Frequently Asked Questions About RESPA

RESPA stands for "Real Estate Settlement Procedures Act." This is the law that says that you should be given certain information when you are purchasing a home. HUD enforces only what is covered under the RESPA law. Here are some questions and answers that will help you to understand the law and your rights.
- Applying for a loan and Before the Settlement
- About the Good Faith Estimate
- Example Situation
- Escrow Accounts
- RESPA and Escrow Accounts in General
- What is covered under RESPA
- What RESPA does NOT cover and who can help
- About Escrow Account Cushions
- Figuring Escrow Accounts
- Variations in Escrow Accounts and Payments
- Disbursement Date
- Dealing with Your Lender or Insurance Company:
Taxes, Insurance, Force-Placement, Escrow and RESPA
- Consumer Tips: Do's

Applying For A Loan And Before The Settlement

Question: I made an application for a loan, but I did not get a Settlement Costs Booklet or a Good Faith Estimate. What should I do?

Answer: You should contact the lender or mortgage broker and ask for them. The lender or mortgage broker is required by RESPA to send these documents out within three days of receiving the application. The lender is only required to give you a booklet if you are purchasing a home. If the lender denies your application within three days, it is not required to give you these documents.

About the Good Faith Estimate

Question: Should I expect the Good Faith Estimate to list the exact charges that I will pay at settlement?

Answer: No. The Good Faith Estimate is only an estimate or range of charges. For example, the lender may not know the costs for a settlement agent that you choose, or the exact amount that will be collected for an escrow account for taxes and insurance.

Question: What rights do I have if the charges I must pay at settlement are higher than those listed on the Good Faith Estimate?

Answer: RESPA does not give a consumer the right to sue in this circumstance. The best protection is to let the lender and settlement agent know that you will want to see the HUD-1 Settlement Statement one day in advance. You should question any amount that you do not understand.

Example Situation

Question: A builder is offering to pay my closing costs or give me an upgrade package only if I agree to use his mortgage company. Is this legal under RESPA?

Answer: Yes. While a builder cannot require you to use a mortgage company with whom he is affiliated, a builder is allowed to offer you a discount if you use a specific company. Under RESPA, the builder cannot charge you more for the home if you do not use his affiliated mortgage company.

section 10: Escrow Accounts

RESPA and Escrow Accounts in General

Section 10 of the Real Estate Settlement Procedures Act (RESPA) limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, insurance, etc. RESPA also requires the lender to provide initial and annual escrow account statements. The newest escrow account regulations became effective in October 1997.

What is covered under RESPA

Question: Does RESPA require borrowers to maintain an escrow account?

Answer No. It is the lender's decision whether the borrower must maintain an escrow account for the purpose of paying taxes and other items. The HUD regulations only limit the maximum amount that a lender can require a borrower to maintain in an account.

What RESPA does NOT cover and who can help

The following questions are frequently asked by consumers about the loan process, but the issues are not covered under RESPA. For more information regarding these issues, contact the agency that administers the governing law.

Question: I applied for a loan at 7 1/2 percent, but when I got to settlement the lender charged me 8 percent. Is this a RESPA violation?

Answer: No. However, the Truth-in Lending Act (TILA) requires that you get a disclosure concerning the interest rate. TILA is administered by the Board of Governors of the Federal Reserve System. (See Consumer Complaint Reference List).

Question: I asked my lender for a copy of the real estate appraisal but the lender has not sent it. Is this covered under RESPA?

Answer: No. Under the Equal Credit Opportunity Act (ECOA) the mortgage broker or lender must tell you how and when you can ask for a copy of your appraisal. ECOA is administered by the Board of Governors of the Federal Reserve System. (See Consumer Complaint Reference List).

Question: My lender says the home I am buying is located in a flood zone and I must purchase flood insurance. What can I do if I don't believe this information is correct?

Answer: The National Flood Insurance Reform Act of 1994 provides for lenders to purchase flood insurance on behalf of borrowers/owners of properties in a special flood hazard area. It is administered by the Federal Emergency Management Agency (FEMA). If you disagree with the lender about whether the property is located in a special flood hazard area, you may make a request to the FEMA Mapping Assistance Center to determine whether the property is located in such an area. The toll free number for requesting FEMA re-determination is 1-877-336-2627.

About Escrow Account Cushions

Question: Does RESPA require lenders to maintain a cushion?

Answer: No. The RESPA statute and regulations do not require the lender to maintain a cushion. However, since 1976 the RESPA statute has allowed lenders to maintain a cushion equal to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. If state law or mortgage documents allow for a lesser amount, the lesser amount prevails.

The new accounting method generally requires borrowers to maintain lesser amount in the account than the single-item method predominately used by lenders. However, many lenders have recently increased the escrow account cushion to the maximum allowed by law.

