Springfield Business Journal Articles


Understanding RESPA's Impact

You may have read that two mortgage companies in Springfield were forced to close because of their involvement with real estate fraud and RESPA violations. RESPA violations are serious and, unfortunately, becoming more common. But what is RESPA and what constitutes a violation?

RESPA is a federal law entitled the Real Estate Settlement Procedures Act. It was enacted in 1974 with the stated purposes of "helping consumers become better shoppers for settlement services and eliminating kickbacks and referral fees that unnecessarily increase the costs of certain settlement services." RESPA covers loans secured with a mortgage placed on a one-to-four family residential property, including most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit.

It is because of RESPA that when you apply for a mortgage the lender provides you with a good faith estimate of settlement closing costs. The hope is for the consumer to avoid hidden charges that suddenly appear on the day of closing. RESPA also prohibits kickbacks among the service providers involved in a real estate transaction.

There are three service providers in a typical residential real estate transaction – the realtor, the lender and the title company. There can also be a fourth party, a mortgage company. Most people understand the role of the realtor and the lender. The realtor represents the seller, the buyer or both in the sale of the property, and the lender funds the purchase. The mortgage company is a middleman between the lender and the buyer. The mortgage company sells the loan to the buyer but does not actually work for the lender. The title company generally handles the actual transfer of the property.

The title company searches the deed records to determine if the seller actually owns the property and if there are any liens filed against the property. The title company then issues two insurance policies, one for the buyer and one for the lender. Each of the policies insures the title of the property. For example, if the title company missed something in its search of the deed records and the seller did not actually own the property (or a portion of the property), then the buyer could file a claim under the title insurance policy for its loss. Of course, there are many exclusions under most policies, as with all insurance. If the seller or buyer does not have an attorney, then the title company will also contact an attorney to prepare the deed transferring the policy. The title company will collect the sale proceeds and distribute them, generally to the seller's lender and the seller. The title company will also file the deed in the Recorder's office.

Of course, all of the services involved in a residential real estate sale generate fees for the realtor, the lender and the title company, and some people developed a practice of referring transactions for a fee. RESPA makes this practice illegal because it increases costs for the consumer and can also result in the consumer using a service provider that is not the best fit for them. Referrals are not illegal and are very important. For example, many people have never dealt with a title company and would not know which company to use. An experienced realtor or lender can provide that referral. They cannot, however, receive a fee for doing so.

All service providers must disclose any related parties and receive your consent to use the related party. For example, if a lender and a title company are affiliated companies and the lender recommends the title company, you must sign a disclosure that you are aware that the companies are affiliated and you consent to using both of them.

RESPA also provides protection for the lenders. All elements of the sales transaction must be disclosed in the settlement documents. For example, assume that a buyer wants to purchase a $100,000 home but does not qualify for the loan. He would qualify for the loan if he could make a 10% down payment. The buyer and the seller decide that they will increase the price of the home to $111,000, and the seller will give the buyer the $11,000 for the down payment. If the buyer and the seller do not disclose their plan to the lender and it is not documented in the settlement papers, they have violated federal law. Why is this illegal? Because the lender would not have knowingly made a loan of 100% of the value of the property. The lender will also require an appraisal of the property confirming the purchase price of $111,000. Therefore, the seller and the buyer will obtain a fraudulent appraisal, which is an additional violation of the law.

Much of the fraud that has been in the papers recently involved flipping properties with fraudulent appraisals. A person would buy a home for little or no money down, obtain a fraudulent appraisal for an increased value and resell the property. That person keeps the profit, and the lender is left with an under secured loan. If the buyer is also in on the fraud, the buyer abandons the property, forcing the lender to foreclose and realize additional costs and a greater loss.

Because most people are not involved in many real estate transactions, they can be duped into committing RESPA violations. Do not believe a seller, buyer or any other party who tells you that you can have side transactions off the books, that the lender already knows or doesn't care, or that this is how it's done. All elements of your home transaction must be disclosed in the settlement documents, or you are committing a federal crime. As always, your best protection is to deal with reputable professionals. Before you hire a realtor, lender, mortgage broker or title company, ask your family and friends for referrals. Check their backgrounds. Ask questions. This may be the biggest transaction of your life. Don't skimp on the research.

by Sarah Delano Pavlik
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