MortgageLoans.net

RESPA Explained: Real Estate Settlement Procedures Act

The Real Estate Settlement Procedures Act (RESPA) is a federal law governing mortgage settlement practices, administered by the CFPB through Regulation X. RESPA prohibits kickbacks and referral fees for settlement services (Section 8), requires disclosure of affiliated business arrangements, establishes escrow account management rules limiting servicer collections to a two-month cushion, and provides borrowers with a formal Qualified Written Request process to dispute servicing errors or request account information.

Key Takeaways

  • Section 8 of RESPA prohibits kickbacks, referral fees, and unearned fee splits in connection with settlement services for federally related mortgage loans.
  • Affiliated business arrangements (AfBAs) are permitted only if the consumer receives a written disclosure, is not required to use the affiliated provider, and the referring party receives only a return on ownership interest.
  • Escrow accounts are subject to a maximum two-month cushion above the amount needed for upcoming disbursements; surpluses above $50 must be refunded within 30 days of the annual escrow analysis.
  • Servicers must provide at least 15 days' notice before a loan servicing transfer, and borrowers cannot be charged late fees for 60 days after a transfer if payments are misdirected.
  • Qualified Written Requests must be acknowledged within 5 business days and substantively responded to within 30 business days; servicers cannot report the disputed amount as delinquent during this period.
  • RESPA's Good Faith Estimate and HUD-1 were replaced by the Loan Estimate and Closing Disclosure under TRID in 2015, but RESPA's substantive provisions remain in effect.
  • Section 8 violations carry both civil and criminal penalties, including fines up to $10,000 and imprisonment for up to one year per violation.
  • RESPA applies to virtually all residential mortgage loans originated by federally regulated lenders or sold to GSEs.

How It Works

How Section 8 Anti-Kickback Enforcement Works

The CFPB and state regulators enforce Section 8 through examinations, complaint investigations, and enforcement actions. When regulators identify a potential kickback arrangement, they evaluate whether a payment or thing of value was exchanged in connection with the referral of settlement service business. The analysis considers the totality of the arrangement: the nature and value of the benefit, the relationship between the parties, the timing of the benefit relative to referrals, and whether the benefit corresponds to actual services of commensurate value performed by the recipient.

Enforcement actions for Section 8 violations can result in civil money penalties, disgorgement of illegally received fees, injunctive relief, and requirements to establish compliance programs. Section 8 also provides for criminal penalties of up to $10,000 in fines and up to one year of imprisonment per violation. Private individuals may bring lawsuits under Section 8 within one year of the violation (or three years for a pattern or practice) and may recover three times the amount of the illegal charge plus attorney’s fees and costs .

Common enforcement scenarios include real estate agents receiving compensation from title companies or lenders for referrals, lenders providing marketing services subsidies to real estate agents in exchange for loan referrals, and settlement service providers offering below-cost services to referral sources. The line between legitimate business relationships and illegal kickbacks is fact-specific and requires careful analysis of each arrangement.

How Escrow Account Analysis Works

The annual escrow analysis is a reconciliation process performed by the loan servicer. The servicer projects the escrow disbursements expected over the next 12 months (property taxes, homeowners insurance, flood insurance, mortgage insurance) and determines the monthly deposit needed to fund those disbursements while maintaining no more than a two-month cushion. The servicer compares the projected account to the actual account balance and identifies whether a surplus, shortage, or deficiency exists.

If a surplus exists (the actual balance exceeds the required balance plus the two-month cushion by more than $50), the servicer refunds the excess to the borrower. If a shortage exists (the projected balance would be insufficient to cover upcoming disbursements and the cushion), the servicer notifies the borrower of the shortage amount and offers the option to repay the shortage in a lump sum or spread over the next 12 monthly payments. The borrower’s monthly payment is adjusted accordingly to reflect the new escrow deposit amount.

Escrow analyses typically result from changes in property tax assessments, insurance premium adjustments, or changes in mortgage insurance rates. Borrowers should review the annual escrow analysis statement carefully, verify that the projected disbursements match their actual tax and insurance bills, and contact the servicer if discrepancies are identified.

