving federally related mortgage loans in the U.S. Parts of this form may be deleted in areas with varying legal or administrative requirements. If the borrower is located in an area which customarily provides this statement, then they must be able to inspect it at or before settlement. Section 2604: Special Information Booklets The Secretary is required to prepare and distribute booklets in order to help persons borrowing money to finance residential real estate purchases better understand the nature and cost of settlement services. Topics covered include: settlement cost incidents, standard settlement form example, description of escrow accounts used in connection with loans, service provider choices, and unfair practices and charges. The booklet shall be provided by delivering or placing in the mail no later than three days after the lender receives the application, and should include a good faith estimate of charges for specific settlement services. Section 2605: Servicing of Mortgage Loans and Administration of Escrow Accounts A servicer is generally the mortgage-holder or a third-party company responsible for servicing a mortgage. This includes collecting payments for principal, interest and escrow. When a mortgage is sold, it is not only the mortgage itself that is transferred, but also the servicing rights of the mortgage. This section discusses 28

30 what notification is necessary upon transfer of mortgage and servicing rights, in addition to the handling of escrow account monies. The old/existing servicer must provide written notification to the borrower of the transfer of servicing, assignment or sale within 15 days prior to the effective date on which the mortgage payment is first due to the new servicer. The new servicer, too, must notify the borrower of the transfer within 15 days after the mortgage payment is first due to the new servicer (the effective date). If the transfer is preceded by termination of the servicing contract for cause, commencement of bankruptcy proceedings for the servicer, or commencement of FDIC or RTC proceedings for receivership of the servicer, then the notification from both old and new servicers is extended to 30 days after the effective date of transfer. Both notices from old and new servicers must contain the following pieces of information: 1) The effective date of transfer of the servicing. 2) The name, address, and toll-free or collect telephone number of the new servicer. 3) A toll-free or collect telephone number for an individual employed by the existing servicer or for the existing servicer department that can be contacted by the borrower to answer inquiries relating to the transfer of servicing. 4) The name and toll-free or collect telephone number for (i) an individual employed by the new servicer or for the new servicer department that can be contacted by the borrower to answer inquiries relating to the transfer of servicing. 29

31 5) The date on which the existing (transferor) servicer will cease to accept payments relating to the loan and the date on which the new (transferee) servicer will begin to accept such payments. 6) Any information concerning the effect the transfer may have, if any, on the terms of or the continued availability of mortgage life or disability insurance or any other type of optional insurance and what action, if any, the borrower must take to maintain coverage. 7) A statement that the assignment, sale, or transfer of the servicing of the mortgage loan does not affect any term or condition of the security instruments other than terms directly related to the servicing of such loan. For 60 days following the effective date of servicing transfer, no one may impose a late fee on the borrower if he or she submits payment before the due date to the original servicer rather than the new servicer, though the new servicer is the one who should be receiving payment. If the borrower submits a written request for information regarding the loan servicing, the servicer has 20 business days to acknowledge receipt of the request in writing, and 60 business days to resolve the inquiry or complaint by correcting the account or providing a statement of the servicer s position. Also, during this period, the servicer may not provide information regarding any disputed overdue payment to any consumer reporting agency. Section 2606: Exempted Transactions Because this chapter refers mainly to residential real estate transactions, it does not apply to credit transactions involving extensions of credit primarily for business, agricultural or commercial purposes, or to government or government agencies or instrumentalities. 30

32 Section 2607: Prohibition against Kickbacks and Unused Fees No one may give or accept any fee, kickback or thing of value for an agreement involving a federally related mortgage loan resulting from a business referral. Also, no one may give or accept a portion, split or percentage of a charge made or received for the rendering of a real estate settlement service involving a mortgage loan. This is not to say that attorneys, title companies/agents, or lenders/agents may not receive a fee for services actually performed. Anyone may be paid a bona fide salary, compensation or other payment for goods or facilities actually furnished or services actually performed. Payments for cooperative brokerage and referral arrangements between real estate brokers and agents are not prohibited; nor are affiliated business arrangements so long as the appropriate disclosures are made and a written estimate of charges are made by the provider to which the person is referred. In these situations, the person must also NOT be required to use a particular provider of settlement services and the only thing of value they may receive is a return on ownership interest or franchise relationship. Section 2608: Title Companies; Liability or Seller No seller of property purchased with a federally related mortgage loan shall require as a condition of sale that the buyer purchase title insurance from a particular company. Any seller who violates this provision is liable to the buyer for three times all charges made for such title insurance. 31

