Log in     Support     Status

Best Practices for Meeting RESPA Requirements

by | Feb 23, 2022

Understanding and complying with the Real Estate Settlement Procedures Act (RESPA) is critical for all mortgage lenders. Lenders and servicers must comply with RESPA-specific initial disclosure, settlement, and servicing requirements. Violation of RESPA carries significant criminal and civil penalties. The best way to ensure loan originators are compliant is to perform RESPA best practices with each loan. There is no such thing as being too cautious regarding federal lending laws.

What is RESPA?

The Real Estate Settlement Procedures Act of 1974 (RESPA) requires loan originators to provide borrowers with timely and pertinent disclosures regarding the nature and costs of the real estate settlement process. Added to RESPA over time were prohibitions to eliminate abusive processes in the real estate settlement process, limit the use of escrow accounts, and prohibit kickbacks. The Consumer Financial Protection Bureau (CFPB) has regulated RSPA since its creation in 2011.

RESPA applies to most purchases, refinances, equity lines of credit, and home improvement loans originated or serviced by a lender. It prohibits lenders from demanding excessive escrow accounts or mandating the use of title insurance companies. Lenders must also provide certain disclosures that pertain to consumer protection laws, settlement services, and real estate transactions. A plaintiff can bring suit for up to one year if they feel improper behavior has occurred in the settlement process. They have up to three years to bring suit against a servicer for specific improprieties.

What are the penalties for violating RESPA?

RESPA violations carry the risk of both criminal and civil penalties. The criminal penalties can be up to $10,000 and one year in prison. RESPA Civil penalties can range between $94 to $189,427.

Best practices to avoid RESPA violations

After creating the CFPB, due to the 2008 financial crisis, RESPA took on a much more expansive approach. The first and most important practice for RESPA compliance is that if you are uncertain whether something complies with RESPA or not, don’t do it.

Beyond the extreme caution of avoiding questionable practices, the most critical procedures to follow are:

Ensure the timeliness of required documentation

RESPA disclosures must be performed at various times during the transaction process to comply with the act. It is imperative to have a process flow that ensures each borrower receives the information on time and records are kept to prove this. When a Special Information Booklet is given or mailed to a borrower after an application is received, a note should be time stamped into the customer file, indicating completion within the three-day RESPA window. Record the good faith estimate of settlement costs in the customer file, including the delivery date and time.

Also required within three days of application is a Mortgage Servicing Disclosure Statement, disclosing whether the lender intends to service the loan or if it will be transferred to another lender. These documents need to either be provided at the time of application or mailed within three days, meaning it is crucial to record the dates and times of delivery.

At closing, the charges imposed on borrowers and sellers in connection to the settlement must be disclosed on a HUD-1 Settlement Statement. This statement allows for the proration or adjustment of the expenses paid overtime. Disclosure of all closing costs identifies the bottom line received by the seller and paid by the buyer. Yet again, record-keeping is essential to show compliance with RESPA.

If a loan servicer sells or assigns the loan servicing rights to another loan provider after the loan settlement, a Servicing Transfer Statement must be sent to the borrower. RESPA requires that the borrower be notified 15 days before the effective date of the transfer. 

Make sure the correct documentation goes to the right borrowers

It might seem unlikely, but documents can often be confused or accidentally switched between borrowers. A best practice is reviewing the good faith estimate with the borrower to ensure the correct estimate is provided. Just as crucial is knowing the accurate information has gone to closing for both the buyer and the seller.

Log interactions throughout the process

The simplest way to ensure RESPA compliance is to foster a culture and system wherein LOs document any interactions with borrowers throughout the entirety of the loan process. A loan originator that can show that interactions are recorded, documents are always double-checked, and required disclosures always provided is best protected against RESPA violation claims. 

How Capacity can help

A robust, end-to-end support automation platform is the best protection when it comes to RESPA compliance. Automating tasks for loan originators ensures RESPA compliance while relieving loan originators of the stress and time burden. Capacity is an end-to-end support automation platform that uses conversational AI to automate repetitive tasks, like those needed to ensure RESPA compliance and gets loan originators back to focusing on what they do best.