Ch6. Real Estate Transaction Disclosure — RESPA, TRID & Reporting Requirements

Real Estate Settlement Procedures Act (RESPA)

RESPA:
Federal law governing residential real estate transactions
(1-4 family properties with federally related mortgages)

Key requirements:
Loan Estimate (LE): provided within 3 business days of
loan application — discloses estimated costs
Closing Disclosure (CD): provided 3 business days before
closing — final costs

Prohibited practices:
Kickbacks and unearned fees between settlement service
providers (e.g., lender-agent referral arrangements)
Excess escrow account deposits

Reporting entity:
Settlement agent / escrow officer prepares HUD-1 / CD
Lender responsible for RESPA compliance

Violations:
Civil penalties, criminal charges for willful violations
Private right of action for consumers

TRID — Loan Estimate & Closing Disclosure

TRID (TILA-RESPA Integrated Disclosure):
Combines Truth in Lending Act (TILA) and RESPA disclosures
Effective for applications on or after October 3, 2015

Loan Estimate (LE):
Provided within 3 business days of loan application
Shows estimated interest rate, monthly payment,
closing costs, APR

Closing Disclosure (CD):
Provided at least 3 business days before consummation
Shows final loan terms and all closing costs

Three-day waiting period:
Cannot close loan until 3 business days after CD delivery
Applies to most residential purchase mortgages

TRID tolerance limits:
Certain fees cannot increase between LE and CD
Lender fees: zero tolerance
Third-party services on approved list: 10% aggregate cap

Foreign Buyer Disclosure — FIRPTA

FIRPTA:
Foreign Investment in Real Property Tax Act
Requires withholding of tax when foreign persons sell
US real property

Withholding obligation:
Buyer must withhold 15% of gross sale price (as of 2016)
and remit to IRS on behalf of foreign seller

Definition of foreign person:
Non-resident alien individual
Foreign corporation, partnership, or trust

Exemptions:
Sale price under $300,000 and buyer uses as residence
→ withholding reduced or waived
IRS withholding certificate obtained by seller

State-level requirements:
Many states have additional foreign buyer disclosure forms
Some states require reporting on all cash transactions

Controlled Areas & Regulated Transactions

CFPB oversight:
Consumer Financial Protection Bureau enforces RESPA/TILD
Regulates mortgage lenders, servicers, and settlement agents

Affiliated Business Arrangement (AfBA):
Allowed if disclosed to consumer and not coercive
Example: lender and title company under same parent company

Anti-Steering Rules:
Loan officers prohibited from steering borrowers to
higher-cost loans for compensation purposes
(Regulation Z / Dodd-Frank)

State disclosure laws:
Most states require Transfer Disclosure Statement (TDS) or
equivalent seller disclosure form
California: TDS mandatory; New York: Property Condition
Disclosure Statement; Texas: Seller's Disclosure Notice

Penalties for non-disclosure:
Rescission of sale, damages, and attorney fees
Criminal fraud charges for intentional concealment

Key Concept Cards

TRID = 3-Day Rule ★★★★★ : Buyer must receive the Closing Disclosure at least 3 business days before loan consummation. Closing cannot occur during this waiting period. Memory hook: CD = 3 days before closing

FIRPTA Withholding = 15% ★★★★★ : Buyer must withhold 15% of gross sale price when purchasing from a foreign seller and remit to the IRS. Memory hook: Foreign seller → buyer withholds 15% for IRS

RESPA Kickback Prohibition ★★★★☆ : Unearned referral fees and kickbacks between settlement service providers are illegal under RESPA Section 8. Memory hook: RESPA = no kickbacks for referrals

Practice Quiz

Q. What is the difference between the Loan Estimate and the Closing Disclosure under TRID?

The Loan Estimate is provided within 3 business days of a complete loan application and shows estimated costs — it is not a final commitment. The Closing Disclosure is provided at least 3 business days before closing and shows the actual final terms and costs. Certain fees (especially lender fees) cannot change between the LE and CD; others are subject to tolerance caps. If fees increase beyond tolerance, the lender must cure the violation by refunding the excess.

Q. What happens if a buyer fails to withhold FIRPTA taxes when purchasing from a foreign seller?

The buyer becomes personally liable to the IRS for the amount that should have been withheld (up to 15% of gross sale price), even if the seller never pays the tax. The IRS can pursue collection from the buyer directly. Buyers should always determine the seller’s residency status before closing — typically through a non-foreign affidavit (FIRPTA affidavit) provided by the seller, or by engaging an escrow officer to handle the withholding obligation.