33 Section 2609: Limitation on Requirement of Advance Deposits in Escrow Accounts A lender may not require a borrower to deposit more funds into an escrow account than would be necessary to assure payment of taxes, insurance premiums or other charges to a property in connection with its settlement. The appropriate advance deposit is only required to cover the charges for the period: Beginning on the last date on which each charge would have been paid according to normal lending practices and local custom, and Ending on the due date of its first full installment payment under the mortgage, PLUS 1/6 th the estimated total amount of such taxes, insurance premiums and other charges to be paid during the ensuing 12-month period. A lender is also NOT allowed to require a borrower to deposit in any such escrow account in any month beginning with the first full installment payment a sum in excess of 1/12 th the total amount of estimated taxes, insurance premiums and other charges reasonably anticipated to be paid on dates during the ensuing 12 months in accordance with normal lending practice of the lender and local custom, plus such amount as is necessary to maintain an additional balance in the escrow account not to exceed 1/6 th the estimated total amount of taxes, insurance premiums and other charges to be paid in the ensuing 12-month period. However, if the lender determines that there is or will be a deficiency, he is not prohibited from requiring additional monthly payments into such escrow account to avoid or eliminate such deficiency. 32

34 Escrow Account Statements If the borrower is required to make payments for advance deposits into an escrow account, the servicer must notify him or her not less than once per year of any shortage of funds in the account. Regarding initial account statements, the servicer must submit to the borrower at closing or within 45 days after the establishment of the escrow account: An itemization of estimated taxes, insurance premiums and other charges that are reasonably anticipated to be paid from the escrow account during the first 12 months after the account is created, As well as the anticipated dates of such payments. The servicer may also incorporate this initial statement into the uniform settlement statement according to regulation governing such incorporation. Servicers are also required to submit a statement to the borrower at least once for a 12-month period, and within 30 days of the conclusion of such period, a statement clearly itemizing: The amount of the current monthly payment The portion of the monthly payment being placed in the escrow account The total amount paid into the account during the period The total amount paid out of the escrow account during the period for taxes, insurance premiums and other charges (which shall be separately identified) and other charges The balance in the escrow account at the conclusion of the period 33

35 Section 2610: Prohibition of Fees for Preparation of Truth-in- Lending, Uniforms Settlement, and Escrow Account Statements No fees may be imposed by a lender in connection with a federally related mortgage loan for the preparation or submission of any of these statements. Lesson Summary RESPA can be found in Title 12, Chapter 27 of the U.S. Code. Section 2601 covers the changes Congress hoped to effect in the process of real estate settlement when the act was penned in 1972, including more effective disclosure processes, the elimination of kickbacks and referral fees, reduction of required escrow amounts and reform of local recordkeeping of land title information. Section 2602 defines several terms related to settlement procedures, including a federally related mortgage loan, a thing of value, settlement services, title company, person, Secretary, affiliated business arrangement, and associate. Section 2603 stipulates that the Secretary of HUD must develop and prescribe a standard form for the statement of settlement costs for all transactions involving federally-related mortgage loans in the U.S. The Secretary is also required to prepare and distribute special information booklets for borrowers to help them understand the nature and cost of settlement services, as is discussed in Section Section 2605 sets forth requirements for the servicing of mortgage loans and administration of escrow accounts, including what must be done regarding notification and payment, how to respond if it s not, and by when responses must be made. 34

36 Section 2606 clarifies that RESPA applies mainly to residential real estate transactions. Section 2607 prohibits kickbacks and unearned fees and notes that fees may still be paid if from agreements between brokers and agents for work. Section 2608 prohibits sellers from requiring as a condition of sale that a buyer purchase title insurance from a particular company. Section 2609 presents the limitations on how much advance deposits must be placed in escrow accounts and what action may be taken if a buyer is deficient. It also stipulates what must be contained in escrow account statements and by when they must be submitted. Section 2610 states that no fees may be imposed by a lender in connection with a federally related mortgage loan for the preparation or submission of any of these statements. 35

