Washington, D.C. – Today, the Consumer Federation of America (CFA) released a report on state real estate commissions, State Real Estate Commissions: Do They Serve the Consumer Interest?, which found the commissions to be dominated by the industry. These commissions (also called boards) are state agencies with prime responsibility for regulating real estate agents, brokers, and their firms.[1]
- Of the 378 seats in these commissions, only 15 percent are held by individuals outside the industry (or allied industries such as banking or real estate law).
- Of these 378 seats, none are held by a consumer or housing advocate.
- Only one commission is required to have a majority of non-industry members (New York State Board of Real Estate).
The report also documented the short-changing of home buyers and sellers because of this industry domination.
- Only 11 state commission websites provide adequate consumer information, while 21 of the agency websites ignore home buyers and sellers. The home pages of the latter contain no mention of consumers, nor is there a separate consumer page with important information about whether an agent is licensed, when an agent has been disciplined, when agents represent or do not represent buyers and sellers, existing consumer rights and protections, and how to complain about unfair practices.
- State commissions do not make a sufficient effort to enforce agency disclosure laws. A 2018 national survey commissioned by CFA found that two-thirds of respondents mistakenly thought that real estate agents “always” or “almost always” were required to represent the interest of the home buyer or seller with whom they were working. Yet, many consumers end up working with a dual agent, a transaction broker, or a fiduciary agent to the other party in the sale. The 2020 National Association of Realtors’ annual survey of home buyers and sellers reported that only 26 percent of surveyed buyers indicated that they received the disclosure at the first meeting with the agent. The timing of the disclosure is especially important for buyers since their first agent contact is often with a fiduciary agent to the seller.
- State real estate commissions have a mandated responsibility to receive, investigate, and act on complaints against licensed real estate agents. However, the commissions do not have the authority to provide restitution to complainants who have been treated unfairly. Most states maintain “recovery funds” to allow aggrieved consumers to apply for restitution, but complainants only qualify if they have obtained a favorable court or mediation decision. Moreover, we could find little evidence that real estate commissions routinely notify the state attorney-general or consumer protection agency of egregious consumer complaints.
- For the few states that publicly report information about complaints and disciplinary actions: Fewer than 10 percent of complaints led to disciplinary actions – a citation, fine, license suspension, or license revocation. A majority of these actions (60-70 percent) are related, not to a consumer complaint, but to an agent’s criminal conviction or lack of a real estate license.
“The state commissions do confer value to home buyers and sellers because their licensing of and ability to penalize agents for a wide variety of offenses certainly deters agents from committing these offenses,” noted Stephen Brobeck, a CFA senior fellow and the report’s author. “However, it is no surprise that many commissioners from the industry ignore consumers or fail to understand and appreciate the important role of their commission in informing and protecting home buyers and sellers,” he added.
Governors and State Commissions Urged to Include Consumer and Housing Advocates
The report recommends that state governments should shift authority from the commissions to state officials and ensure effective consumer representation on the commissions themselves. It also acknowledges that commissions representing all important stakeholders, including realtors and consumers, could play an important role in advising state regulators. The smaller commissions may need to expand in size to ensure the representation of these stakeholders.
While this major reform may take time, state governors should immediately appoint at least one consumer or housing advocate to serve as a public member on each commission. Others who could productively serve as non-industry members include a state attorney-general representative (required in Pennsylvania and Rhode Island) and law professors and economists with no industry ties. Maryland, commendably, appointed a retired member of the state ethics board to its commission.
“Just a single consumer or housing advocate sitting on a commission would likely have a positive impact on the work of the commission,” noted CFA’s Brobeck. “At the very least, the commission would feel obligated to recognize and provide information to home buyers and sellers on their website, to make greater efforts to enforce agency disclosure laws, and to refer egregious consumer complaints to the state attorney-general or consumer protection agency,” he added.
A large majority of Americans support public and consumer representation on commissions. In September, CFA commissioned an online survey of 1,003 representative Americans from Ipsos, the international survey and marketing firm. In response to a question about participation of industry and non-industry members on these commissions, 29 percent said that commissions should continue to include more industry members than non-industry members, 43 percent said that there should be equal numbers of industry and non-industry members, 20 percent said that there should be more non-industry members than industry members, and 8 percent said that there should be no industry members on the commissions.
Entire Residential Real Estate Industry is Under Scrutiny
This third CFA report on state real estate regulation is being released at a time when the brokerage industry is facing much public scrutiny and criticism, especially for anti-competitive practices. Several major antitrust class action lawsuits have been filed against the National Association of Realtors (NAR) and other industry leaders. In rejecting the industry’s appeal for dismissal of the most significant case (Moehrl v. NAR), the court found that MLS rules “plausibly show that the [industry’s] buyer-broker commission rules…cause an artificial inflation of buyer-broker commission rates.” The U.S. Department of Justice has collected data on these rates and, in July, withdrew from the settlement of a DOJ lawsuit against the NAR “to permit a broader investigation of NAR’s rules and conduct.” Moreover, a White House antitrust agenda released more recently targeted the coupling of buyer broker and listing broker commissions. A principal goal of the class action lawsuits, and a reform priority of CFA, is the uncoupling of these commissions to allow buyers to negotiate lower rates, to curb the steering of buyers to listings carrying the highest commissions, and to free discount listing brokers from having to charge high buyer broker commissions.
While the industry has actively defended itself against this criticism and litigation, the industry-dominated commissions have sat on the sidelines of these controversies. However, a number of commissions in the past supported and defended anti-competitive practices, notably state bans on buyer broker rebates and agent minimum service requirements. We have seen no evidence that the commissions in the ten states with rebate bans, or the at least half-dozen states with minimum service requirements, have opposed these restrictions on competition.
“State real estate commissions should not escape the scrutiny that the industry has been under,” said CFA’s Brobeck. “The lack of independent and effective regulation has contributed to the anti-competitive practices that are the subject of private and government anti-trust litigation,” he added.
[1] California and Minnesota do not have real estate commissions, and the commission in Illinois has an advisory role to state officials.
Contact: Stephen Brobeck, sbrobeck@consumerfed.org