The recent regulations require lenders to reduce the size of the cushion in some accounts. Unfortunately, to avoid customer disapproval, some lenders may be giving their customers the impression that the HUD regulations require them to make this increase. This is a false impression. The lender, not HUD, has chosen to increase the cushion.

Question: Can HUD require lenders to pay interest on escrow accounts?

Answer: No. In 1992 and 1993, legislation was introduced in Congress that would have required lenders to pay interest on escrow account balances, but it never passed. Some states do require interest to be paid on escrow account funds, but many do not.

Figuring Escrow Accounts

Question: How do I figure how much money the lender is allowed to require in my escrow account?

Answer: HUD cannot figure out your own escrow account cushion and payments. Please use the following steps and example to help you estimate the amount of money you may be required to put into your own escrow account, either a new or existing account, under aggregate accounting:

1. List all the payment amounts for items that will be paid out of your escrow account, and when paid, for the next 12 months (e.g., taxes- $1200 -- $500 paid July 25 and $700 paid December 10; hazard insurance -- $360 paid September 20).

[If you have a payment like flood insurance, which is paid every 3 years, you must project a trial balance over that 3-year period.]

2. Divide this total amount by 12 monthly payments ($1560 divided by 12 = $130).

3. Create a trial running balance for the next 12 months listing all payments to the escrow account and all payments out of the account, when these items are paid.

4. Increase all the monthly balances to bring the lowest point in the account (December -$780) up to 0.

pmt dis 3) bal 4) bal
Jun - - 0 780
Jul 130 500 -370 410
Aug 130 0 -240 540
Sep 130 360 -470 310
Oct 130 0 -340 440
Nov 130 0 -210 570
Dec 130 700 * -780 * 0
Jan 130 0 -650 130
Feb 130 0 -520 260
Mar 130 0 -390 390
Apr 130 0 -260 520
May 130 0 -130 650
Jun 130 0 0 780

Add any cushion your lender requires to the monthly balances. The cushion may be a maximum of 1/6 of the total escrow charges (1/6 of $1560 = $260).
pmt dis bal
Jun - - 1040
Jul 130 500 670
Aug 130 0 800
Sep 130 360 570
Oct 130 0 700
Nov 130 0 830
DEC 130 700 * 260
Jan 130 0 390
Feb 130 0 520
Mar 130 0 650
APR 130 300 780
May 130 0 910
Jun 130 0 1040

In this example, $1040 is the maximum amount the lender should require in the account. The account should fall to the cushion at least once during the year. In this example, it is in December ($260).

New Accounts -- In this example, if you settled May 15, and the first payment was due in July, $1040 would be the maximum amount you should be required to place in an escrow account. If your lender requires less than the maximum cushion, the amount would be less.

Existing Aggregate Accounts -- In this example, during escrow analysis, the lender would compare the required amount of $1040 to the actual balance in your account in June. For example:

If your balance is $1076, there is a surplus of $36. Your lender may choose to apply any surplus less than $50 to future payments, reducing your monthly escrow payment to $127, or may choose to return the surplus to you.

If your balance is $1090, there is a surplus of $50. The lender must return any surplus of $50 or more to you within 30 days of the analysis.

If your balance was $940, there is a shortage of $100. This amount is less than one month's escrow payment and the lender may ask you to pay this amount within 30 day or may spread it out over a year.

If your balance was $800, there is a shortage of $240. The lender must spread the collection over at least 12 months. If the lender spreads the shortage over 12 months, your monthly escrow payment would increase to $150.

If you have a deficiency in your account (where the lender has to use his own funds to pay a bill), you may have to reimburse the lender sooner than over 12 months. If the deficiency is less than one monthly escrow payment, you may have to repay the lender in 30 days. If the deficiency is more than or equal to one monthly escrow payment, the lender may require you to repay the amount over 2-12 months.

Variations in Escrow Accounts and Payments

Question: My escrow account payments went up, rather than down. Why?

Answer: There could be a couple of reasons why your servicer is charging more for your escrow account. First, your bills may have gone up and the account changed to reflect that. Or, the servicer has changed the amount of cushion to the maximum amount allowed by RESPA. Check your statement from the servicer. You may also want to check your loan documents to figure out what is the appropriate cushion. If the mortgage loan documents are silent on the amount of the cushion or pre-accrual practices, then the RESPA "two month" limits apply, unless state law provides for a lower amount.

Disbursement Date

Question: What is the disbursement date for paying escrow account items?

