HUD Residential Real Estate Disclosure Act
The U.S. Department of Housing and Urban Development passed the Real Estate Disclosure Act (RESPA) in 1974 to ban undisclosed incentive payments between real estate agents, lenders, appraisers, title and escrow companies and other real estate professionals in the effort to protect consumer interests when selling or purchasing residential real estate of one to four units. Over the years, amendments to RESPA have increased the mandatory disclosures to consumers to clarify the costs and charges for residential real estate transactions.
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No Kickbacks
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Payment between lenders and third-parties is banned. Lenders and third-party settlement service agents in the real estate settlement process cannot pay each other incentives for reciprocal business. For example, RESPA does not allow an escrow company to pay a lender a referral fee for business. If a lender refers a borrower to an affiliated company for services, the affiliation must be disclosed and no compensation between the lender and the affiliated company can be received.
Good Faith Disclosure
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Estimated fees must be disclosed in good faith. An estimate of all loan fees and costs must be disclosed to borrowers within three business days of submitting a completed loan application. The Good Faith Disclosure itemizes the estimated costs of securing the loan and includes the fees and charges for related services such as tax service, appraisal fee, escrow cost and title insurance.
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HUD-1
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Actual fees must be disclosed. The buyer and seller must receive a copy of the HUD-1 Settlement Statement outlining all the debits and credits in the transaction at least one day prior to the transaction closing. If a buyer or seller notices a mistake or questions a fee or charge, a new HUD-1 must be prepared with the corrections.
New Legislation
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New laws amended RESPA. In response to the mortgage meltdown in the late 1990s, the U.S. Department of Housing and Urban Development passed new regulations on Nov. 17, 2008, which became effective Jan. 1, 2010. These new regulations amended the mandatory Good Faith Disclosure and HUD-1 Settlement Disclosure provided to borrowers and sellers in real estate transactions involving residential property of one to four units.
Changes to Good Faith Disclosure
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The Good Faith Disclosure offers comparisons of different loan scenarios. The Good Faith Disclosure now summarizes the loan terms, loan origination charges and settlement charges on the first page, giving a broad overview of total charges. The second page of the Good Faith Disclosure itemizes each cost. The third page of the Good Faith Disclosure offers a comparative loan analysis of the loan being offered with two other loan scenarios.
Changes to HUD-1
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Final closing costs must be disclosed. The HUD-1 lists the actual costs of the loan detailed as debits and credits in two columns, one for the buyer and one for the seller. Fees and charges must not vary more than 10 percent from the Good Faith Disclosure provided to the buyer unless the lender disclosed these changes at least 10 days prior to the transaction closing.
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