How to Submit a Qualified Written Request

To submit a QWR, the borrower prepares a written request that clearly identifies their name, loan number, and a description of the information sought or the error believed to exist. The request must be sent to the servicer’s designated QWR address, which is typically listed on the monthly mortgage statement or available on the servicer’s website. Sending the QWR to the wrong address (such as the payment processing address) may not trigger RESPA protections, so borrowers should verify the correct address.

The QWR should be sent by certified mail with return receipt requested to establish proof of receipt and timing. Upon receipt, the servicer must send a written acknowledgment within five business days. The servicer then has 30 business days (extendable by 15 business days with written notice) to investigate and provide a substantive response. During the investigation period, the servicer cannot pursue collection of the disputed amount and cannot report the disputed information to credit bureaus as delinquent. If the servicer identifies an error, it must correct the account and notify the borrower of the correction.

Related topics include trid: tila-respa integrated disclosure rules, fair lending laws and equal credit opportunity, mortgage servicing rights and loan transfers, appraisal independence requirements, and mortgage regulations: a borrower’s guide.

Key Factors

Factors relevant to RESPA Explained: Real Estate Settlement Procedures Act
Factor Description Typical Range
Section 8 Anti-Kickback Scope
Affiliated Business Arrangement Requirements
Escrow Cushion Limitation
Qualified Written Request Protections

Examples

Scenario: Real estate agent receiving compensation from a title company for referrals
Outcome: The gift cards are compensation for referral of settlement service business and constitute a prohibited kickback under RESPA Section 8. The real estate agent and the title company are both in violation. Penalties may include treble damages in a private borrower lawsuit, civil money penalties from the CFPB, and potential criminal prosecution. The arrangement lacks an AfBA structure because the agent has no ownership interest in the title company and is receiving per-referral compensation.

Scenario: Borrower receiving annual escrow analysis showing a shortage
Outcome: The borrower's monthly payment increases regardless of the shortage repayment method. The new monthly escrow deposit increases from $467 to $563 ($96/month more) to fund the higher projected disbursements plus the two-month cushion. If the borrower chooses to spread the shortage, the total monthly increase is approximately $192 ($96 for the higher ongoing deposit plus $96 for the shortage repayment). After the shortage is repaid in 12 months, the monthly increase reduces to $96. The servicer cannot collect more than the two-month cushion.

Scenario: Borrower submitting a Qualified Written Request about a payment dispute
Outcome: The servicer acknowledges the QWR within five business days. During the investigation, the servicer cannot report the account as delinquent to credit bureaus for the disputed amount. Within 30 business days, the servicer responds, confirming that the payment was misapplied due to a system error. The servicer corrects the payment application, reverses any late fees, updates the account to current status, and provides a corrected payment history. If the servicer had failed to respond or refused to correct the error, the borrower could pursue a private action for actual damages, statutory damages up to $2,000, and attorney's fees.

Scenario: Lender with an affiliated title company providing required disclosures
Outcome: The arrangement is a permissible affiliated business arrangement under RESPA because all three conditions are met: the disclosure is provided, the borrower is not required to use the affiliate, and the lender receives only its ownership interest return (dividends or profit distributions) rather than per-referral compensation. If the lender were to pay the loan officer a bonus for each referral to the affiliated title company, the arrangement would lose its RESPA protection because the bonus constitutes per-referral compensation beyond a return on ownership interest.

Common Mistakes to Avoid

  • Not reviewing the annual escrow analysis statement for accuracy
  • Sending a Qualified Written Request to the wrong servicer address
  • Assuming affiliated business arrangement disclosures eliminate the obligation to shop for services
  • Accepting gifts or incentives from settlement service providers without understanding Section 8 implications
  • Not tracking servicing transfer notices and payment redirection deadlines
  • Confusing RESPA's GFE requirements with current TRID requirements