Answer: The disbursement date means the date on which the lender actually pays an escrow item from the escrow account. However, the lender must pay the items in a timely manner, that is, on or before the deadline to avoid a penalty. This is required as long as the borrower's payment is not more than 30 days overdue. Borrowers should review their annual escrow statement to make certain the lender did not make late payments and charge any penalties to the borrower's account.

Dealing with Your Lender or Insurance Company: Taxes, Insurance, RESPA and Escrow

Question: I got a notice from the county that my lender did not pay my taxes on time and the county is assessing a penalty. Do I have to pay this bill?

Answer: Send the bill to the lender. The lender should pay the penalty for failing to pay the taxes on time as long you were current in your mortgage payments. If the lender refuses, you may wish to follow the guidelines for filing a complaint.

Question: Are lenders required to pay taxes on an annual basis if a discount is offered to the consumer?

Answer: No. The Department published a new rule in the Federal Register in January 1998. The rule clarifies what a lender should do when a taxing jurisdiction offers a choice of payment on an installment basis or an annual basis. If there is a discount to the consumer when disbursing on an annual basis or there is an additional charge for disbursing on an installment basis, the lender may disburse on an annual basis. Otherwise, the lender should disburse tax payments on an installment basis. The borrower and the lender may mutually agree to another disbursement basis or date. The Department encourages lenders to follow the preference of the borrower.

Question: What steps should I take if the lender does not pay my hazard insurance on time or at all and my insurance is canceled?

Answer: Lenders are required by Section 6 to make escrow account disbursements on time. If a lender fails to do so, a borrower may bring a private law suit under this Section. Therefore, if you incur any damages due to the lender's negligence, you may wish to consult an attorney.

You should also contact your lender immediately and send a copy of the bill. Some lenders list a special address and/or FAX number for insurance and tax bills. Keep checking with the insurance company to make certain the bill is paid. You may wish to pay the insurance company directly to avoid cancellation of your policy and then seek a refund from your lender. Keep copies of all your correspondence and payments. If you incur any damages due to the lender's negligence, you may wish to consult an attorney.

Question: I got a notice that my hazard insurance has been canceled. My lender force-placed hazard insurance with a different company and it costs a lot more. Can a lender do this?

Answer: As long as your mortgage payment is not more than 30 days late, Section 6 of RESPA requires the lender to make escrow payments, for taxes, insurance, etc., in a timely manner. You should write to your lender and complain. If your lender does not refund the difference or otherwise resolve your complaint satisfactorily, you may wish to file a complaint with HUD or the Consumer Protection Office of your State Attorney General's Office. You may also wish to consult an attorney.

Question: My loan was transferred to a new lender. I made my loan payment on time, but to the old lender. Can I be charged a late fee?

Answer: No. For 60 days, neither lender may charge a late fee as long as you make your payment on time to the previous lender or to the new lender. Your lender must send you a notification 15 days before your payment is due to the new lender. Both lenders must provide you with certain information about the loan transfer, including: when the payment is due to the new lender, the new lender's address, toll-free telephone numbers, etc.

Question: What steps should I take if I think the lender is requiring too much money in my escrow account?

Answer: First, figure out the maximum amount RESPA allows to be required in your escrow account from the example. If you still believe your lender is requiring too much money, you should contact your lender for an explanation.

Section 6 of RESPA provides that borrowers may make a "qualified written request" to the lender concerning the servicing of their loan account. The request should not be included with the monthly mortgage payment. The lender must acknowledge the complaint within 20 business days and must resolve the complaint within 60 business days by correcting the account or giving a statement of the reasons for its position. If you do not get a satisfactory answer from the lender, you may wish to file a complaint with HUD. You should continue to make your mortgage payment during this time.

Consumer Tips: Do's

* Do ask lenders what fees they charge, as well as the interest rate and points, when shopping for a loan.

* Do ask the builder whether you are required to use a certain provider in order to get a special concession.

* Do compare the costs of different settlement service providers before agreeing to use one to whom you were referred.

* Do ask to see the HUD-1 Settlement Statement a day before settlement, and compare the charges with those listed on the Good Faith Estimate.

* Do question the lender and settlement agent about any charges you do not understand.

* Keep making your mortgage payment on time, even if you have sent a complaint to your lender.

* Do forward any tax or insurance bills you receive, immediately to your lender. (If the lender is supposed to pay the bill).

* Do check your annual escrow account statement for mistakes.

* Do make a "qualified written request" when asking your lender for information or making a complaint.

* Do read the FAQs about Escrow Accounts carefully before filing an escrow complaint with a banking or government regulator.

 

 

 

****DISCLAIMER****
Bob Marcy is not the author of the information provided in this article and is providing it to his website visitors for informational purposes only. Bob is a licensed Realtor and not a legal or financial expert. The information contained in this article should not be used to replace the advice of a trained legal or financial expert.

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