The Truth-in-Lending Act was enacted by the U.S. Congress in 1968 as part of the Consumer Protection Act. Its purpose is to protect borrowers by ensuring that they are aware of the terms and costs of credit, so that they can knowledgeably compare different loans and lenders. Consumers must be provided with a written disclosure of the costs associated with a mortgage loan, such as Annual Percentage Rate (APR), finance charges, annual fees, and the size of the credit line. Also known as Regulation Z, TILA also gives consumers the right to cancel certain credit transactions that involve a lien on the consumer’s principal dwelling.
RESPA, or the Real Estate Settlement Procedures Act, was enacted in 1974 by the U.S. Department of Housing and Urban Development (HUD). According to HUD, its purpose is to clarify and outline the settlement process and fees to consumers and eliminate illegal activity such as kickbacks and referral fees among settlement service providers. Mortgage loans on one- to four-family residential property are covered by RESPA, which includes most purchase loans, assumptions, refinances, home improvement loans, and equity lines of credit.
RESPA also requires that written disclosure of estimated settlement costs be provided to the borrower. The Good Faith Estimate is the form that itemizes these costs at the beginning of the application process. HUD’s HUD-1 or -1A Settlement Statement itemizes these costs exactly at loan closing. The fees can vary based on changes in the loan that may occur between the time of origination and closing.
RESPA mandates that borrowers receive disclosure documents at various times during the loan process. At the time of application, or within three days afterward, the lender must provide the borrower with the Good Faith Estimate; HUD’s Settlement Cost Guide, which describes the home buying process; and a Mortgage Servicing Disclosure Statement, which tells the borrower whether the lender intends to service the loan or sell it to another party.
All affiliated business arrangements (AfBA) must be disclosed to the borrower at or before the time of referral. This disclosure must identify and describe the relationship between the two providers, and also must give an estimate of the referred provider’s charges.
Disclosures which are required at closing include the Initial Escrow Statement, which itemizes the estimated taxes, insurance premiums, and other fees anticipated to be paid during the first year from the escrow account. An Annual Escrow Statement must also be sent to the buyer once a year. As previously stated, the HUD-1 Settlement Statement must also be given to the borrower at closing, or one day prior. All charges imposed on the buyer and the seller in connection with the closing must be listed on this statement. After the closing, RESPA requires a Servicing Transfer Statement be sent to the buyer if the lender sells the loan or assigns the servicing rights to another loan servicer. The buyer must be notified no later than fifteen days prior to the effective date of the loan transfer.
Although they are very good consumer protection laws to have in place, it should be noted that these laws are not perfect. It’s always possible that a few points that may have “slipped through the cracks”. Read the article What Isn’t Disclosed Under the TILA to give you some idea of what to be on the lookout for.
For more thorough information on RESPA, go to the RESPA page at HUD.com. Remember, it’s education that’s the key.