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Real Estate Settlement Procedures Act (RESPA)

The Real Estate Settlement Procedures Act (RESPA) was passed in 1974 to protect home buyers from harm when engaging with lenders and mortgage brokers. It also helps to ensure that there is more transparency between lenders, mortgage brokers and borrowers. The law applies to the majority of purchase loans, refinances, property improvement loans, and home equity lines of credit (HELOCs).

RESPA aims to make sure that all parties involved in a real estate transaction, including the lenders, operate in a manner that is transparent and fair to the consumer. The major protections put in place by RESPA can be summarized as follows:

Disclosure: RESPA requires lenders and mortgage brokers to provide a borrower with detailed disclosure of all costs and fees associated with the loan prior to settlement. The disclosure document provides a good faith estimate of all costs and fees due at closing.

Controlling Risk: RESPA also prohibits loan servicers from demanding excessively large escrow accounts, thus allowing borrowers to be able to better manage their loan payments and risks.

Restricting Kickbacks: RESPA also restricts sellers from mandating title insurance companies in exchange for money or other things of value. It also bans kickbacks, referral fees and other types of “unearned fees.”

Protections for Consumer: The act also provides recourse for consumers who have experienced violations of its provisions. Strict time limits for bringing a lawsuit also aim to give consumers more time to resolve problems. A plaintiff has up to one year to bring a lawsuit to enforce violations where kickbacks or other improper behavior occurred during the settlement process. A plaintiff has up to three years to bring a suit against their loan servicer.

All in all RESPA provides key protections to consumers that help make sure the settlement process is fair. It also helps make sure lenders, mortgage brokers and other parties involved in the settlement process are held to a higher standard of transparency and fairness.

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