What is Regulation X

What is Regulation X (Real Estate Settlement Procedures Act – RESPA)?

One of the more important federal laws governing mortgage lending is the Real Estate Settlement Procedures Act (RESPA). RESPA, also known as Regulation X, was passed to control loan settlement practices mainly for consumer loans. Lenders, brokers, and title companies who provide loans for people buying owner occupied properties for personal use are primarily impacted by RESPA. It covers “federally associated mortgage loans,” which includes most residential loans.  A federally related mortgage loan is any loan backed by residential property with one to four families. Despite this expansive description, many loans are eligible for RESPA exemptions.

Changes to be Aware of

Some of the changes include the lowering of the escrow amounts that buyers of homes must deposit to cover real estate taxes and insurance premiums. Another change made by RESPA is the elimination of “referral fees,” which sometimes called kickbacks which raise the settlement costs for house buyers. Another requirement is that RESPA requires the settlement statement to detail the fees levied against the buyer and seller. Finally, whether title insurance premiums cover the lender’s interest, the borrower’s interest, or both must also be included in the settlement statement.

Under the (RESPA), lenders were required to provide consumers with GFEs within three days of a regular mortgage application. The GFE calculates the settlement expenses that are most likely to appear on the settlement statement. Therefore, a GFE and the standard GFE form must be submitted during the application phase in accordance with RESPA.  Then, in October 2015, GFEs were only made applicable to people seeking reverse mortgages, with loan estimate forms being introduced for other types of home loans.  Also, this new rule combines the Good Faith Estimate with the Truth in Lending (TIL) disclosure now called the “loan estimate” and the HUD-1 settlement statement with the final TIL, now called the “closing disclosure.”  Perhaps the greatest change is that the closing disclosure must be in the hands of the consumer three days before closing. 

Compliance and Exemptions

Private lenders who lack a sizable compliance department may find it challenging to comply with all these RESPA’s regulations. Thankfully, RESPA has been reduced with explicit exemptions that are reasonably simple to apply. The most popular of these exemptions is the Business Purpose exemption, in which loans explicitly serviced for business purposes are exempted from RESPA’s requirements. Thus, it is critical for lenders always to investigate the purpose of loan proceeds to ascertain this determination.