Who's got your back when you're getting a mortgage loan? The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute by the Department of Housing and Urban Development (HUD) designed to help homebuyers be better shoppers during the home buying process.
RESPA rules direct lenders to provide consumers with disclosures at various times in the transaction, including a required, standardized Good Faith Estimate (GFE) at the beginning of the transaction and a HUD-1 settlement statement at closing.
The GFE is provided to consumers within three days of the loan application. It's supposed to provide the information they need to understand projected settlement costs and interest rate-related terms. The GSE also helps consumers shop settlement service providers, including the initial cost difference between interest rates offered by the same lender.
HUD provides categories for lender charges that allow some tolerances and imposes penalties for some charges if they're higher at settlement than on the GSE. Lenders are liable for any costs that exceed the acceptable tolerance levels of the new GFE.
According to EntitleDirect.com, lenders are wary of paying penalties, so some lenders may quote the most expensive services available. "This may make their settlement charges look high to the consumer who shops around, thus creating an uncompetitive GFE," advises the site. "It will also reduce the chance of the lender paying penalties because the actual final costs are likely to be lower."
How does HUD know if the lender is charging the consumer more than the estimate? At closing, the lender provides all the settlement costs on a HUD-1 form. There's a line-by-line comparison, and if the charges are higher than HUD allows, a refund is issued by the lender to the borrower.
The HUD-1 outlines settlement costs for both the buyer and seller as well as costs that that weren't known at the time the GSE was provided such as property tax and homeowner's insurance escrows and real estate brokers' fees.
If there is a discrepancy between the GSE and the HUD-1, ask your lender to explain the reason for the increase.