RESPA was passed on June 20, 1975 by Congress to address consumer complaints regarding real estate closing costs and procedures. RESPA is administered by the US Department of Housing and Urban Development (HUD), is to regulate and standardize real estate settlement practices when “federally related” first mortgage loans are made on one to four family residences, condominiums and cooperatives.
RESPA prohibits kickbacks and fees for services not performed during the closing process. For example, prior to RESPA in some regions it was common practice for attorneys and closing agents to channel title business to certain title companies in return for a fee. This practice increased settlement costs to the consumer without adding services. Since RESPA, there must be a service performed for each closing fee charge and the fees must be disclosed to the borrower.
The Act also prohibits the seller from requiring that the buyer purchase title insurance from a particular provider and contains restrictions on the amount of advance property tax and insurance payments a lender can collect and place in an escrow account. The amount is limited to the property owner’s share of taxes and insurance accrued prior to settlement plus one-sixth of the estimated amount that will come due for these items in the 12 month period beginning at settlement. This requirement assures that the lender has an adequate but not excessive amount of money impounded when taxes and insurance payments fall due. If the escrow account falls short to pay an item when it comes due, the lender is required to pay the item and then bill the borrower or increases the monthly reserve payment.