The Truth of RESPA & TILA
When I was taking real estate classes, I was so confused about RESPA and TILA. Here I am writing a brief article to help students and consumers better understand these terms in real estate finance.
RESPA is the abbreviation of Real Estate Settlement Procedures Act. It is the Federal Law administered and enforced by the Consumer Financial Protection Bureau (CFPB). It was enacted by Congress in 1975 to provide homebuyers and borrowers with complete settlement cost disclosures. RESPA was also introduced to eliminate abusive practices in the real estate settlement process, prohibit kickbacks, and regulate the use of escrow accounts. RESPA does not set prices for settlement services. RESPA limits who may conduct a real estate closing, also called settlement agents, and imposes obligations on settlement agents that are intended to alleviate borrowers‘ confusion over the real estate closing process and associated costs.
RESPA covers loans secured with a mortgage placed on a one-to-four family residential property, including most purchase loans, assumptions, refinances, property improvement loans and equity lines of credit.
RESPA does not apply to business purpose loans; temporary financing; loans to purchase vacant land; loan conversions; secondary market transfers; transactions financed solely by the seller; an assumption that does not require lender approval; a residential property consisting of more than four family units; or cash sales.
RESPA requires lenders, mortgage brokers, or servicers of home loans to provide disclosures to borrowers concerning real estate transactions, settlement services, and consumer protection laws. Within 3 business days of receiving a loan application, mortgage brokers and/or lenders must provide the following disclosures to the borrower: Special Information Booklet, which is also called Settlement Cost Booklet, Homeownership Counseling Reference, Loan Estimate, Mortgage Servicing Statement, and Affiliated Business Disclosure. If the lender rejects the loan within 3 business days of receiving the loan application, the lender is not required to provide these documents to the borrower.
RESPA prohibits loan servicers from demanding excessively large borrower deposits into escrow accounts and restricts sellers from mandating title insurance companies.
The Truth in Lending Act, abbreviated TlLA, was passed in 1968 as part of the Consumer Credit Protection Act and is implemented under the Federal Reserve Board’s Regulation Z. TILA is the Federal law to promote the meaningful disclosure of consumer credit and lease terms and regulate advertisement of loan and lease terms to facilitate consumer credit transactions. TILA/Regulation Z enables standard comparisons of the financial terms of different loans to better understand the total cost of borrowing money. The key disclosure is the rate of interest charged on the loan as the Annual Percentage Rate (APR), which represents the yearly interest rate on the borrowed money, which includes the interest rate, points paid to the lender, mortgage broker fees and certain other credit charges (APR=interest rate + all fees).
TILA applies to consumer loans which a consumer applies for, or a lender advertises, including credit cards, or open-end credit. It also applies to loans secured by real property, such as a mortgage, deed of trust (DOT) or closed end credit, and personal property leases, such as cars.
Under TILA “consumer credit” may be either closed end or open-end credit and is extended primarily for personal, family, or household purposes. The term consumer credit excludes transactions such as: business, commercial, and agricultural loans; and loans not secured by real or personal property which exceed a given threshold amount (adjusted annually for inflation). Consumer credit laws apply to credit extended by a creditor even though it may be advertised by someone else, such as a builder, real estate broker, or advertising agency.
Under TILA, a “consumer lease” is a lease for personal property to a private individual. The lease must be for personal, family, or household purposes and must be for a term more than four months, thus, renting a car for a weekend is not a consumer lease. The term excludes leases where the customer must pay a total which exceeds a given threshold amount (adjusted annually for inflation). However, the term does include leases through which the customer has an option to buy at the end of the lease term. Note that, under TILA, a “lease” where the payments equal or exceed the value of the property and the consumer may buy the property at the end of the lease term for a nominal payment, or no further payment, is actually a credit sale (closed-end credit), not a consumer lease. Consumer lease obligations were originally regulated under TILA, later such transactions were moved to the Consumer Leasing Act/Regulation M.
RESPA and TILA both state that lenders must provided a Loan Estimate of settlement service charges that the borrower will likely have to pay within 3 days of application. Actual charges may vary. Lenders must provide borrowers with a Closing Disclosure at least three days before settlement, which contains an itemized list of the actual fees charged. After delivery, changing certain terms of the loan terms may trigger a new 3 days waiting period. The settlement agent must also provide the seller with a Closing Disclosure on or before the settlement date.
Note that the Loan Estimate and Closing Disclosure are not applicable to: home equity lines of credit (HELOCS), reverse mortgages; mobile homes and dwellings not attached to land; and loans made by non-creditors. In such situations, lenders must instead provide an initial TILA statement within three business days of application, and a final TILA statement at closing. This statement discloses information about the cost of financing the loan. However, this is a shorter disclosure than what is required in the Loan Estimate and Closing Disclosure forms.
Lenders must ensure that borrowers understand what they are agreeing to before taking on the loan. Therefore, RESPA and TILA both requires lenders provide the borrower with a list of federally approved homeownership counseling organizations within 3 days of application.
TILA was signed into law in 1968 to protect consumers from unfair and predatory lending practices. It requires lenders and creditors to supply borrowers with clear and visible key information about the credit extended. TILA prohibits creditors and loan originators from acting in a self-seeking manner, especially when they are acting to the detriment of the borrower. To protect consumers against unfair lending practices, consumers are granted the opportunity to rescind their agreement within a specific time for certain loan transactions. The Truth in Lending Act not only serves to protect consumers but also lenders and creditors who act in good faith.
RESPA was passed in 1975 as part of an effort to limit the use of escrow accounts and prohibits specific practices, such as kickbacks, referrals, and unearned fees. For example, Section 8 prohibits any person from giving or receiving something of value in exchange for referrals of settlement service business. It also regulates the use of escrow accounts—such as prohibiting loan servicers from demanding excessively large escrow deposits that far exceed the purpose for which the money is required—and restricts sellers from mandating title insurance companies.
Lenders cannot require borrowers to use a particular affiliated settlement service provider. However, they can provide financial incentives to do so. For example, a homebuyer may be able to take advantage of affiliated services at a discounted rate.
Real estate licensees should not hold themselves out as experts in lending or attempt to influence lenders into making a loan. Agents should encourage their clients to consult a reputable lender, to become informed about the terms and the risks associated with the loans they are considering, and to recognize the signs of predatory lending. Those signs include: high interests rates and fees; large future costs (high-risk adjustable rate mortgages with payments that rise substantially after a short introductory period); over-valued property (inflated appraisals can result in the borrower owing more to the bank than the home is worth); barriers to refinancing (high prepayment penalties); no down payment loans; loans that may be split into two mortgages, with one having a much higher cost; and unethical document management practices (lenders who require borrowers to sign blank documents). TILA and RESPA both protect the interests of consumers and borrowers in real estate financial transactions.