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Real Estate Settlement Procedures Act of 1974 (RESPA) | Real Estate Exam Prep Videos - YouTube
Channel: The Real Estate Classroom
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hey everyone my name is paul vachesky
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and welcome to the real estate classroom
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youtube channel
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hey before we get to today's video on
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the real estate settlement procedures
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act please do me a favor give this video
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a thumbs up hit that red subscribe
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button and click on
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that notification bell
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all right so today's video we're going
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to discuss a federal law called the real
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estate settlement procedures
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act commonly known as in the industry is
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respa
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now the original intent when this law
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was passed back in 1975 was
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that it was designed to protect the
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consumer
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so the consumer who was out getting a
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loan would have
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a disclosure of the cost associated with
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borrowing that money
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now certainly since 1975 it is
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that this particular law has broadened
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quite a bit
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now on your screen there is one thing
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that you probably should know for your
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real estate licensing exam and that is
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that there's a federal agency called the
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consumer finance protection bureau
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or what we like to uh call the cfpb
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that is the federal agency that is
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tasked with enforcing the real estate
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settlement procedures
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act rules and regulations all right so
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that's probably something that you need
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to know for your
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licensing exam so the overview what are
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we going to learn here today or what it
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what does
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respa entail well it requires certain
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disclosures of
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settlement costs or what we call closing
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cost and then
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there are certain time frames that those
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closing costs or settlement costs has to
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be given to
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the consumer it prevents kickbacks it
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places
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limits on the amount of the escrow
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the escrow funds or the escrow accounts
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it also regulates allows and regulates
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what we call affiliated business
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arrangements
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it has certain prohibitions in there for
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example it prohibits
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agents and sellers from requiring buyers
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to use certain specific title insurance
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companies
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and then it also requires borrowers to
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receive other certain documentations
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all that we're going to talk about in
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this video and you have to know it
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not only for the real estate licensing
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exam but quite honestly
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to protect yourself when you become a
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practitioner
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in the real estate industry
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all right so the first thing i want to
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talk about is kickbacks now
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as it says on your screen kickbacks one
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of the things is it prevents
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referral fees between real estate
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service
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providers now who are real estate
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service providers well
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real estate agents is considered a
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service provider
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home warranties mortgage companies
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mortgage lenders
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banks a home inspection companies
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termite companies pretty much anything
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that's
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any company that could be involved in a
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real estate transaction under respa
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is considered a service provider or a
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real estate service provider so what
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does that mean it means that for example
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a real estate agent couldn't go to a
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loan
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officer and say here's the deal
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every buyer that i send you you cut me
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a referral fee of 250 bucks or 500 bucks
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the amount doesn't matter it's it's the
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formation of the business arrangement
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that's illegal
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so that would be considered a kickback
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excuse me and that would be illegal
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under the real estate settlement
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procedures act that is the first thing
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that the law does the second thing that
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the law does is prohibits
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choice of title insurance companies so
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it prohibits a
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seller or an agent whether it's the
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listing agent or
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the buyer's agent from using the terms
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of the transaction to require
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a buyer to purchase title insurance from
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a a specific
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company now for the purposes of the exam
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that's really all you need to know all
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right i'm not going to get into the
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what's the difference between an escrow
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closing company an insurance company a
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title insurance company because there is
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a difference
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but what you need to know for the
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licensing exam is it prohibits sellers
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and agents from requiring the buyer
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to to purchase title insurance from a
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specific
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insurance company so just keep that in
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mind you'll learn more about that as you
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get into the industry
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number three it limits the amount of
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escrow accounts and this is important
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um this is an important concept so
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we have to understand what what the
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p-i-t-i
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is p-i-t-i stands for principal
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interest taxes and insurance
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so when you go to the bank and borrow
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money for a house you're going to have a
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monthly mortgage payment well that
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mortgage payment is divided into four
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categories it's divided into the
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principal and interest and that's the
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amount that you have to pay the
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the bank back for borrowing the money so
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you're paying the bank back the money
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that you borrowed
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but there is the taxes and insurance
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part and that allows
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the bank to pay on your behalf
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the annual homeowner's insurance
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and then the annual property taxes
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and in many jurisdictions the principal
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and interest can be just as much
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uh as the taxes and insurance well the
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taxes and insurance
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that is sent to an escrow account at the
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at the the bank or the bank may have a
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subsidiary company to take care of this
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but it's that ti the taxes
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and the insurance portion of your your
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monthly payment that gets sent to this
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escrow account
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so the money is there so every year the
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bank then pays your
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uh or the escrow account will then
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release funds to pay for
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your homeowners insurance and your
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property taxes
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that is what an escrow account is now
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what was happening prior to respa is
