Clashing Class Actions on the Buyer Broker Commission Rule Remind Us That State Oversight & Governance is Still Needed

The proposed settlement in the big National Association of Realtors case out in Missouri includes “Buyer Broker Commission Rule” practice changes in exchange for avoiding a $1.78 billion jury verdict.

The NAR settlement in Missouri only removes offers of Buyer Broker compensation from MLS listings. Realtors can still enter into Exclusive Listing Agreements that continue commission sharing; but the sharing can’t be visible to Buyer Brokers on MLS. The U.S. Department of Justice is right in doubting that this change makes sense, or that it will end the anti-competitive “steering” that is at the heart of the anti-trust issues. Any real consumer-oriented solution ultimately comes back to state oversight and the proper governance of state regulatory, oversight and consumer protection institutions.

The NAR and other “copy-cat” class action lawsuits give all states the opportunity to properly oversee a very important consumer service industry; but we cannot expect state regulated Broker practices to be completely and forever sorted out by separate federal court class action lawsuits. In fact, the problematic Broker commission sharing practices (on which all the class action lawsuits are focused) ultimately depend on the rights and obligations allocated to Listing Brokers in a Broker’s Exclusive Listing Agreement with a particular Seller. And the scope and limitations to those rights and obligations is subject to state law establishing the overall role and responsibilities of real estate brokers and their agents.

As can be seen from yesterday's stay (see photo) by Judge Patti B. Harris in the Nosalect v MLS PIN class action, "pending ruling by Judge Bough on the NAR proposed settlement", the legal wrangling among, and cross-pollination of, all the class action parties s is still a work in progress. At best, it won’t be sorted out until the end of the year. In the meantime, each state has an opportunity to strengthen consumer-oriented oversight of Broker practices.

?For example, the perverse practice of a Listing Broker pocketing the 3% commission intended for Buyer's Broker, under the fiction that the Listing Broker is a “Contributing Broker”, is clearly an unfair and deceptive trade practice. If a state’s oversight institutions want to make that clear to Brokers, they can. ?On the other hand, to the extent that any state continues to look the other way on this practice, then little will change in that state, whatever final practice changes come out of the many class action lawsuits.

In fact, allowing Selling (Listing) Brokers to pay themselves a Buyer Broker commission provides a perverse incentive for Brokers to delay MLS listings. Any delay, say because of Broker recommended pre-sale renovations, provides the Selling Broker with time to claim “Contributing Broker” status, in order to double its commission -- even if the Seller hurt because of a lack of competitive bidding on his or her house. While every anti-trust class action lawsuits is focused on Broker abuse of their MLS systems, in the end, a strong MLS and public marketing of homes is pro-consumer and pro-competition.

But correcting the "steering" and anti-trust problems with the real estate industry's current commission sharing practices, or any other specific reform, is secondary to the need for each states to look at its overall regulatory and governance structure. The objective of every state should be to position the state to better deal with all realtor practices, even those that will only come into existence down the road.

Here are a few suggestions, referencing the institutions in my home state, Florida:

1)????? Amend the Florida statute that gives effective control of Florida’s Real Estate Commission (FREC) to the Florida Realtor’s Association. FREC was created to “protect the public”; but Florida law requires that four of seven Commissioners be long term brokers; another must be either a broker or sales associate for at least 2 years; and only two can be non-realtors representing consumers.

2)????? Florida Bar’s Unlicensed Practice of Law Committee, acting on behalf of the Florida Supreme Court, should look at the realtor exemption from unlicensed practice of law rules. This exemption was granted in 1953, when all real estate Brokers had a common law fiduciary duty toward residential Buyers and Sellers. Florida’s legislature removed this common law duty for Transaction Brokers in 1997. Transaction Broker status is now the default; but all Brokers still have an exemption from the special fiduciary duties of loyalty and confidentiality that ordinarily govern the providing of legal advice.

Brokers provide consumers with complicated FAR/BAR contracts that, once signed, give Buyers and Sellers liabilities that they never contemplated. For example, the FAR/BAR contract indemnifies a Listing Broker for pre-sale renovation related services. With no sense of embarrassment, the indemnification, hold harmless, and release language protects the Broker with respect to common Broker services (including pre-sale renovation) that are “beyond the scope of services regulated by Chapter 475, F.S.”. This includes a Broker’s “referral, recommendation or retention of any vendor for, or on behalf of” Buyer or Seller. And Florida Brokers know what Florida consumers do not; namely, that Broker renovation services are not regulated by Chapter 475.

3.????? Florida Bar appointments to the Florida Realtor-Attorney Joint Committee should focus on consumer law expertise and minimize the appointment of attorneys who are materially dependent on business from realtors. The purpose of the Joint Committee is realtor oriented: “The committee promotes cordial relations between realtors and attorneys and presents educational seminars.” ?So, Brokers tell Buyers and Sellers that the “FAR/BAR” purchase & sale contract that they use has been approved by the Florida Bar. Even the Florida Real Property Probate and Trust Law Section of the Florida Bar has a realtor-oriented mission: “to support the accord between Florida Realtors and The Florida Bar through the efforts of the Florida Realtor-Attorney Joint Committee and the FR/BAR contract”.

These three consumer-oriented governance changes come with no specific pre-determined practice changes. But they will help to give Florida consumers a sense that oversight of our important real estate industry is really intended to protect the public.

The particular institutions of each state will, of course, vary. For example, many states do not exempt real estate Brokers from unlicensed practice of law rules; and/or they have institutionalized attorney review rights for Buyers and Sellers to have a fiduciary who is knowledgeable on contract and real estate law, review the purchase and sale contracts provided by Brokers.