Real Estate Settlement Procedures Act  of 1974 (RESPA) | Real Estate Exam Prep Videos

Real Estate Settlement Procedures Act of 1974 (RESPA) | Real Estate Exam Prep Videos

– Hey everyone, my name
is Paul Vojchehoske, and welcome to the Real Estate
Classroom YouTube channel. Hey before we get to today's video
(swooshing pops) on the Real Estate
Settlement Procedures Act, please do me a favor,
(clicking) and give this video a thumbs up, hit that red Subscribe button
(ding) and click on that notification bell. (swaggering rock music) Alright, so in today's video, we're gonna discuss a federal law called the Real Estate
Settlement Procedures Act, commonly known in the industry as RESPA. Now the original intent when this law was passed back in 1975, was that it was designed
to protect the consumer, so the consumer who was out getting a loan would have a disclosure of the cost associated with borrowing that money. Now certainly since 1975, this particular law has
broadened quite a bit. Now on your screen, there is one thing that
you probably should know for your Real Estate Licensing Exam, and that is that there is
a federal agency called the Consumer Finance Protection Bureau, or what we like to call the CFPB.

That is the federal agency
that is tasked with enforcing the Real Estate Settlement Procedures Act rules and regulations. Alright, so that's probably somethin' that you need to know
for your licensing exam. So the overview, what are we going to learn here today, or what does RESPA entail? Well, it requires certain
disclosures of settlement cost, or what we call closing cost. And then there are certain timeframes that those closing cost or settlement cost has to be given to the consumer. It prevents kickbacks, it places limits on the
amount of the escrow funds or the escrow accounts. It also allows and regulates what we call affiliated business arrangements. It has certain prohibitions
in there, for example, it prohibits agents and sellers
from requiring buyers to use certain specific title
insurance companies. And then it also requires borrowers to receive other certain documentations, all that we're gonna
talk about in this video, and you have to know it, not only for the Real
Estate Licensing Exam, but quite honestly, to protect yourself when
you become a practitioner in the real estate industry.

(camera shutter whirs) Right, so the first thing I
want to talk about is kickbacks. Now, as it says on your screen, kickbacks, one of the things is it
prevents referral fees between real estate service providers. Now who are real estate service providers? Well, real estate agents is
considered a service provider. Home warranties, mortgage
companies, mortgage lenders, banks, home inspection
companies, termite companies, pretty much anything that's any company that could be involved in
a real estate transaction under RESPA is considered
a service provider or a real estate service provider, so what does that mean,
it means that for example, a real estate agent couldn't
go to a loan officer and say, "Here's the deal. "Every buyer that I send you, "you cut me a referral fee
of 250 bucks or 500 bucks." The amount doesn't matter. It's the formation of
the business arrangement that's illegal. So that would be considered a kickback, and that would be illegal under the Real Estate
Settlement Procedures Act, that is the first thing that the law does.

(pleasant chime) The second thing that the law does is prohibits choice of
title insurance company. So it prohibits a seller, or an agent, whether it's the listing
agent or the buyer's agent, from using the terms of the
transaction to require a buyer to purchase title insurance
from a specific company. Now, for the purposes of the exam, that's really all you need to know. Alright, I'm not gonna get into what's the difference between
an escrow closing company and an insurance company and
a title insurance company, because there is a difference. But what you need to know
for the licensing exam is it prohibits sellers and
agents from requiring the buyer to purchase title insurance from a specific insurance company. So just keep that in mind,
you'll learn more about that as you get into the industry.
(paper rips) Number three, it limits the
amount of escrow accounts, and this is important. This is an important concept.

So, we have to understand what, what the P-I-T-I is. P-I-T-I stands for Principal, Interest, Taxes, and Insurance. So, when you go to the bank
and borrow money for a house, you're gonna have a
monthly mortgage payment. Well, that mortgage payment is
divided into four categories. It's divided into the
principal and interest, and that's the amount that
you have to pay the bank back, for borrowing the money, so you're paying the bank back
the money that you borrowed. But there is the taxes and insurance part. And that allows the bank
to pay on your behalf, the annual homeowner's insurance, and then the annual property taxes. And in many jurisdictions,
the principal and interest can be just as much as
the taxes and insurance. Well the taxes and insurance, that is sent to an escrow
account at the bank, or the bank may have a subsidiary company to take care of this, but it's that T-I, the taxes
and the insurance portion of your monthly payment
(whoosh) that gets sent
(clicking) to this escrow account.
(bell rings) So the money is there.
(whoosh) So every year the escrow
account will then release funds to pay for your homeowners insurance and your property taxes.

