The world of real estate is a tricky one to navigate. Unless you’re a real estate professional or a home selling veteran, there are plenty of costs, terms, and documents that can cause confusion and uncertainty for buyers & sellers alike.

Given the chance, some real estate service providers might try and capitalize on that confusion for their own gain. Fortunately, the RESPA, or Real Estate settlement Procedures Act, was created to prevent that from happening.

The RESPA creates transparency in a home transaction, ensuring that buyers & sellers know exactly what costs they can expect to see at closing. 

What is RESPA?

The Real Estate Settlement Procedures Act was first passed by Congress in 1974 and serves two main purposes:

• RESPA mandates that lenders disclose certain information to home buyers so they can make fully informed decisions regarding their home transaction.
• RESPA also lowers closing costs by eliminating kickbacks and referral fees between real estate service providers.

Both of these purposes are meant to decrease closing costs & increase buyers’ confidence in the home buying transaction by keeping them safe from illicit or controversial behavior from lenders and other providers.

What RESPA means for you

The first goal of RESPA is to increase transparency in mortgage lending. This means that lenders have to tell borrowers the various settlement costs that come with their loan – eliminating hidden or unexpected fees that they might otherwise try to tack on at closing. The law also limits escrow accounts to only collect the amount needed to pay for closing charges, including insurance, taxes, and other reasonable payments.

The second goal of RESPA is to eliminate scams in the form of “referral fees” and kickbacks. Kickbacks between real estate agents and service providers raise costs for buyers and eliminate your opportunity to shop different providers to find the best deal available. Platforms such as Inspectify, are built to drive transparency for consumers to ensure they are provided multiple options when considering their service provider.

Lastly, RESPA prohibits sellers from requiring buyers/borrowers to purchase title insurance from a specific insurance company.

Affiliated Business Arrangements

Affiliated Business Arrangements, or ABAs, are a way for real estate agents to legally receive a share of the profits from different parts of a home transaction.

Because RESPA prohibits referral fees, agents have to get a signed disclosure from the buyer stating their financial interest in the affiliated company. Thanks to RESPA, consumers are under no obligation to sign an ABA disclosure. If your agent or someone else is pressuring you to sign an ABA or use a certain affiliated company, proceed with caution. Always do your own due diligence when it comes to deciding which service provider to go with.

Are ABAs legal?

The short answer? Yes. ABAs are legal. However, both the document and the relationship between parties have to be set up in compliance with the guidelines outlined by RESPA.

This means the disclosure must include the following:

• Identify the relationship between the parties
• Explicitly state which parties are involved in the relationship
• Disclose the exact percentage of ownership
• Clearly explain that you (the buyer) are under no obligation to hire the company you are being referred to

RESPA & ABA violations are monitored by the CFPB (Consumer Financial Protection Bureau) and can be quite costly, so it’s in everyone’s best interest to set them up correctly and not push their luck. That said, there are agents who look to take advantage of their clients, so be careful and consult a professional before signing any document you don’t fully understand.

Final Note

The bottom line is this: RESPA was created to protect YOU as a home buyer (or seller); and it does so by increasing transparency & decreasing hidden costs and illegal referral fees. 

This article is meant to give you an overview of RESPA and ABAs so you can purchase your next home with more confidence.