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RESPA Mortgage Law Overview
Please note that many elements of RESPA were incorporated into, or replaced by, the TILA-RESPA Integrated Disclosure Rule (TRID) that became effective October 3rd, 2015. TRID is the primary rule that governs the mortgage process and dictates the disclosure documents lenders are required to provide to borrowers. We provide the RESPA overview below for your reference
The mortgage process is regulated by a law called the Real Estate Settlement Procedures Act of 1974, also known as RESPA. From the borrower's standpoint, the most important thing to know about RESPA is that it requires lenders to disclose certain information to borrowers about costs, fees and interest rates before moving forward with the mortgage process. RESPA was designed to help borrowers select the mortgage that is right for them and to protect them from getting ripped off by lenders.
RESPA was implemented to provide borrowers with more up-front information on key mortgage terms before borrowers select a lender. RESPA is supposed to help borrowers avoid a "bait and switch" by lenders -- when the lender promises one set of terms at the beginning of the mortgage process but then delivers another, less attractive set of terms, such as a higher interest rate or closing costs, when the mortgage is finalized.
RESPA requires that lenders provide borrowers an extensive amount of information and numerous documents before borrowers select a lender for their mortgage and when their mortgage closes. The four documents below are the most important for borrowers to understand and review when they get a mortgage. According to RESPA regulations, lenders are required to provide the Good Faith Estimate, Truth-in-Lending Statement and HUD-1 Statement to borrowers. Lenders are not required to provide the Lenders Fee Worksheet by law but typically provide it if borrowers request it.
- Good Faith Estimate: Outlines the key terms of a mortgage including interest rate and closing costs. A lender must provide a Good Faith Estimate at the time the borrower submits a loan application
- The Good Faith Estimate was replaced by the Loan Estimate in 2015. Review our Loan Estimate Overview
- Truth-in-Lending Statement: Outlines important mortgage costs and features such as the Annual Percentage Rate (APR), Finance Charge and the Total of Payments you will make over the life of the loan including principal and interest. Provided by the lender to the borrower at the same time as the Good Faith Estimate
- HUD-1 Statement Overview: A standardized form that lists the final, actual terms and costs of your mortgage, including your interest rate, points and all one-time fees. RESPA requires the settlement agent to issue estimated HUD-1 Statement to the borrower at least one day prior to the closing of the loan
- The HUD-1 Statement was replaced by the Closing Disclosure in 2015. Review our Closing Disclosure Overview
- Lender Fees Worksheet: Although it is not required by RESPA, you should ask lenders for a Lender Fees Worksheet, which provides a detailed breakdown of all the costs and expenses associated with a mortgage
You should request the Good Faith Estimate , Truth-in-Lending Statement and Lender Fees Worksheet when you interview lenders and compare mortgage proposals. If a lender is unwilling to provide these documents at the time you submit a mortgage application or request a mortgage proposal, this raises a red flag and you should contact other lenders. If used properly, these documents are highly valuable tools for borrowers to review mortgage proposals and negotiate the best terms for their mortgage. Borrowers should review the HUD-1 prior to mortgage closing to confirm they are receiving the mortgage terms that the lender committed to at the beginning of the process.
FREEandCLEAR recommends that you compare mortgage proposals from at least four lenders
Lenders may require you to submit a loan application in order to receive these documents. This requires a little extra effort on your part (and the lender's part) but it is well worth it if you can improve the terms of your mortgage. Submitting a loan application to a lender and receiving documents such as the Good Faith Estimate does not mean that you are required to work with that lender. It means that you are gathering information to allow you to make an informed decision about your mortgage. Lenders must provide borrowers with certain RESPA disclosure items, including the Good Faith Estimate, within three days of submitting the application.
Sources
“Real Estate Settlement Procedures Act (RESPA) examination procedures.” CFPB. Consumer Financial Protection Bureau, March 30 2018. Web.
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