While the Real Estate Settlement Procedures Act (RESPA) has had a significant hand in the real estate transaction process, it’s just as embedded in the mortgage process.
Since 2010, when major revisions were implemented, it has changed the way in which mortgage operations are conducted, as well as what may or may not happen in the fees that borrowers pay.
Fees Disclosure to Borrowers
Prior to 2010, lenders were quoting one set of fees to borrowers, then at the closing table, were able to introduce additional fees, often significantly increasing the cost of the transaction for buyers.
On a refinance transaction, the borrower might have had the option of finding another lender. However, on a purchase transaction, this wasn’t a likely option, as sellers probably won’t wait for the buyer to start looking for new financing from scratch.
For a buyer’s application to be considered, a certain minimum amount of information must be provided to the lender, including a property address. When this application is taken, RESPA requires that the lender provide a Good-Faith Estimate (GFE) within three days. A GFE is an estimate of how much money the buyer will need to be able to close the transaction.
Change in Fees
The current RESPA process requires that some fees never change, that some fees may change, but only within certain tolerances, and that others can change to what is required. Note that there is also now a procedure whereby originally quoted numbers are compared to numbers at closing.
Here is a breakdown of some of them.
Fees that Can’t Change
Origination fees are the big ones: At closing, these fees must be the same or less than they were on the original GFE. Origination fees may come in the form of a flat fee, or as a percentage of the loan amount, and they are net of any type of lender credit that may be provided.
Even in the face of rate shifts, where the lender has the opportunity to realize a higher fee, they would be unable to do so once they quote origination fees to the borrower in the GFE.
Fees with up to a 10 Percent Tolerance
Fees such as those for flood certifications, appraisers or other third-parties involved in the transaction, collectively have a 10 percent tolerance for movement. This means that some can increase by more than 10 percent, but the fees as a whole must be within 10 percent of what they were quoted at application.
Fees that Have No Tolerances if They Change
There are third party providers (for example, title companies) in a purchase transaction that are selected by the seller’s side. The lender will often provide a reasonable guess based on experience with fees relating to title companies. However, they also may inflate them. As a result, the borrower will likely have over-estimated the fees and will probably need to pay less at closing.
If you want to know more about RESPA’s impact, talk to your mortgage professional.