Documents You May Need

  • Affiliated Business Arrangement Disclosure (if the lender or real estate agent refers to an affiliated service provider)
  • Annual escrow analysis statement from the loan servicer showing projected disbursements, actual balance, and surplus/shortage calculation
  • Servicing transfer notice from the current and/or new loan servicer
  • Qualified Written Request (borrower's written correspondence disputing an error or requesting account information)
  • Servicer acknowledgment letter responding to the QWR within five business days
  • Servicer substantive response to the QWR within 30 business days
  • Escrow account initial disclosure provided at closing showing anticipated escrow deposits and disbursements
  • Monthly mortgage statement showing payment breakdown (principal, interest, escrow) and servicer contact information
  • Property tax bill and insurance declarations page (for verifying escrow analysis projections)

Frequently Asked Questions

What is RESPA and who does it protect?
RESPA is a federal consumer protection law that governs settlement practices in residential mortgage transactions. It protects borrowers by prohibiting kickbacks and referral fees that inflate settlement costs, requiring disclosure of affiliated business relationships, regulating escrow account management to prevent excessive collections, and establishing a formal process (Qualified Written Requests) for borrowers to dispute servicing errors and request account information.
What is a kickback under RESPA?
A kickback under RESPA Section 8 is any fee, payment, gift, or thing of value given or received in exchange for the referral of settlement service business in connection with a federally related mortgage loan. This includes cash payments, gifts, trips, below-cost services, marketing subsidies, and any other benefit that functions as compensation for referring business. Both the person giving and the person receiving the kickback are in violation.
What is an affiliated business arrangement?
An affiliated business arrangement exists when a person or entity in a position to refer settlement service business (such as a real estate agent or lender) has an ownership or affiliate relationship with a settlement service provider (such as a title company or appraisal firm). AfBAs are permitted under RESPA if the referrer provides a written disclosure to the consumer, does not require the consumer to use the affiliate, and receives only a return on ownership interest rather than per-referral compensation.
How much can my lender collect for escrow?
Under RESPA, the lender can collect monthly escrow deposits equal to one-twelfth of the anticipated annual disbursements (taxes, insurance, mortgage insurance) plus a cushion of no more than two months' worth of escrow payments. At closing, the lender can collect an initial deposit to establish the account at the level needed to pay upcoming obligations plus the two-month cushion. The lender cannot collect more than the two-month cushion under RESPA.
What happens when my loan servicing is transferred?
Your current servicer must notify you at least 15 days before the transfer, and the new servicer must notify you within 15 days after the transfer. During the 60 days following the transfer, you cannot be charged a late fee if you accidentally send your payment to the old servicer. Both notices must include the effective date, contact information for both servicers, and information about your rights during the transition period.
What is a Qualified Written Request?
A Qualified Written Request is a formal written correspondence sent by a borrower to their loan servicer's designated address that requests account information or asserts that an error exists in the servicing of the loan. The servicer must acknowledge the QWR within 5 business days and respond substantively within 30 business days. During the investigation period, the servicer cannot report the disputed amount as delinquent to credit bureaus.
Is the Good Faith Estimate still used?
No. The Good Faith Estimate (GFE) was replaced by the Loan Estimate (LE) on October 3, 2015, when the TRID rule took effect. The Loan Estimate serves the same general purpose as the GFE (providing an estimate of closing costs) but uses a different format with enhanced tolerance protections. RESPA's substantive provisions (anti-kickback rules, escrow regulations, servicing transfer rules, and QWR process) remain fully in effect under Regulation X.
What are the penalties for RESPA violations?
Section 8 violations carry both civil and criminal penalties. Criminal penalties include fines up to $10,000 and imprisonment for up to one year per violation. In private civil actions, borrowers may recover three times the amount of the illegal charge (treble damages) plus attorney's fees and costs. Escrow and servicing violations under Sections 6 and 10 may result in actual damages, statutory damages up to $2,000 for individual actions (or $1,000,000 or 1% of net worth for class actions), and attorney's fees .
Does RESPA apply to commercial real estate loans?
No. RESPA applies only to federally related mortgage loans on one-to-four-unit residential properties. Commercial real estate transactions, loans for properties with five or more units (unless the borrower occupies one unit), and business-purpose loans are generally excluded from RESPA coverage. However, a mixed-use property where the borrower resides in one unit of a four-unit building would be covered .
Last updated: Reviewed by:

Related Topics