RESPA Section 8 Explained

Just like the truth, sometimes it’s hard to tell who is scamming you in real estate. The Real Estate Settlement Procedures Act (RESPA) Section 8 protects consumers from lenders and settlement service providers that are out to scam them. Now you’ll know if RESPA section 8 violations are scamming you.

What is The Real Estate Settlement Procedures Act or RESPA?

The Real Estate Settlement Procedures Act, or RESPA, is a federal law enacted in 1974. Its purpose is to protect consumers when engaging in real estate transactions.

One of the critical ways that RESPA protects consumers is by requiring lenders and settlement service providers (such as title companies, escrow agents, and appraisers) to disclose their fees and any relationships with one another.

This helps ensure that consumers know exactly how much they’re spending on their transaction and who is earning what commission.

RESPA also prohibits certain practices, such as steering borrowers into a particular mortgage lender or settlement service provider.

It also requires lenders to provide a reasonable faith estimate of closing costs so that consumers know what to expect.

Discrepancies in RESPA

There are several discrepancies between RESPA guidelines and what happens during the settlement process. For example, one common complaint from consumers is that they are not given all of the information required by RESPA about the fees charged by their lender or settlement agent.

In addition, there have been cases where lenders and settlement agents have violated RESPA by steering borrowers to particular companies or into a specific loan.

This is particularly true in the area of mortgage broker compensation, where lenders have been found to violate RESPA by paying higher commissions for SFR loans than for purchase transactions.

What is RESPA Section 8?

Under Title I, Section 8 of real estate law (Real Estate Settlement Procedures Act), certain fees are prohibited from being charged by a lender, broker, mortgage banker agent/representative, loan officer, or any other person involved in a real estate transaction, for services performed by a settlement service provider.

RESPA section 8 was created to protect consumers being charged “kickbacks” or fees that are not allowed under RESPA regulations.

The initial purpose of the law was to prohibit any person involved in a real estate settlement from requiring, requesting, demanding, or receiving any remuneration (i.e., fee, kickback) for the performance of services that were being paid for by someone other than that person.

Since its inception, RESPA section 8 has been expanded and now prohibits certain arrangements involving third parties engaged in actual property closings or settlements (i.e., inspections, appraisals) even if they are not directly involved in performing settlement services as the lender.

A RESPA section 8 violation results when a loan originator or outside party demands or receives compensation for providing a service that the borrower reimburses through an add-on to the settlement charges.

The amount of money involved in these transactions can be pretty high and result in large lawsuits.

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Examples of RESPA Section 8 Violations

There are many examples of RESPA Section 8 violations, but some of the more common ones include:

* Charging excessive application, processing, or origination fees.
* Requiring Social Security numbers or other personal information not necessary to process the loan.
* Misrepresenting the loan terms or failing to disclose all associated costs and risks fully.
* Making unauthorized charges to a borrower’s account or coercing them into signing blank documents.
* Refusing to refund the money paid on a loan that was later rescinded or refinanced elsewhere.
* Making loans to borrowers who have credit scores that are too low.

Here is a more detailed look at some RESPA section 8 violations:

1. The lender notifies a borrower that a third-party escrow agent will hold the earnest money deposit and requests a list of settlement service providers for 15 general categories of services, including attorney, real estate agent, and the closing agent.

The borrower provides an incomplete list to the lender with phone numbers for his brother acting as the loan officer on the purchase transaction, real estate broker, and title company.

This act violates RESPA Section 8 because this information was communicated before Closing Disclosure was provided to the borrower.

2. Borrower’s sister has agreed to serve as a loan originator, but her license has not yet been processed. The lender asks the borrower what she intends to do about financing and whether they intend to seek outside help to prepare the necessary documentation for their loan application.

Borrower replies that his sister is acting as a loan originator. The lender then asks the borrower whether they need an attorney, real estate agent, or other settlement service provider services.

Borrower answers “no,” and closes on the home purchase without contacting settlement service providers.

However, shortly after closing on the sale, the lender contacts borrower to ask some questions about title insurance coverage because it appeared that the property may have encroached on some historical property lines.

When the borrower answers these questions, this act violates RESPA Section 8 because this information was communicated before Closing Disclosure was provided.

3. Lender notifies its attorney that a specified settlement cost was charged to the borrower’s account due to an appraisal performed.

The lender should have sent a closing statement showing this information instead of disclosing it to the attorney.

This act violates RESPA Section 8 because this information was communicated before Closing Disclosure was provided to the borrower.

4. Lender notifies its real estate broker that additional settlement costs were charged to the borrower’s account for items such as garbage collection and water/sewer service fees related to local property taxes.

The lender should have either sent a closing statement showing all settlement charges or only communicated with parties involved in completing or receiving settlement services.

This act violates RESPA Section 8 because this information was communicated before Closing Disclosure was provided to the borrower.

Discrepancies in RESPA Section 8

It’s interesting how this new regulation has been expanded since its inception while closing loopholes. Below are significant discrepancies in requirements under RESPA section 8:

LOAN ORIGINATORS: When originating loans not involving any third parties, loan officers are exempt from complying with RESPA section 8 rules they are working for compliance with HUD/FHA regulations.

FEDERAL LOANS: Transactions involving federal loans are exempt from RESPA section 8 rules for either the lender or the service provider. Again in these cases, they must comply with HUD/FHA regulations and not RESPA.

FHA CASE NUMBER: In a transaction governed by HUD/FHA regulations, an add-on fee can be charged if the borrower has been given a valid case number at least 14 days before settlement.

However, this requirement applies only to settlement services directly related to obtaining the loan, such as title searches and insurance premiums (including flood insurance). It does not extend to any other fees involved in the real estate purchase transaction.

MIP: Mortgage insurance premiums (MIP) are exempt from RESPA section 8 rules as part of a purchase transaction.

Conclusion

If you feel that a RESPA Section 8 real estate violation is victimizing you or your client, there are several things that you can do. You should first contact the lender or settlement agent directly about their inappropriate practices.

If they are uncooperative, consult with an attorney about what legal recourse may be available to you. You can also file an official complaint with HUD or your state’s RESPA administrator if the problem occurs in either of those settings.

By taking this proactive approach, you may prevent other people from becoming victims of these discriminatory practices.

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End:  RESPA Section 8 Explained

Disclaimer: This article is meant for educational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.