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if a bank or a lender would uh
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find if they were concerned about the
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consumer that they were loaning the
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money to what they would do is have an
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exorbitant
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amount requ requirement for the escrow
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account so if you only needed
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twelve hundred dollars a year for the
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escrow account to pay your taxes and
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insurance
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legally the bank could require twenty
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thousand dollars
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and they would simply say that if you
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don't comply with
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our requirement we're not going to give
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you the loan
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so the so congress seen this as being
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egregious and said no that's ridiculous
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so they placed a limit
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on how much could be in an escrow
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account and it only allows an escrow
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company to hold up to
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one-sixth of the amount that's needed
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in addition to the amount that's needed
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to pay the taxes so there's a lot
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they're allowed to have a little overage
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but now as you can see on your screen if
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you only needed twelve
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hundred dollars a year to pay your
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property taxes
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and your homeowner's insurance then
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the most in any given one-year period
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that the escrow company could have in
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your account
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is 1400 so they would be allowed to have
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a 200
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cushion there anything above that
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that 1400 threshold then a refund would
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have to be given
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on the one-year adjustment date so
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every year under respa the escrow
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company
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is required to review your escrow
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account and adjust accordingly now
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typically
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taxes and insurance go up every year so
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what you find is
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more and more money is needed for the
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escrow and therefore your
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your ti part of your payment goes up
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however if for whatever reason it went
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down and it went above that one that
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one-sixth threshold then they would have
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to refund
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uh the amount above one-sixth and that
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would be done
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on an annual basis so the key here is
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the refund any amount
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above one-sixth that's needed in your
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escrow account
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number four respa requires the
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disclosure
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uh of settlement cost or what we call
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closing costs to the borrower
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now a couple of things you have to know
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number one
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the disclosure to the buyer
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must disclose to the buyer the estimated
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settlement cost using what's called
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a loan estimate that's the document it's
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called a loan
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estimate and that estimate must be given
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or that document the loan estimate
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must be given to the borrower within
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three business days of making
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application for the loan
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so that disclosure is going to have a
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printout of
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all the estimated closing costs for that
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loan all right and that has to be given
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to the borrower within three business
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days of making application that's
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important remember
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the borrower must also be given a
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consumer finance protection bureau
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closing cost booklet and then
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the borrower must receive a closing
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disclosure
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that's a separate document three days
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prior to the settlement closing or the
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closing date
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so we have two documents the borrower
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goes in and makes application within
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three business days of making
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application the borrower must receive
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from the lender within three business
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days
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a document called the loan estimate it's
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gonna have an estimated
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or printout of all the estimated cost
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associated with that loan
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then three days prior to closing
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then they're going to get a closing
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disclosure it's a separate document
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that basically does the same thing so
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therefore it allows
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the borrower to make a comparison what
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was the initial estimate
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what was the final estimate and if it's
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really egregious and there's some
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thresholds that are built in we're not
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going to discuss those
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the um the the borrower does not have to
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go through with closing
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number five loan types it's probably
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important too that you know
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under the real estate settlement
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procedures procedures
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act the types of loans that apply are
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the one
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to four family residents which is the
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single family house the duplex the three
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plex and the four plex
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it can apply to investment properties as
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well
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here is the key and you have to know
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this for your
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real estate exam it applies to all
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federally related loans now federally
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related loans
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can be veterans loans or va loans it can
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be
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federal housing administration loans
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which we typically call
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fha loans it can be conventional loans
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you don't really have to know that so
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much for the exam
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you have to know that respa or the real
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estate settlement procedures act
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applies to all federally related loans
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that's an important thing you need to
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know
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and there are a couple of exceptions
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number one is seller financing so if
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you're doing a land contract you're not
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going to have
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a any of these disclosures and
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understand that
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under federal regulation an investor for
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example is only allowed to do
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two or sell two properties on land
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contract
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in a one-year period or every two uh
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every year so they're allowed two per
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year
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if they do three or more then they
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actually have to get a mortgage
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origination license
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and then loan assumptions they don't
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have to that because remember on a loan
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assumption you're simply
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changing the names to the loan none of
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the terms of the original loans
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of the original loan is going to change
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well the sixth and final thing i want to
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talk about is respa
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or the real estate settlement procedures
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act allows
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and regulates what's called affiliated
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business arrangements
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and they're very common in the the
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practice of real estate and basically
