Types of Real Estate Loans Exempt From RESPA Requirements
Normally, loans secured by real estate for a business or agricultural purpose are not covered by RESPA. However, if the loan is made to an individual to purchase or improve a rental property of one to four residential units, then it is regulated by RESPA.
The following transactions are not covered by RESPA: An all-cash sale; • A sale where the individual home seller takes back the mortgage; and • Business, Commercial, or Agricultural purpose loans. RESPA requires disclosures to be given to applicants for a federally related mortgage loan.
A “bridge loan” or “swing loan” in which a lender takes a security interest in otherwise covered 1- to 4-family residential property is not covered by RESPA and this part.
Kickbacks & Referral Fees
Section 8a of RESPA prohibits giving or receiving any referral fees, kickbacks, or anything of value being exchanged for referral of business involving a federally related mortgage loan.
RESPA, along with other regulatory guidelines, is designed to help protect homebuyers and existing homeowners from unfair practices when dealing with real estate agents, brokers, lenders and affiliated companies. Consumer Financial Protection Bureau. "CFPB Consumer Laws and Regulations," Page 3-4.
RESPA generally prohibits kickbacks and offering a thing of value in exchange for the referral of business to a settlement service provider.
It requires lenders to disclose necessary financial information so consumers can make an informed home-buying decision. It also eliminates kickbacks and limits the use of escrow accounts. RESPA applies to home loans made for residential properties designed to accommodate one to four families.
RESPA does not require lenders to impose an escrow account on borrowers; however, certain government loan programs or lenders may require escrow accounts as a condition of the loan. RESPA also prohibits a lender from charging excessive amounts for the escrow account.
Explanation: Business purpose loans are exempt from RESPA coverage.
It requires lenders, mortgage brokers, or servicers of home loans to provide borrowers with pertinent and timely disclosures about the nature and costs of the real estate settlement process. RESPA also prohibits practices such as kickbacks, and limits the use of escrow accounts.
RESPA specifies “No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person.”
RESPA requires a borrower to receive a closing disclosure three days before closing and a loan estimate three days after applying for a loan, along with an informational booklet about closing charges.
Final answer: RESPA applies to a variety of real estate transactions but generally does not apply to a seller-financed loan when the seller does not regularly extend credit. It covers transactions such as condominium purchases, second mortgages, and federally-insured loans.
Transactions generally not covered under RESPA include: “an all cash sale, a sale where the individual home seller takes back the mortgage, a rental property transaction or other business purpose transaction.” “The sale of a loan after the original funding of the loan at settlement is a secondary market transaction.
CFPB considers a RESPA violation when the costs of services for a third party closing or services rendered are inflated. For example: Mortgage brokers are prohibited from charging a buyer for a credit report at closing more than what the mortgage broker paid to obtain the credit report.
Examples of Loans Exempt from RESPA:
Loans on vacant land: These loans do not involve the purchase of a primary residence and thus fall outside the purview of RESPA. Loans made in connection with HUD: Certain loans backed by the Department of Housing and Urban Development may also be exempt.
Final answer: RESPA does not cover business purpose loans or temporary/bridge loans.
Exemptions – 12 CFR 1024.5(b)
The following transactions are exempt from coverage: A loan primarily for business, commercial or agricultural purposes (definition identical to Regulation Z, 12 CFR 1026.3(a)(1)).
Passed in 1974, the Real Estate Settlement Procedures Act (RESPA) is designed to protect consumers from unscrupulous sales practices and make them more informed shoppers for settlement services.
RESPA violations include bribes between real estate representatives, inflating costs, the use of shell entities and referrals in exchange for settlement services.
The short answer is no, they cannot. The Real Estate Settlement Procedures Act (RESPA), established in 1974 and enforced by the Consumer Financial Protection Bureau (CFPB), was designed to protect homebuyers from abusive practices during the homebuying process.
However, some specific categories of loans are excluded from the rule. Specifically, the TILA- RESPA rule does not apply to HELOCs, reverse mortgages or mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land).
“And all five of those elements need to be present in a fact pattern in order for there to be a Section 8 violation.” Those elements are a federally related mortgage loan, settlement service business, a referral, a Thing of value, and an agreement or understanding.
The Act requires lenders, mortgage brokers, or servicers of home loans to provide borrowers with pertinent and timely disclosures regarding the nature and costs of the real estate settlement process. The Act also prohibits specific practices, such as kickbacks, and places limitations upon the use of escrow accounts.