That is what an escrow account is. Now, what was happening prior to RESPA, is if a bank or a lender, if they were concerned about the consumer that they were loaning the money to, what they would do is
have an exorbitant amount requirement for the escrow account, so if you only needed $1,200
a year for the escrow account to pay your taxes and insurance, legally, the bank could require $20,000. And they would simply say that if you don't comply with our requirement, we're not gonna give you the loan. So Congress, seeing this as
being egregious, and said, no, that's ridiculous. So they placed a limit on how much could be in an escrow account.

And it only allows an escrow company to hold up to one sixth of
the amount that's needed, in addition to the amount
that's needed to pay the taxes. So they're allowed to
have a little overage. (futuristic pulse) Now, as you can see on your screen, if you only needed $1200 a year to pay your property taxes,
and your homeowners insurance, then the most in any given one-year period that the escrow company
could have in your account is $1400, so they would be allowed to have a $200 cushion there. Anything above that $1,400 threshold, then a refund would have to be given on the one-year adjustment date. So, every year under RESPA, the escrow company is required to review your escrow account,
and adjust accordingly. Now typically, taxes and
insurance go up every year, so what you find is, more and more money is
needed for the escrow. And therefore your T-I part
of your payment goes up. However, if for whatever
reason it went down, and it went above that
one sixth threshold, then they would have to refund
the amount above one sixth, and that would be done on an annual basis.

So, the key here is a refund, any amount above one sixth that's needed, in your escrow account.
(horn beeps) Number four, RESPA requires the
disclosure of settlement cost or what we call closing
cost to the borrower. Now, a couple of things you have to know. Number one, the disclosure to the buyer, must disclose to the buyer,
the estimated settlement cost using what's called a loan estimate, that's the document, it's
called a loan estimate. And that estimate must be
given, or that document, the loan estimate must
be given to the borrower within three business days of making application for the loan. So that disclosure is
gonna have a printout of all the estimated
closing cost for that loan. Alright, and that has to
be given to the borrower within three business days
of making application, that's important to remember. The borrower must also be given a Consumer Finance Protection Bureau, closing cost booklet. And then the borrower must
receive a closing disclosure, that's a separate document, three days prior to the settlement closing or the closing date.

So we have two documents. The borrower goes in
and makes application. Within three business days
of making application, the borrower must receive from the lender within three business days, a document called the loan estimate. It's gonna have a printout of all the estimated cost
associated with that loan. Then, three days prior to closing, then they're gonna get
a closing disclosure, it's a separate document that
basically does the same thing, so therefore it allows the
borrower to make a comparison. What was the initial estimate? What was the final estimate? And if it's really egregious, and there's some thresholds
that are built in, we're not gonna discuss those. The borrower does not have
to go through with closing. (crackling)
Alright, so… Number five, loan types, it's probably important
too, that you know, under the Real Estate
Settlement Procedures Act, the types of loans that apply are the one to four family residence, which is the single
family house, the duplex, the threeplex and the fourplex. It can apply to investment
properties as well. Here is the key, and you have to know this for your real estate exam.

affiliated business arrangement disclosure

It applies to all federally related loans. Now, federally related loans can be veteran's loans or VA loans, it can be Federal Housing
Administration loans, which we typically call FHA loans. It can be conventional loans. You don't really have to know
that so much for the exam. You have to know that RESPA, or the Real Estate
Settlement Procedures Act applies to all federally related loans, that's an important
thing you need to know. And there are a couple of exceptions, number one is seller financing. so if you're doin' a land contract, you're not gonna have
any of these disclosures, and understand that
under federal regulation, an investor, for example, is only allowed to sell two
properties on land contract every year, so they're
allowed two per year. If they do three or more then
they actually have to get a mortgage origination license. (whoosh) And then loan assumptions,
(clicking) they don't have to do that,
(bell rings) because remember on a loan assumption, you're simply changing
the names to the loan, none of the terms of the original loan is going to change.
(phone trills) Well the sixth and final thing
I wanna talk about is RESPA, or the Real Estate
Settlement Procedures Act allows and regulates what's called affiliated
business arrangements.

