Washington, D.C. – Last week, the U.S. Department of Justice’s Antitrust Division announced that it was withdrawing from the proposed settlement with the National Association of Realtors (NAR) “to permit a broader investigation of NAR’s rules and conduct.”
“This withdrawal by the Department of Justice is good news for consumers for two reasons: first, the proposed settlement would not have significantly advanced price competition in a marketplace with high, fairly uniform commissions; and second, the settlement threatened to undercut several class-action lawsuits that seek to remove the most important barrier to price competition,” stated Stephen Brobeck, a senior fellow at the Consumer Federation of America (CFA).
The key elements of the proposed settlement were that (1) brokers were to make the commission offered to buyer agents on multiple listing services (MLS) publicly available, and (2) buyer agents were prohibited from representing their services as free to consumers. “Although the proposed settlement would have given buyers more information about buy-side commissions, it would not have given these home purchasers adequate opportunity to negotiate these fees,” noted CFA’s Brobeck. “This opportunity would only occur if buyer and seller commissions were uncoupled, the main goal of class-action lawsuits that have advanced in the courts,” he added.
Proposed Settlement Would Not Have Created Price Competition
The key barrier to price competition is the NAR’s buyer broker commission rule that requires all brokers to make a blanket, non-negotiable offer of buyer broker compensation to participants in the MLS. This rule institutionalizes a very strange and anti-competitive method of broker compensation. Sellers and their listing agents decide the commission to be paid to the buyer broker working with the home purchaser. Buyers not only cannot negotiate this commission but usually are not aware of its level because buyer brokers either do not discuss it with them or inform them that it is paid by the seller.
On the other hand, sellers have little ability to negotiate the commission rate down. If asked, their agents will correctly inform sellers that if they offer a low buyer broker commission, buyer agents may steer prospective buyers away from their property. While sellers ostensibly have the ability to negotiate the commission they pay to their own agent, research by CFA shows that when home sellers ask agents whether they would lower this commission, three-quarters refused to do so.
“Real estate agents compete vigorously for clients but not by offering lower commissions,” said CFA’s Brobeck. “As a result, commissions remain high and fairly uniform,” he added. A large majority of commissions range from five to six percent and are the same in a particular area. Listing agents, though, will sometimes cut one-half or one percent off their commission if the home is expensive, they are the sole agent involved in the sale, or if they help a consumer sell their home and purchase a new one. Even then, the agent usually receives at least $20,000 in commission on the sale of a $400,000 home. In England, by comparison, real estate agents typically receive less than two percent for facilitating the sale of a home.
The proposed settlement would, depending on the effectiveness of the buyer agent commission disclosures, have discouraged steering. But it would not have given buyers the ability to negotiate these commissions. A CFA analysis of the proposed settlement noted several ways that agents could easily thwart the intention of the fee disclosure.
Proposed Settlement Would Have Undercut Class Action Antitrust Lawsuits
Several class-action lawsuits seek remedies for lack of price competition by requiring an uncoupling of listing broker and buyer broker commissions. Both buyers and sellers would negotiate and pay their own commissions. Buyers would then have the ability to negotiate down buyer agent commissions that are usually 2.5 to 3 percent. More sellers would be likely to seek a lower commission from their listing agent. Discount brokers using MLSs, now hamstrung by coupled commissions forcing them to offer buyer brokers the going commission rate, would be free to offer real discounts. The practice of newly licensed, unskilled agents charging the same commission as highly competent, experienced agents would no longer be supported by industry rules.
In the first two lawsuits – Moehrl v. NAR and Sitzer v. NAR – the courts have already rejected the request of the NAR for dismissal of the cases. The 25-page decision of the court hearing on Moehrl found: “In sum Plaintiffs allegations plausibly show that the Buyer-Broker Commission Rules prevent effective negotiation over commission rates and cause an artificial inflation of buyer-broker commission rates.” The court noted that it’s decision was “in accord with conclusions reached by a district court addressing the same issues in Sitzer v. NAR.”
The proposed settlement would have undercut these class action lawsuits. An opinion piece written by a real estate broker and published in Inman News (Michael Lissack, November 23, 2020) asserted that “the Moehrl lawsuit has thus been rendered moot. The DOJ has taken action on the two claims at issue, and it disagreed with Moehrl’s proposed remedy.” The author added: “The DOJ-NAR settlement works to pre-empt alternative resolutions of the issues common to all three lawsuits: disclosure and rules.” Noted CFA’s Brobeck: “While it may be an exaggeration to say that the lawsuit was ‘rendered moot,’ the proposed settlement would certainly have been used by the NAR in its defense and possibly to great effect.”
Did the NAR Cut a Deal With Trump Officials to Undermine the Lawsuits?
There is no disputing that the proposed settlement would have posed challenges to plaintiffs in the class action lawsuits. And there is some circumstantial evidence to suggest that the NAR cut a deal with Trump officials to undermine the lawsuit.
- As noted above, the proposed settlement would have weakened and possibly devastated the claims of plaintiffs in the class action lawsuits against the NAR and other industry groups.
- The settlement would have limited DOJ’s pursuit of other antitrust claims against the NAR.
- The NAR appears to have readily assented to the proposed settlement even though it had previously defended NAR Rules that forbid MLSs from making buyer broker commissions public.
- The proposed settlement was announced in November 2020 just after the election.
- The Assistant Attorney-General heading the Antitrust Division and the Division Deputy Assistant Attorney-General who signed the original complaint both joined the Department of Justice and received these appointments during the Trump Administration. Both left DOJ after the election in early 2021.
- The Biden administration appointed a career DOJ official to the position of Assistant Attorney-General heading antitrust. The Deputy Assistant-General position is now vacant.
- It is very unusual for DOJ to withdraw a proposed antitrust settlement. The NAR called it a “complete, unprecedented breach of agreement.”
Noted CFA’s Brobeck: “One can speculate that the proposed settlement received strong pushback from some career officials strongly committed to impartial antitrust enforcement. After the election, these officials were able to delay a final settlement until after the departure of the Trump appointees and their replacement by career officials. There ensued a months-long negotiation with the NAR to give the DOJ greater ability to continue pursuing anti-competitive practices by the industry. When the NAR refused to budge, or budged only a little, the DOJ decided to withdraw the proposed settlement.”
Contact: Stephen Brobeck, sbrobeck@consumerfed.org