In order to control incentives and referral fees and lower closing costs, the Real Estate Settlement Procedures Act (RESPA) was established back in 1974. Crooked business tactics such as raising the price of real estate transactions and giving incentives illegally were bleeding the consumer and were prevalent among agents, mortgage lenders and development companies. RESPA officials are on the watch when it comes to the real estate settlement process and they not only forbid bribes between lenders and third party settlement agents; they also question mutual referral payments among real estate experts.
Good faith estimates (GFE) became mandatory in January of 2010, however they were first initiated by HUD in November of 2008. Also in addition to a good faith estimate, every mortgage lender at closing must present to RESPA a HUD-1 and HUD-1A form whenever buying or refinancing mortgage loans. By offering these forms, the homebuyer becomes informed as to exactly the amount of the home mortgage fees are and to whom the specific payments are allocated.
The following illustration shows the effects of this particular judgment. Lets suppose somebody fills out the paperwork for a loan from a corrupt mortgage lender who promises a 5% interest rate, but when applying, the borrower is required to use the lender's title insurance company which charges the inflated price of five thousand dollars for what should cost one thousand dollars. The dishonest gain of four thousand dollars is guaranteed to the lender's title company. This type of deal has become way too noticeable to pull off with a good faith estimate. Honest price competition dependent on buyer demand, which hopefully drive the price down, must prevail and the GFE assures that all prices for all services are clearly stated.
RESPA also requires lenders to issue intermittent disclosures and firmly prohibits them to utilize any practice or service that involuntarily raises the end cost of services. A good example of this is the requirement that title insurance has to be bought at the choice of the borrower and not the mortgage lender. RESPA is always there whenever there is a transaction involving a home mortgage, assumption, refinancing, and property improvement loan or a line of credit.
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