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what it is
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is we have the broker and then we have
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all of these real estate service
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providers
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like home inspectors lenders we have
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home warranty companies termite
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inspectors those type of things
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now we know under rest because we talked
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about it that there can't be
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kickbacks from referral fees that's
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illegal
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but what happens if a broker and a
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lender get together and they have they
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create a legitimate business arrangement
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how does the broker get paid from that
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so the broker is going to
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encourage their agents to refer this
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mortgage company to the buyers that come
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through the
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the real estate company and of course we
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know the disclosures and stuff have to
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be made but
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how does that work well here's how it's
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regulated number one
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the agent or the broker must disclose in
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writing the arrangements
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of these business arrangements that the
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agent or the broker
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is offering their buyer so if an
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agent at 12th street realty is referring
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their buyers to a1 mortgage company
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and the broker of the real estate
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company and the owner of the
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mortgage company have a business
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arrangement or a business agreement
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then a disclosure must be given to
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the buyer it has to be in writing it's
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called an affiliated
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business arrangement that's what it's
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called it's a it's
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a it's an actual document it has to be
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in writing now
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in addition to the disclosure the other
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thing that that disclosure must include
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is
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estimated cost to use that company so
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not only is the agent making the
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disclosure in writing to
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the buyer about a1 mortgage company
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on that disclosure is going to be the
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estimated cost if you use
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a1 mortgage now understand this applies
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to any other
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real estate service provider so if the
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broker had an arrangement with the
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lender
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and a home inspection company the same
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rules would apply
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the other thing that can happen number
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four is the agent or the broker can't
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require their
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agent to require the buyer
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to use those affiliated uh service
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providers now they can encourage their
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buyers
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to use them they can say that you know
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they can say they're a great company
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those type of things but what they can't
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use
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is the terms of the transaction to
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require
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the buyer to use anyone or all of those
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affiliated
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companies number five brokers and agents
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can't receive referral fees we talked
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about that but the one thing that they
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can do is they can receive compensation
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from
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legitimate business arrangements so
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let's finish this up by describing how
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this works you have
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you have 12th street realty and you have
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a1
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mortgage company the owners of the two
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company come into
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a business arrangement maybe they create
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a limited liability company or whatever
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point is is the mortgage company is
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going to receive
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profits they're they are a for-profit
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company
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and through the normal course of
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distributing dividends or
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or or passing through profits to the
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owners
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the broker can benefit in that regard
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what they can't do is receive referral
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fees from the transactions
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only receive compensation through the
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distribution of
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dividends or profits via the company the
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other way that this happens is many
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brokers
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instead of entering to a business
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relationship together
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the the broker will enter into a
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marketing agreement with the lender or
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with the home warranty company or the
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home inspection company
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and it'll be so much every month a
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marketing fee
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is what they call it we call it a
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controlled marketing arrangement
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and those are perfectly legal as long as
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the amount that's being charged to those
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real estate service providers
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are fair market value what you couldn't
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do
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is the loan company couldn't say well
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i'm going to rent an office at the
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real estate company so i have an
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in-house mortgage company there when the
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real market value or the real
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rent value on the open market for that
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office is 300
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a month but the the the loan company
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pays them 3
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000 a month that would be a violation of
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respa
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so the only thing the only amount that
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the real estate broker could charge for
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rent for that
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in-house office in the real estate firm
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would be 300
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a month because that's the fair market
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rental rate
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uh for where that office is located the
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same thing
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with marketing you know how much and
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this is the hard part it's hard to
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hard to value this i have your you know
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if you put the
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lender's logo on the the real estate
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company's website
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how much is that worth i don't want to
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go down that road because it's a very
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complex formula
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however many individual agents have the
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same kind of arrangements with the
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the brokers who own real estate firms so
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this does apply to
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brokers and agents alike key things to
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come away with when we're talking about
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number six affiliated business
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arrangements
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disclosures have to be made and
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and no referral fees and then any
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compensation that is given
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has to be a fair market value
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so that one's a long complicated part
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of this entire video but you have to
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know it so
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all right that is all for the real
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estate settlement procedures act if
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you're going to continue to study check
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out this video it's going to help you
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and do me a favor if you have not
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subscribed to our channel
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click on the little circle i would
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appreciate that i'll see you
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in the next video
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