RESPA (Regulation X): kickbacks, escrow accounts and servicing answers, explained

RESPA polices the money that moves around a closing — referral fees, escrow cushions, servicing transfers — and makes your servicer answer written questions on a clock.

Congress passed the Real Estate Settlement Procedures Act in 1974 after hearings showed that home buyers were paying inflated settlement charges driven by hidden referral fees between lenders, title companies, agents and insurers. HUD administered the law for decades; since 2011 it sits with the CFPB as Regulation X, 12 CFR Part 1024. RESPA is the other half of the TRID disclosure system (with TILA), but most of its text is about conduct rather than forms: who may pay whom for a referral, how much a servicer may hold in escrow, and how quickly a servicer must respond when you write to it.

Scope: “federally related mortgage loans”

RESPA applies to a federally related mortgage loan, which in practice means nearly every loan secured by a lien on a one-to-four family residential property made by a regulated lender, insured by FHA or VA, or intended for sale to Fannie Mae or Freddie Mac. The exemptions are specific:

Loans primarily for business, commercial or agricultural purposes, using the Regulation Z definition, which is why most investor and hard money financing is outside RESPA.
Temporary financing such as a construction loan (unless it may be converted to permanent financing by the same lender or is used to finance a transfer of title).
Loans secured by vacant land or property of 25 acres or more.
Assumptions where the lender has no right to approve the new borrower, and loan conversions without a new note.
Secondary-market transactions: the sale of a loan from one investor to another is not a settlement.

Section 8: the anti-kickback rule

Section 8 prohibits giving or accepting any fee, kickback or thing of value in exchange for referring settlement service business, and prohibits splitting charges for services that were not actually performed. A real estate agent cannot be paid by a title company for sending clients; a lender cannot pay a builder for steering buyers; “marketing service agreements” are scrutinized for disguised referral payments. Penalties are unusually sharp for a consumer statute: up to one year in prison and a $10,000 fine per violation, and in a private action the borrower may recover three times the charge paid for the tainted service, plus attorney’s fees, within one year of the violation.

Related rules: an affiliated business arrangement (your lender owns part of the title company it recommends) is lawful only if you receive a written disclosure, generally at or before referral, stating the relationship and that you are free to shop elsewhere. Section 9 forbids a seller from requiring that you buy title insurance from a particular company as a condition of the sale.

Section 10: escrow account limits

A servicer may require an escrow account for taxes and insurance, but RESPA caps what it can hold. The cushion cannot exceed one-sixth of the annual disbursements — two months of escrow payments. You must receive an initial escrow statement within 45 days of settlement and an annual analysis thereafter. If the analysis shows a surplus of $50 or more and your loan is current, the servicer must refund it within 30 days; a shortage can be spread over at least 12 months. The servicer must pay taxes and insurance on time when you have paid into escrow, and is liable for penalties caused by its late payment.

Section 6: servicing, transfers and written requests

Most of the 2013 CFPB mortgage servicing rules were written into Regulation X under Section 6. The parts most borrowers meet:

Servicing transfer notices. The old servicer must notify you at least 15 days before the transfer date, the new servicer within 15 days after (a combined notice is allowed). For 60 days after the transfer, a payment sent to the old servicer on time cannot be treated as late.
Notices of error and requests for information — the successors to the old “qualified written request.” The servicer must acknowledge within 5 business days and respond within 30 business days (extendable by 15 with notice), within 7 business days for payoff errors, and before a scheduled foreclosure sale for errors involving the sale. While a notice of error is open the servicer may not report the disputed payment as delinquent to a credit bureau.
Homeownership counseling list. Within three business days of an application, the lender must give you a list of HUD-approved counseling agencies near you.

What RESPA leaves alone

RESPA does not cap closing costs, does not set the price of title insurance, and does not decide which services you need. It does not apply to loans on commercial property or to most investor loans. It says nothing about whether a loan is affordable, and it gives no private remedy for a missing counseling list or an affiliated business disclosure on its own; those are enforced by regulators.

Using RESPA

Shop the settlement services you are allowed to shop (the Loan Estimate tells you which), and ask any “preferred” provider whether your lender or agent has an ownership interest. When your loan is transferred, keep both notices and proof of payments during the 60-day grace period. When something is wrong with your account — a misapplied payment, an escrow charge you do not recognize, a fee you were never told about — send a written notice of error to the address the servicer designates for that purpose (it is on your statement), dated and with your loan number, and calendar the deadlines above. For servicing violations the statute of limitations is three years and a borrower may recover actual damages plus up to $2,000 in statutory damages for a pattern of noncompliance. Complaints go to the CFPB; a housing counselor can help draft the letter, as described in our HUD housing counselor guide.

Key points

Enacted 1974; Regulation X (12 CFR 1024), administered by the CFPB since 2011 (HUD before that).
Applies to “federally related mortgage loans” on 1–4 family property; business-purpose, construction-only, 25-acre-plus land and secondary-market transfers are exempt.
Section 8 bans referral fees and unearned fee splits; penalties include treble damages, a $10,000 fine and up to a year in prison.
Affiliated business arrangements must be disclosed in writing; sellers may not require a specific title insurer.
Escrow cushion capped at two months of payments; surpluses of $50 or more refunded within 30 days; annual escrow analysis required.
Servicing transfers: 15-day notices before and after, 60-day grace period for payments sent to the old servicer.
Notices of error and information requests: acknowledgment in 5 business days, answer in 30 business days (7 for payoff errors).
Private actions: one year for Section 8/9 claims, three years for servicing claims; CFPB complaints available at no cost.

How RESPA applies to you

Frequently asked questions

Can my real estate agent require me to use a particular lender or title company?

No. RESPA bars payments for referrals, and a seller may not condition the sale on a specific title insurer. An agent may recommend providers, and may be affiliated with one, but must disclose any affiliation in writing and tell you that you are free to shop. If you suspect a required referral or a hidden fee, keep the paperwork and report it to the CFPB.

How much can my servicer keep in my escrow account?

Enough to pay the coming year’s taxes and insurance, plus a cushion of no more than one-sixth of the annual disbursements — two months of escrow payments. The servicer must run an annual analysis, refund any surplus of $50 or more within 30 days if the loan is current, and may collect a shortage over at least 12 months. Your state law may be stricter.

What happens if I pay the old servicer after my loan was transferred?

For 60 days after the effective date of the transfer, a payment received by the old servicer on or before its due date cannot be treated as late or trigger a late fee; the old servicer must forward it or return it. Keep your transfer notices and proof of payment in case the new servicer’s records show a missed payment.

Is a notice of error the same as a qualified written request?

Functionally, yes. The 2013 servicing rules replaced the qualified written request with two procedures, a notice of error and a request for information, with the same core deadlines: acknowledgment within 5 business days and a substantive response within 30 business days. The letter should go to the address the servicer designates for those requests, which appears on periodic statements.