Dating back to 1974, the Real Estate Settlement Procedures Act (RESPA), was established to ease closing expenses by removing incentives and referral premiums and improve settlement disclosure strategies. It was a necessary action as deceptive practices such as inflating the cost of real estate ventures and providing secret incentives between agents, lenders and construction firms were permeating the market at the expense of the consumer.
RESPA not only forbids bribes among mortgage lenders and third-party settlement service agents in the real estate settlement process, but its officials also carefully watch shared referrals among professionals and consider them "possible violations."
In November of 2008, HUD issued a ruling concerning good faith estimates (GFE), which went into effect on January 1, 2010. At the closing of a real estate mortgage, all lenders must supply to RESPA a good faith estimate relating to the approximate costs for a specific loan, and in the circumstances of buying or refinancing real estate mortgage loans a HUD-1 and a HUD-1A form respectively. The finalized variations of these forms act as watchdogs for fraudulent activities, as they permit the homebuyer to know precisely how much the loan costs and to who the particular fees are allotted.
To see the effects of this ruling in action, take into account the following example. An immoral mortgage lender advertises for a home mortgage with a five percent interest rate, but when somebody applies for the home mortgage, the homebuyer is required to utilize the mortgage lender's affiliated title insurance company and has to pay $5,000 for the service, while the standard rate is $1,000.
This way the title company earns a return of $4,000. The GFE makes this procedure against the law and very noticeable to boot. Fees for services must be distinctly and specifically affirmed to allow reliable price competition based on consumer demand, which will decrease prices.
Additionally, RESPA mandates that mortgage lenders have to supply disclosures at different times and bans the use of particular tactics that automatically escalate the rate of services. For instance, home sellers are forbidden to require homebuyers to buy title insurance from any specific corporation. The long arm of RESPA reaches across most loans, assumptions, refinances, property restoration loans and equity lines of credit.