The Real Estate Settlement Procedures Act, (known as "RESPA"), was an Act passed by the United States Congress in 1974. It is
codified at Title 12, Chapter 27 of the United States Code, 12 U.S.C. § 2601–2617.
Purpose
It was created because various companies associated with the buying and selling of real
estate, such as lenders, realtors, and title insurance companies
were often engaging in providing undisclosed kickbacks to each other, inflating the
costs of real estate transactions and obscuring price competition by facilitating bait and switch tactics.
For example, a lender advertising a home loan might have advertised the loan with a 5% interest rate, but then when one
applies for the loan one is told that one must use the lender's affiliated title insurance company and pay $5,000 for the service
(whereas the normal rate is $1,000). The title company would then have paid $4,000 to the lender. This was made illegal.
Restrictions
The Act prohibits kickbacks between lenders and third-party settlement service agents in the real estate settlement process
(Section 8 of RESPA), requires lenders to provide a good faith estimate for all the
approximate costs of a particular loan and finally a HUD-1 (for purchase real estate loans) or a HUD-1A (for refinances of real
estate loans) at the closing of the real estate loan. The final HUD-1 or HUD-1A allows the borrower to know specifically the
costs of the loan and to whom the fees are being allotted.
Criticisms
Critics say however that various kickbacks still occur. For example, lenders often provide captive insurance to the title insurance companies they work with, which critics say is essentially a
kickback mechanism. Others counter that economically the transaction is a zero sum game, where
if the kickback were forbidden, a lender would simply charge higher prices. One of the core elements of the debate is the fact
that customers overwhelmingly go with the default service providers associated with a lender or a realtor, even though they sign
documents explicitly stating that they can choose to use any service provider. Some say that if the profits of the service
providers were truly excessive or if the prices of the service were excessively inflated because of illegal or quasi-legal
kickbacks, then at some point non affiliated service providers would attempt to target consumers directly with lower prices to
entice them to choose the unaffiliated provider.
There have been various proposals to modify the Real Estate Settlement Procedures Act. One proposal is to change the "open
architecture" system currently in place, where a customer can choose to use any service provider for each service, to one where
the services are bundled, but where the realtor or lender must pay directly for all other costs. Under this system, lenders, who
have more buying power and would more savvily seek for the lowest price for the various real estate settlement services.
Sources
External links
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