Real Estate Settlement Procedures Act

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The real estate settlement procedures act, known as RESPA, was an act passed by the United States Congress in 1974. It was created because various companies associated with the buying and selling of real estate, such as lenders, realtors, and title insurance companies were often engaging in providing undisclosed kickbacks to each other, inflating the costs of real estate transactions and obscuring price competition by facilitating bait and switch tactics.

For example, a lender advertising a home loan might advertise the loan with a 5 percent interest rate, but then when one applies for the loan one is told that one must use the lender's affiliated title insurance company and pay 5000 dollars for the service (whereas the normal rate is 1000 dollars). The title company pays 4000 dollars to the lender.

The act prohibits kickbacks between different parties in the real estate settlement process, and also requires lenders to provide a good faith estimate for all the costs of a particular loan.

Critics say however that various kickbacks still occur. For example, lenders often provide captive reinsurance to the title insurance companies they work with. Others counter that economically the transaction is a zero sum game, where if the kickback were forbidden, a lender would simply charge higher prices. One of the core elements of the debate is the fact that customers overwhelmingly go with the default service providers associated with a lender. Some say that if the profits of the service providers were truly excessive or if the prices of the service were excessively inflated because of illegal or quasi-legal kickbacks, then at some point non affiliated service providers would attempt to target consumers with lower prices to entice them to choose the unaffiliated provider.

Sources

http://www.realtor.org/RESPA

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