Managing risk requires a basic understanding of the legal theories upon which legal liability is based. Statutes, regulations, and court cases define the relationships between a licensee (real estate or mortgage) and a seller, buyer or borrower. These laws are constantly evolving. As a result, licensees must continually keep up-to-date on changes that may influence their real estate practice.
The focus of this article is on liability based upon the violation of law.
Licensees can be held liable for the violation of various laws. Depending on the law violated and the nature of the violation, the penalties can range from the governing regulatory agency disciplinary action, to civil penalties and criminal action. A brief discussion of the more important areas of law violation follows:
- Agency law – A real estate licensee representing a client is necessarily involved in an agency relationship. The majority of licensee exposure to violations of agency law occurs in three areas:
- Entering into an unintentional undisclosed dual agency relationship
- Non-compliance with agency disclosure and documentation requirements
- Breach of an agent’s fiduciary duties.
The details of agency law violations will be explored in a subsequent article.
- Fair housing law – Fair housing law prohibits discriminatory conduct with respect to certain classes of individuals in certain situations. The issues relating to potential housing law violations will be discussed in more detail in a subsequent article
- Antitrust law – Antitrust law violations relate to conduct that restrains trade. The majority of the violations relating to the practice of real estate may be classified as conduct in restraint of trade, boycotts and tying arrangements (tying one agreement to another). The issues relating to antitrust law liability will be discussed in more detail in a subsequent article
- RESPA – RESPA stands for the Real Estate Settlement Procedures Act. The purpose of the act was consumer-oriented, in that it requires numerous consumer disclosures and prohibits certain abusive settlement practices. The act applies to all transactions involving federally related loans, including those insured by the FDIC. Most of the RESPA requirements are the responsibility of the lender and those engaged in mortgage lending. However, certain RESPA rules also affect real estate licensee practice. The two main issues relating to real estate licensees where potential liability may exist for violation of the law are:
- Prohibited Settlement Practices – Kickbacks, Fee-Splitting, Unearned Fees – RESPA banned a number of practices that involved kickbacks, fee-splitting, and unearned fees by parties involved or related to a real estate transaction. These unearned fees and kickbacks were often adding to the cost of settlement services. It was therefore deemed in the best interest of the consumer to ban, or at the very least, reign in these types of practices. The ban on these practices may be found in RESPA, Section 8.
RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed. Examples of such prohibited fee arrangements are lenders giving a referral fee to a real estate agent referring a purchaser, title companies giving kickbacks to lenders who refer their loans to a title company in exchange for something of value or appraisers sharing the appraisal fee with the lender who ordered the appraisal for a borrower.
However, nothing in the law prohibits agents from identifying and recommending service providers who will perform quality services for the client. Recent consumer research suggests that homebuyers want real estate agent recommendations for providers of homebuyer related services. These services may include inspection, title, escrow, loan, pest control, land survey, home insulation, home warranty, lead-based paint and radon inspections, and many others. A recent study conducted by the National Association of Realtors® relating to the profile of homebuyers and sellers offered no theories as to why agents don’t make a wider range of service provider recommendations to their clients. Many industry analysts have identified a trend where real estate agents are offering clients more formalized and extensive service provider recommendations. This trend will fulfill the need of buyers who want recommendations from agents whose judgment they trust. The real estate agent also benefits from providing these recommendations, as they become a valuable part of the package of professional services offered to the client.
Violations of RESPA’s anti-kickback, referral fees and unearned fees provisions are subject to criminal and civil penalties. If brokers or agents are to receive fees from lenders or other service providers involving the settlement process, legal counsel should be engaged to determine whether the fee arrangement meets the requirements of RESPA. For example, a lender may be able to provide a fee to a real estate agent if the agent prepares collects the original borrower information from the purchaser and provides this package of information to the lender. However, the rules and regulations regarding this type of activity are very specific and must be followed. Criminal penalties may result in fines of up to $10,000 and imprisonment for up to one year. In civil litigation, the borrower may recover up to three times the amount of the charge paid for any violation of the anti kickback, fee splitting or unearned fee provisions.
- RESPA Section 9 – Seller Required Title Insurance – RESPA Section 9 prohibits a seller from requiring the homebuyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount that is equal to three times all charges made for the title insurance.
It has long been the practice for listing agents in many areas of the country to indirectly (through the seller) require that a particular title company be used as a condition of the sale. This practice is prohibited under RESPA, Section 9. It should be noted that title services are not the same as escrow services. The listing agent and/or seller may try to require use of a specific escrow company. However, the seller and/or listing agent cannot require that the title insurance policy be obtained from a specific company. The title companies make the majority of their profits off title the issuance of title policies, not by providing escrow services. Therefore, it would be unusual for escrow services to be provided by one company, with another company issuing the title policy.
- Violation of predatory lending laws – Predatory lending is any lending practice that intentionally places consumers in loan products with significantly worse terms and/or higher costs than loans offered to similarly qualified consumers in the region for the primary purpose of enriching the loan originator and with little or no regard to the costs to the consumer. The following are examples of common predatory lending practices:
- Refinancing with a “cash-out” that provides little or no equity in the property
- Sub prime lending is offered without proper disclosures.
- The borrower obtains a HELOC (Home Equity Line of Credit), which is a line of credit, as opposed to a loan for a specified sum, and which is always an adjustable rate. The problem with HELOCs is they have no limit on the size of the interest rate adjustment.
- Refinancing from to an adjustable rate mortgage (ARM) in order to lower the payment required under an in place fixed rate mortgage.
Lenders, mortgage brokers and real estate licensees should assist their clients to avoid entering into loan transactions that are predatory in nature. All proper RESPA loan disclosures must be made within the time parameters prescribed by law. These disclosures will provide the prospective borrower with information relating to the financial details of the quoted loan transaction.
- Real estate law and mortgage license law – Real estate and mortgage laws and requirements for licensing are derived from a state’s exercise of its police power to enact laws for the protection of the public’s health, safety and welfare. Each state has enacted laws and implementing regulations that further amplify and expand upon the basic statutory language of the enacted laws. These two bodies of law are the main rules regulating the practice of real estate and mortgage brokerage. Violations of the real estate law or mortgage laws are subject to disciplinary action by the governing regulatory agency. Penalties may range from a letter of reprimand, to license suspension or revocation. Fines are also a possible penalty. A referral to the appropriate authority for criminal prosecution is also possible. It is beyond the scope of this course to enumerate or discuss that many violations of law which may expose a licensee to disciplinary actions or penalties. However, as a part of any risk management program, a licensee should be familiar with the real estate law and regulations or mortgage law and regulations as applicable.
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