In the realm of mortgage lending, compliance with federal regulations is paramount to ensuring fair and transparent practices that protect both consumers and lenders. Two key regulations that govern the mortgage lending process in the United States are the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA). In this article, we'll delve into what RESPA and TILA are and summarize the rules associated with each regulation.
The Real Estate Settlement Procedures Act (RESPA) is a federal law enacted in 1974 to protect homebuyers and borrowers by regulating real estate settlement practices and preventing abusive practices such as kickbacks and referral fees. RESPA is administered and enforced by the Consumer Financial Protection Bureau (CFPB).
- Disclosure Requirements: RESPA requires lenders to provide borrowers with various disclosures throughout the mortgage loan process, including a Loan Estimate (LE) within three business days of loan application and a Closing Disclosure (CD) at least three business days before loan consummation.
- Prohibition of Kickbacks and Unearned Fees: RESPA prohibits kickbacks, referral fees, and other forms of payment for the referral of settlement service business. This includes any payment, fee, commission, or thing of value provided in exchange for referrals of settlement service business.
- Escrow Account Management: For certain mortgage loans, RESPA requires lenders to establish and manage escrow accounts to collect and disburse funds for property taxes, homeowners insurance, and mortgage insurance premiums.
- Servicing Transfer Disclosures: When the servicing of a mortgage loan is transferred to another entity, RESPA requires both the old and new servicers to provide borrowers with notice of the transfer and information regarding how to contact the new servicer.
The Truth in Lending Act (TILA) is a federal law enacted in 1968 to promote the informed use of consumer credit by requiring lenders to disclose key terms and costs of credit to consumers. TILA is implemented and enforced by the Federal Reserve Board.
- Disclosure of Annual Percentage Rate (APR): TILA requires lenders to disclose the annual percentage rate (APR) to borrowers, which represents the true cost of borrowing expressed as an annualized rate, including interest and certain fees.
- Right of Rescission: TILA grants borrowers the right to rescind certain mortgage transactions within three business days after closing. This right applies to refinance transactions on a primary residence and home equity loans secured by the borrower's primary residence.
- Disclosure of Loan Terms and Costs: TILA requires lenders to provide borrowers with a Loan Estimate (LE) within three business days of receiving a loan application and a Closing Disclosure (CD) at least three business days before consummation of the loan. These disclosures include key loan terms, costs, and other important information.
- Ability-to-Repay Rule: Under TILA's ability-to-repay (ATR) rule, lenders must make a reasonable and good faith determination of a borrower's ability to repay a mortgage loan before extending credit. This rule aims to prevent irresponsible lending practices and protect consumers from obtaining loans they cannot afford.
RESPA and TILA are crucial regulations that govern the mortgage lending process and aim to protect consumers from predatory practices and ensure transparency in lending transactions. By understanding the key rules associated with RESPA and TILA, both borrowers and lenders can navigate the mortgage process confidently and make informed decisions regarding home financing. Compliance with RESPA and TILA is essential for maintaining fair and ethical lending practices and promoting a healthy housing market.