And they're very common in
the practice of real estate. And basically what it is is, we have the broker and then we have all of these
real estate service providers, like home inspectors, lenders, we have home warranty companies, termite inspectors, those type of things. Now we know under RESPA,
'cause we talked about it, that there can't be
kickbacks from referral fees, that's illegal.

But what happens if a broker
and a lender get together and they create a legitimate
business arrangement. How does the broker get paid from that? So the broker's gonna
encourage their agents to refer this mortgage company to the buyers that come through
the real estate company. And, course we know the
disclosures and stuff have to be made, but, how does that work? Well, here's how it's regulated. Number one, the agent or the broker must disclose in writing these business arrangements that the agent or the broker
is offering their buyer. So, if an agent at 12th Street Realty is referring their buyers
to A1 Mortgage Company, and the broker of the real estate company and the owner of the mortgage company have a business arrangement
or a business agreement, then a disclosure must
be given to the buyer. It has to be in writing, it's called an affiliated
business arrangement, that's what it's called, it's an actual document,
it has to be in writing. Now, in addition to the disclosure, the other thing that that
disclosure must include is, estimated cost to use that company.

So, not only is the agent makin' the disclosure
in writing to the buyer about A1 Mortgage Company, on that disclosure is gonna
be the estimated cost, if you use A1 Mortgage. Now, understand this applies to any other real estate
service provider, so, if the broker had an arrangement with a lender and a
home inspection company, the same rules would apply. The other thing that
can happen, number four, is the agent or the broker
can't require their agent to require the buyer to use those affiliated service providers, now they can encourage
their buyers to use 'em, they can say they're a great
company, those types of things, but what they can't use is
the terms of the transaction to require the buyer, to use any one or all of
those affiliated companies. Number five, brokers and agents
can't receive referral fees, we talked about that, but the one thing that they can do is they can receive compensation from legitimate business arrangements. So, let's finish this up by
describing how this works.

You have 12th Street Realty and you have A1 Mortgage Company. The owners of the two company come into a business arrangement, maybe they create a limited
liability company, or whatever. Point is, is the mortgage
company is gonna receive profits, they are a for-profit company. And through the normal course
of distributing dividends, or passing through profits to the owners, the broker can benefit in that regard. What they can't do is receive referral fees
from the transactions, only receive compensation
through the distribution of dividends or profits via the company.

The other way that this
happens, is many brokers, instead of entering to a
business relationship together, the broker will enter
into a marketing agreement with the lender or with
the home warranty company or the home inspection company. And it'll be so much every month. A marketing fee is what they call it. We call it a controlled
marketing arrangement.

And those are perfectly legal as long as the amount that's being charged to those real estate service providers are fair market value. What you couldn't do is, the
loan company couldn't say "Well, I'm gonna rent an office
at the real estate company "so I have an in-house
mortgage company there," when the real market value or the real rent value on the open market for that
office is $300 a month, but the loan company
pays them $3,000 a month, that would be a violation of RESPA.

So the only amount that
the real estate broker could charge for rent
for that in-house office, in the real estate firm
would be $300 a month because that's the fair market rental rate for where that office is located. The same thing with marketing, and this is the hard part,
it's hard to value this. If you put the lender's logo on the real estate company's website, how much is that worth? I don't wanna go down that road, because it's a very complex formula. However, many individual agents have the same kinda arrangements with the brokers who
own real estate firms, so this does apply to
brokers and agents alike. Key things to come away with, when we're talking about number six, affiliated business arrangements, disclosures have to be
made, and no referral fees, and then any compensation that is given has to be of fair market value. So, that one's a long complicated part, of this entire video, but
you have to know it, so. (cock crows) Alright, that is all for the Real Estate
Settlement Procedures Act, if you're gonna continue to study, check out this video, it's gonna help you, and do me a favor, if you have not subscribed to our channel, click on the little circle,
I would appreciate that, I'll see you in the next video.

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