37 Lesson 3: Enforcement of RESPA Lesson Topics This lesson focuses on the following topics: Introduction Civil Lawsuits Loan Servicing Complaints Other Enforcement Actions Filing a RESPA Complaint 36

38 Introduction Because RESPA sets forth rules for disclosure and prohibits many specific actions by parties involved in real estate settlement services, there are obviously many actions that may be taken against violators of the Act. What follows are enforcement actions, including how long parties have to file suit or complaint for violations of specific actions, as well as what the penalties may be for the violations. Civil Lawsuits Individuals have one (1) year to bring a private lawsuit to enforce violations of Section 8 or 9. A person may bring an action for violations of Section 6 within three years. Lawsuits for violations of Section 6, 8, or 9 may be brought in any federal district court in the district in which the property is located or where the violation is alleged to have occurred. HUD, a State Attorney General or State insurance commissioner may bring an injunctive action to enforce violations of Section 6, 8 or 9 of RESPA within three (3) years. Loan Servicing Complaints Section 6 (Section 2605) provides borrowers with important consumer protections relating to the servicing of their loans. Under Section 6 of RESPA, borrowers who have a problem with the servicing of their loan (including escrow account questions), should contact their loan servicer in writing, outlining the nature of their complaint. The servicer must acknowledge the complaint in writing within 20 business days of receipt of the complaint. Within 60 business days the servicer must resolve the complaint by correcting the account or giving a statement of the reasons for its position. Until the complaint is resolved, borrowers should continue to make the servicer's required payment. A borrower may bring a private law suit, or a group of borrowers may bring a class action suit, within three years, against a servicer who fails to comply with Section 6's provisions. 37

39 Borrowers may obtain actual damages and costs of the action and attorney s fees, as well as additional damages if there is a pattern of noncompliance. For individuals who have violated this section, additional damages may not exceed $1,000. For class action suits, additional damages may not exceed $1,000 for each member of the class, or the total amount of damages may not exceed the lesser of $500,000 or 1 percent of the net worth of the servicer. Other Enforcement Actions Under Section 10 (Section 2609), HUD has authority to impose a civil penalty on loan servicers who do not submit initial or annual escrow account statements to borrowers. This civil penalty is $50 for each failure to submit an escrow statement to a borrower, though they can not exceed $100,000 total in a 12-month period; a $100 penalty may be imposed for intentional disregard to submit the statement. Borrowers should contact HUD's Office of Consumer and Regulatory Affairs to report servicers who fail to provide the required escrow account statements. For a violation of Section 8 (2607) the violator may not be fined more than $10,000 or imprisoned for more than one year. The violator will be liable for three times the amount of any charge paid for settlement service involved in the violation. Violators of Section 9 (2608) are liable to the buyer for an amount equal to three times all changes made for title insurance, as well. Filing a RESPA Complaint Persons who believe a settlement service provider has violated RESPA in an area in which the Department has enforcement authority (primarily sections 6, 8 and 9), may wish to file a complaint. The complaint should outline the violation and identify the violators by name, address and phone number. Complainants should also provide their own name and phone number for follow up questions from HUD. Requests for confidentiality will be honored. Complaints should be sent to: 38

40 Director, Office of RESPA and Interstate Land Sales U.S. Department of Housing and Urban Development Room th Street, SW Washington, DC Lesson Summary The Real Estate Settlement Procedures Act can be enforced in several different ways. Depending on the nature of the violation, a person may file a complaint with the Secretary of HUD or may bring an individual or class suit against the violator. The violator can be charged as much as $100,000 depending on the nature of the violation, or as little as $50. If the person who files suit wins a case, he or she may be awarded damages and/or coverage of the related legal fees. If a borrower wishes to file suit, he or she should do so as soon as possible to ensure that the process is begun before the statute of limitations comes into effect, usually within one year for settlement service violations (though if HUD, the State Attorney General or insurance commissioner is bringing injunctive action, they have three years to enforce the violation). 39

41 Lesson 4: Real Estate Practice Lesson Topics This lesson focuses on the following topics: Introduction Case Studies 40