Definition
The Real Estate Settlement Procedures Act (RESPA) is a federal law passed in 1974 that requires mortgage lenders and brokers to disclose estimated closing costs and affiliations with other providers prior to closing.
Analysis
RESPA requires lenders to deliver a Good Faith Estimate of all such closing cost estimates prior to closing so that the homebuyer can review and ask any questions. Furthermore, it requires any kickbacks and affiliate relationships to be disclosed to the homebuyer.
RESPA allows for homebuyers to gain an understanding of what the total terms of their mortgage agreement consist of. Any charges or clauses contained within the Good Faith Estimate should be questioned prior to closing.
If a lender plans to sell the mortgage to another provider or to allow for a third party to service the mortgage, then that relationship must be disclosed in the Good Faith Estimate.
One additional advantage available to homebuyers due to RESPA is that it is easier to compare the terms of two competing mortgage offers. That way, if one lender charges higher points to compensate for a lower advertised interest rate, then the total costs are calculated to allow for easy comparison.
