Real concern raised over Realtors as regulators

Nation's Housing

nation's housing

July 21, 2006|By KENNETH HARNEY | KENNETH HARNEY,EARTHLINK

When it comes to protecting consumers in the real estate market, are the wolves guarding the henhouse?

That's the conclusion of provocative new research by the Consumer Federation of America into the relatively obscure state regulatory commissions that oversee residential real estate. Whereas other key industries regulated at the state level - utility and insurance commissions, for example - typically are run by professionals independent of the industries they oversee, real estate commissions are dominated and essentially run by active real estate agents and brokers.

That, in turn, according to the CFA, makes them slow to act on consumer complaints and slow to introduce needed consumer protections, and prejudices them against "nontraditional" approaches such as limited-service, limited-cost options that can save consumers money. Sometimes the industry-dominated commissions are the primary authors of state regulations or legislation that directly harm home sellers and buyers, including statewide bans against realty fee rebates to customers.

The CFA examined the structures and membership of regulatory commissions in 47 states.

As of April of this year, 79 percent of all real estate commissioners were either "real estate agents, brokers or licensees," or individuals who otherwise "earn a living through real estate transactions," such as closing attorneys or title agents.

Four states - Idaho, Louisiana, Mississippi and Nevada - require that all commissioners be real estate brokers or salespeople. Another 11 states - Colorado, Kentucky, New Mexico, Ohio, Utah, West Virginia, Georgia, Indiana, Missouri, Oklahoma and Washington - "require at least four-fifths of commissioners to hold real estate licenses." Only two states - Rhode Island and Pennsylvania - prohibit licensed real estate agents from constituting a majority of commissioners.

Illinois, California and Minnesota are the only states that appoint "professional regulators who work full time to oversee the real estate brokerage marketplace."

One out of four real estate commissioners nationwide, according to the CFA, works for one of the four largest national real estate firms - Re/Max, Prudential, GMAC or one of NRT Inc.'s networks (Coldwell Banker, Century 21, ERA and Sotheby's). Even when state law requires the appointment of "public" interest commissioners, one in four is either a real estate attorney or a title agent.

"Realtors basically have the regulatory function sewn up and controlled by themselves, and the inherent conflicts are endless," said Stephen Brobeck, CFA executive director and co-author of the research project. The heavy weighting of real estate commissions with industry members "stacks the deck" in the industry's favor, he said, while harming consumers whenever the traditional brokerage industry's interests diverge from those of the public at large.

Real estate commissions often do not widely publicize their complaint-handling services, and when they do get complaints, the resolution process can be glacial, according to the CFA. In Texas during 2005, for example, "more than a half-million homes were sold, yet the Real Estate Commission reported [receiving] only 86 complaints that year." Other states provide minimal resources to handle consumer complaints, leading to long waits such as California's backlog of 3,663 unresolved cases as of 2004.

State commissioners also have allowed realty agents to ignore legislatively mandated requirements such as early, formal disclosure to consumers about whom the agent represents in a transaction. The National Association of Realtors cited agents' noncompliance with state disclosure rules as a growing problem in the industry earlier this year.

Realtor-dominated state commissions have opposed the growth of money-saving nontraditional brokerage approaches, especially those involving Internet-based firms, according to the CFA. In several states this year, realty commissions have sought to retain or enact bans against rebates to home buyers, and have supported "minimum service" regulations that discourage the growth of "unbundled" discount brokerage concepts where consumers assume greater responsibilities in the sale of their homes but pay brokers lower commissions or flat fees.

Last year, the Justice Department filed suit against the Kentucky Real Estate Commission for prohibiting all forms of rebates of agent commissions to consumers. The commission later rescinded its ban. The same regulatory commission also ran radio advertisements "suggesting that using non-full service brokers would [lower] the sales prices" home sellers could obtain in the market, according to the CFA.

Not surprisingly, the real estate industry disputes the CFA's conclusions. Though he had not seen the study, Malcolm Young, chief executive officer of the Louisiana Realtors Association, said the state legislature - not the industry - required that all nine commissioners be realty brokers or agents "because more than anybody else, [licensed agents] understand the complex issues" involved in real property transactions. Having industry representatives on the commission, he said, is analogous to oversight in other fields such as "nursing, cosmetology, engineering, property inspections" and the like.

Thomas Stevens, president of the National Association of Realtors, praised the services rendered to the public by the dozens of active agents who serve on state-appointed regulatory commissions "just like doctors, lawyers and other professionals."

kenharney@earthlink.net

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