Regulation X: The Real Estate Settlement Procedures Act

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What is RESPA?

The Real Estate Settlement Procedures Act (“RESPA”) is one of the more notable federal regulations surrounding mortgage lending. Otherwise known as Regulation X, RESPA was enacted to regulate loan settlement procedures in consumer loans. RESPA mainly affects lenders, brokers, and title companies involved in making loans for personal, family, or household purposes. It applies to “federally related mortgage loans,” which is a very broad term. Essentially, any loan secured by a one to four family residential property is a “federally related mortgage loan.” Despite this broad definition, many loans qualify for exemptions under RESPA.

RESPA was created for two reasons. First, RESPA eliminates “kickbacks” or “referral fees” that increase settlement costs for home buyers. Second, RESPA reduces the amounts home buyers must place in escrow to pay real estate taxes and insurance fees. To enforce these requirements, RESPA enlists the help of a uniform settlement statement known as a HUD-1 form. Under RESPA, the HUD-1 must clearly state the charges being imposed on the buyer and seller. The HUD-1 must also clearly state whether title insurance premiums cover the lender’s interest, the borrower’s interest, or both.

Another requirement RESPA enforces is the Good Faith Estimate (“GFE”). The GFE estimates the settlement costs that are likely to show up on the settlement statement, or the HUD-1. RESPA requires that a GFE is provided during the application stage as well as a standard GFE form. The GFE is an effort to protect consumers by giving them an estimate of their settlement costs before deciding on a lender or a broker. With the GFE in hand, the consumer is free to shop for a loan that suits their needs.

RESPA’s requirements can be difficult to follow for private lenders who do not have a large compliance department at their disposal. Fortunately, there are clear exemptions cut out of RESPA that are relatively easy to use.

Business Purpose Loans

The most common RESPA exemption, the Business Purpose Exemption, comes from another federal regulation, the Truth in Lending Act. RESPA and TILA share the same Business Purpose Exemption, which exempts loans for business, commercial, or agricultural purposes from complying with the requirements within both federal statutes. To qualify for this exemption, the loan itself must be used for a business purpose; the nature of the property should not be the only thing relied on to determine the business purpose. Do not throw caution to the wind and assume your loan is exempt just because it is secured by a strip mall; there may be underlying conditions that result in your loan being regulated by RESPA. The most important question a lender should ask to determine whether their loan qualifies for the Business Purpose Exemption is: “what is the purpose of the loan proceeds?”

One factor to consider when looking at the business purpose of your loan is the borrower’s occupation in relation to the property being acquired or refinanced. The more the borrower’s occupation has to do with this, the more likely it is a business purpose. For example, a mechanic purchasing a tire shop is more likely to qualify for a business-purpose loan than a florist buying a residential property. Even if you have determined there is a business purpose to your loan, you should still obtain a handwritten business purpose disclosure from the borrower.

Who is RESPA for?

RESPA is a consumer protection measure that protects homebuyers or the average layperson from potential kickbacks and referral fees that were common when RESPA was created. The exemptions make it clear who is safe from this regulation. If businesses were supposed to be protected by RESPA, there would not be a business-purpose loan exemption. Also, RESPA is enforced by the Consumer Financial Protection Bureau or CFPB, a federal agency which exists expressly to protect consumer finances. RESPA is, very clearly, a regulation created to protect consumers. Even if you qualify for the Business Purpose Exemption, your loan will be subject to state settlement procedures law, which can vary greatly. Many states exempt business purpose loans from regulation, but many states also have licensing and other requirements in place to make even a business purpose loan. In addition, being exempt from RESPA does not clear you from all federal regulations either; other aspects of your loan may be subject to ECOA, HMDA, or various other federal regulations. Of course, if you are not sure where your loan fits, it is best to contact an attorney.

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