In the 1970s, the U.S. Congress became concerned that mortgage loan applicants were being overcharged for settlement services. A 1972 study by HUD and the Administrator of Veterans Affairs (VA) found that most consumers were not shopping around for their settlement service providers. Instead, their real estate brokers, closing attorneys, and other professionals were referring them to lenders, title insurance companies, and other providers. Of particular concern to Congress was the report’s finding that there was little price competition for those services, and consumers were being overcharged by companies that were engaged in systematic kickbacks and referral-fee schemes.
The HUD/VA report requested that Congress give the agencies the power to establish maximum allowable settlement charges and to require the use of uniform consumer disclosures, but this recommendation was not favored within the real estate industry. Instead, Congress in 1974 passed the Real Estate Settlement Procedures Act (RESPA), a federal law that gave consumers more advance disclosure of their settlement costs and cracked down on the practice of kickbacks and referral fees. RESPA is codified at Title 12, Chapter 27 of the United States Code, 12 U.S.C. §§2601–2617. The regulations implementing the statute are known as “Regulation X.”
RESPA applies to federally related mortgage loans that are secured by a mortgage loan on a one- to four-family residential property. It does not apply to commercial real estate transactions. The act required certain disclosures to be given to consumers at specific times during the mortgage transaction, including the Good Faith Estimate of Settlement Costs (GFE); the Servicing Disclosure Statement; the Affiliated Business Arrangement Disclosure; the HUD-1 Settlement Statement; and the Escrow Account Operation and Disclosures form.
The portion of the RESPA statute of most concern to the real estate industry is found in Section 8, which prohibits kickbacks, referral fees, and fee-splitting among settlement service providers for services that were not actually rendered, or that were rendered at lower than fair market value.
Each section of the statute has its own penalties for violations. RESPA violations can result in federal district court actions or administrative adjudication proceedings. The statute also provides for a private right of action for consumers, who may bring civil and class action lawsuits.
From the time RESPA was enacted in 1974 until 2011, the U.S. Department of Housing and Urban Development (HUD) administered and enforced the act. In July 2011, those duties transferred to the Consumer Financial Protection Bureau (CFPB), a federal agency created in 2010 by the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act. Both regulators and the federal courts have faced industry criticism for failing to provide sufficient compliance guidance or for uneven or conflicting interpretations of the statute.
Most states also have laws similar to RESPA on their books, some of which are stricter than the federal statute. These states have the authority to enforce and prosecute their own RESPA laws, in addition to federal actions.