Recently, I shared with you some very interesting marketing strategies mortgage companies (and non-mortgage companies) were putting out to consumers to entice you to refinance your house. American Express had partnered with a firm in New Jersey to tack on bonus rewards points for mortgage dollars. Airlines are offering up frequent flyer points for taking out a mortgage with their selected lender and the marketing dance goes on. Some even offer cash back at the settlement table in the form of a credit against closing costs.

All of these arrangements are legal. Nevertheless, over the years, the federal government has limited some of the activities of mortgage companies to protect consumers from unnecessary costs increases. When mortgage companies start giving things away to lure consumers and when they pay for leads, the costs to consumers, it would seem, would move upward. Thus, federal regulators require much disclosure so you know what’s happening with your money.

The Real Estate Settlement Procedures Act (RESPA) is one of the laws regulating lenders' activities. Primarily it requires lenders to disclose estimated costs of settlement, cash you’ll need to withhold for expenses, even certain business arrangements. (For detailed information, visit www.HUD.gov and search there for RESPA.)

There’s been a lot of confusion in the industry about what can and cannot be practiced on the part of mortgage providers as they conduct business and comply with RESPA. Specifically, Realtors have to be careful in their relationships with loan officers to ensure that they are not receiving some sort of “pay back” for simply referring a buyer to them for a mortgage. Can a business professional pay for leads – sure, but not in the world of mortgages. What may be considered good marketing in one industry can actually break the law when taking a look at a relationship between lenders and people with whom they conduct business. The Feds want to make sure that if someone receives money through the mortgage process, it’s because they actually worked on the mortgage.

Four particular elements of the loan application process come under the RESPA regulations.

The Good Faith Estimate of Settlement Costs is the first disclosure you’ll receive. The U.S. Department of Housing and Urban Development lists this document as the first part of the disclosure process. When consumers apply for a loan the Good Faith Estimate provides a rough estimate as to how much the loan is going to cost them. It’s not a guarantee, mind you, but at least it will let you know how much some of the fees will run to allow you to compare with other lenders. Once you make an application, the lender or broker has to deliver it to you within the next three business days.

Something many consumers fail to do is to bring the Good Faith Estimate to the settlement table to compare what they were told versus what’s actually being promised. The last time I refinanced, comparing these notes saved me $2,000.

The Servicing Disclosure Statement is another disclosure that lets you know if the lender expects the loan to be serviced by someone other than the company that sold you the loan. Affiliated Business Arrangements must also be disclosed. Some mortgage companies are part of a larger company that may also own a settlement service and all their settlements may go through that company.

The day before settlement, under RESPA, the borrower has the right to view the HUD-1 Settlement Statement, which lays out exactly what you’ll be required to pay for the whole settlement process.

If you have to fund an escrow account for taxes and insurance expenses, the lender must disclose to you how this will work and then you will receive an accounting of that fund within 45 days of settlement.

Now, these are all good requirements, but they protect the consumer only if the consumer looks over the disclosures to be aware of what’s happening through the transaction. A lot of paper is sliding across the table during a settlement and a good settlement agent will help you understand them as you move along. However, it’s imperative that you get to know these more intimately than just through a glancing of the eyes and then filing them away.

Published: August 1, 2003

Use of this article without permission is a violation of federal copyright laws.

Mr. Carr is an award-winning real estate broker in Northern Virginia and authored "Real Estate Investing Made Simple: a commonsense approach to building wealth." He also contributed to Donald Trump’s book, "The Best Real Estate Advice I Ever Received," and is an active trainer and coach of top producers in the Washington DC market. As a sought-after expert on real estate, Mr. Carr has been featured on CNN, various broadcast outlets and was the former real estate editor for The Washington Times. He accepts questions at his blog www.RealEstateOlogy.org.