The Real Estate Settlement Procedures Act, 12 U.S.C. 2601-2617, was passed in 1974 by Congress in response to secret fees, profits, and kickbacks in the real estate market that are shared by brokers, mortgage lenders, title insurance companies, construction companies, and realtors.
Prior to the passage of this law, various parties in the home purchase, sale, and lending process would work in concert to increase fees and costs for the clients. They would then pass on the profits to each other in a variety of different schemes, unbeknownst to the clients.
The Consumer Financial Protection Bureau monitors and prosecutes all violations of the Real Estate Settlement Procedures Act.
For each loan, the lender must provide an estimate in good faith of the total cost of the loan, including all fees. Buyers will then be fully informed of what they are paying for and who the money is going to.
All kickbacks are now illegal under the Real Estate Settlement Procedures Act. A kickback is a payment, similar to a fee or commission, made to a third party as part of agreement. A kickback by nature involves collusion and secrecy. Often, one party will agree to do something illegal for another party in exchange for the kickback.
Here are some examples of kickback scenarios:
- A construction company and lender agree to partner and share proceeds of any maintenance services on mortgaged homes. The lender tells all prospective buyers that they are required to use the construction company for any maintenance on the home. The construction company charges fees that are much higher than all other local construction companies and gives some of the fees to the lender.
- A broker pushes clients to finance with a specific lender because the lender provides the broker with a secret 2% bonus on all sold property. This money is taken from the seller’s profits.
- A lender forces all applicants to purchase title insurance through a specified company for an outrageous sum of money. The title company then gives a portion of the price back to the lender.
Despite the Real Estate Settlement Procedures Act, illegal kickbacks still occur relatively frequently. If a recipient of a home loan notices something strange in his or her account, a “qualified written request” can be sent to the lender, requesting information on any potential errors in the account. However, this system relies on the honesty of the lender.
The best way to fight illegal kickbacks is to hire a real estate attorney. A lawyer who practices real estate law can review your contracts, point out flaws, and advise you on your legal options.