Settlement Statement

A breakdown of costs involved in a real estate sale.

Before real estate is sold, federal law requires both the buyer and seller to provide a settlement statement. This official document lists all the costs involved in the sale. A settlement statement is typically prepared by either a lender or a third party known as an escrow agent, who must follow the regulations set forth in the Real Estate Settlement Procedures Act of 1974 (RESPA) (12 U.S.C.A. § 2601 et seq.). RESPA is a Consumer Protection law enforced by the federal Housing and Urban Development Department (HUD).

Historically, the secondary costs in real estate transactions have been expensive. These costs include broker's fees and appraiser's fees, some of which are required by lenders in real estate deals. Buyers and sellers have not always known the full extent of these costs in advance. Responding to the maze of hidden costs during the early 1970s, both the secretary of HUD and the administrator of Veterans' Affairs petitioned Congress on behalf of reform that would reduce the likelihood of unpleasant surprises for consumers.

RESPA set forth four goals. First, it attempted to improve advance disclosure of settlement costs to home buyers and sellers. Second, it sought to eliminate corruption in the form of kickbacks or referral fees that unfairly inflate settlement costs. Third, it aimed to reduce the amounts home buyers are required to deposit in an escrow account—in this case, a bank account established to ensure the payment of real estate taxes and insurance. Finally, Congress wished to modernize an outmoded system of local record keeping of land title information.

Besides a full accounting of sale costs, RESPA requires lenders to keep settlement statement records for five years or until they dispose of the loan. It provides no civil penalties for lenders who fail to properly disclose information. However, section 8, which includes anti-corruption measures, sets forth criminal and civil penalties for illegal referral fees: it is designed to keep intermediaries in the deal from cheating consumers by piling up costs.

In the 1990s the scope of RESPA expanded. Initially RESPA had only covered home purchase loans, but it grew to include refinances and subordinate lien loans with the enactment of the Housing and Community Development Act of 1992 (Pub. L. No. 102-550, 106 Stat. 3672). These changes took effect in 1994 after HUD amended its rules (24 C.F.R. pt. 3500). As a result, lenders providing Equity or second mortgage loans, home improvement financing, and mobile home financing came under the regulation of RESPA.

The expansion of RESPA brought complaints from the finance industry about the burden of excess regulation. Yet with the signing of the Housing and Community Development Act by the usually antiregulatory President george h. w. bush, Washington signaled its approval of the benefits for consumers in regulating costs in real estate transactions.