Real Estate ‘Settlement’ is generally referred to as the ‘closing’- the closing or settlement is the final step in a real estate transaction. This occurs towards the end when the ownership of a property is being transferred to the new owner from the old owner.
Real Estate Settlement Services or the closing services include services such as title searches, title examinations, provision of title certificates, title insurances, services rendered by an attorney, preparation of documents, property surveys, rendering of credit reports or appraisals, pest and fungus inspections, services provided by a real estate agent or broker and the origination of a federally related mortgage loan. The services are not limited only to these services but entail other proceedings too. Some of the other services which come under this purview include the taking of loan applications, loan processing, the underwriting and funding of loans, handling of the processing, and closing of settlement.
The Real Estate Settlement Procedure Act is a law first passed by the United States Congress in the year 1974. Abbreviated as RESPA, the primary objective is to create a mechanism where residential original settlement providers can make disclosures about the mortgage and the real estate settlement process that would be required and processed to the buyers of the property. It is to ensure that the buyers choose the settlement providers with full knowledge and transparency. This law also ensures that the fees that the buyers are charged with regards to the settlement process are reasonable and fair under the eyes of the law.
RESPA plays a key role in the prohibition of some of the unlawful practices practiced by the settlement providers, such as kickbacks and referral fees. Such malpractices shoot up the prices for the buyers and are an illegal form of profit accumulation. Real Estate Settlement Procedures Act makes the settlement providers’ disclosures at four different stages to the buyers. They are as follows:
1. Disclosures at the Time of Loan Application
Three specific disclosures are made at this point:
- A special booklet is issued describing all kinds of closing costs and their nature. It is provided at the time of loan application or within three days of the application.
- A Good Faith Estimate (GFE) is also given to the borrower- it explains the charges which a buyer may have to pay at the time of closing or settlement.
- A Mortgaging Service Disclosure Statement is the third specific disclosure provided to the buyers. This statement advises the borrower whether the lender intends to service the loan or transfer it to another lender. It also informs them about the procedures the borrowers must follow to resolve any complaints they have.
2 . Disclosures before Settlement
The lender provides the borrower with an Affiliated Business Arrangement Disclosure before the settlement. This happens in cases where the borrower is referred to some other settlement provider to whom the part has some ownership interest.
3. Disclosures during Settlement
The borrower receives the final HUD-1 Settlement. This statement shows the actual costs of the transaction, at the time of the settlement. The borrower also receives an Initial Escrow Statement which itemizes the taxes, insurances and other related charges which are to be paid from the accounts of the escrows in the first 12 months of taking the loan.
4. Disclosures after Settlement
The borrowers get an Annual Escrow Statement delivered to them by the loan servicer once a year. This statement gives a summary of all the escrow account deposits and payments made during the financial year. The borrowers are also advised whether there are any shortages or surpluses in the escrow account and also suggest the actions which should be taken accordingly.
There are no private rights for action or specific penalties for the violation of any of the disclosure terms. Other than the disclosure requirements, it is imperative for people to know about four sections of the Real Estate Settlement Procedure Act before indulging themselves in the real estate processes. These four sections are mentioned below:
- RESPA Section 6– This section keeps the homeowners safe from the abuses related to the servicing of home loans.
- RESPA Section 8– Section 8 of RESPA is its most important aspect as it is used for prohibiting three different kinds of practices followed by the settlement providers. Kickbacks, fee splitting, and unearned fees are malpractices which harm the buyers and they are provided protection against these issues.
- RESPA Section 9– This section safeguards the interest of the buyers against the sellers of the property by preventing the sellers from demanding any specific title insurance company from the buyers. The buyer can file a suit against the seller and recover the damages against the violation of this section.
- RESPA Section 10– This section limits the amount that a mortgage lender may demand from the buyer to be transferred to the escrow account for the payment of real estate taxes, home owner’s insurances, or other charges which are related to escrow.
Real Estate Settlement Procedures Act is more complicated than it seems to be and the aforementioned is a reader-friendly and simplified version of the act.