Tuesday, July 30, 2013

What Is RESPA and What Is TILA?

People applying for a mortgage will encounter the term, "RESPA. and "TILA." RESPA is an acronym for the Real Estate Settlement Procedures Act and, and it's purpose is to eliminate certain unethical, even deceitful practices once common in the real estate and mortgage professions. TILA--the Truth in Lending Act--is kind of a cousin, in that it applies to all credit and not just mortgages. While various states sometimes have their own augmentations of the federal law, TILA requires disclosure of important information on the true cost of credit.

The worst or the pre-RESPA abuses occurred a long time ago, before RESPA was enacted in 1974. Kickbacks to and from real estate brokers, lenders, insurance providers and other real estate vendors were common and drove up the price of mortgages. Worse, these charges were hidden, so people didn't even know they were paying them.

Borrowers experienced a lot of bait and switch-type tactics. A lender might offer a certain favorable loan, but the borrower had to use the lender's affiliate company for, say, title or homeowners insurance, who would charge a higher fee. This fee would be kicked back to the lender. Real estate brokers might be paid an undisclosed fee for directing borrowers to a certain lender.

RESPA requires full disclosure to a borrower (see a previous post on Good Faith Estimates) and prohibits the kickbacks and charges for services that don't get performed. It also offers remedies if a consumer is cheated. For example, the borrower was promised a 5% rate but then receives a loan with an 8% rate at closing, a RESPA violation with consequences may have occurred. Here's a useful link to HUD for consumer FAQ's on what RESPA does and does not cover.

The Truth in Lending Act (TILA), enacted in 1968, intends to make sure borrowers know what the loan costs and what the term, Annual Percentage Rate (not the interest rate) and other loan charges are. As with RESPA, it's updated regularly.

TILA disclosures will not only tell you how much you're paying for the loan, but how much your total payments are over time. Most home buyers are stunned when they see how much more the total of their payments are over thirty years compared with the price of the home!

By knowing the APR versus the interest rates, bvorrowers are brtter able to cmpare the actual costs of a loan from lender to lender. Lending programs vary quite a bit, and borrowers' situations can be unique. Because of TILA and RESPA. people can make pretty good apples-to-apples comparisons.

Insiders sometimes call RESPA "Reg. X" and TILA "Reg. Z." Both are periodically updated and received huge scrutiny and rule changes following the housing bust of 2007. This link provides a good summary of recent changes to Regulation X and Regulation Z.

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