Realtor-backed legislation that would ban cash rebates to consumers in real estate transactions awaits the governor’s signature in Tennessee.
The U.S. Department of Justice opposes the bill, which it alleges “would impede real estate brokers from competing on price and force Tennesseans to pay more in real estate commissions.” Also, the legislation would reverse a decision earlier this month by the Tennessee Real Estate Commission, a regulatory agency, to repeal a statewide ban on real estate cash rebates. The commission’s decision, according to the Justice Department, was in response to the department’s investigation of the state’s rebate restrictions.
Tennessee Association of Realtors officials say the legislation is pro-consumer and could lessen the risk that consumers will be drawn to participate in risky real estate deals.
“The new law simply affirms Tennessee’s long-standing practice of prohibiting cash rebates in real estate transactions,” said J.A. Bucy, the Realtor group’s director of government affairs, while continuing to allow other gifts and prizes that are not in the form of cash payments.
The Justice Department has taken action to eliminate restrictions on real estate rebates in other states, too, though the department has limited authority to take action related to the passage of state legislation. Agency investigations led the West Virginia Real Estate Commission and South Dakota Real Estate Commission to now allow real estate rebates, and in July 2005 the Justice Department reached settlement with the Kentucky Real Estate Commission when that state agency agreed to allow licensees to offer rebates and other inducements.
John R. Read, a litigation chief for the Justice Department, argues in a letter to the Tennessee Legislature that while the state’s real estate regulatory commission “brought Tennessee into line with the 39 other states and the District of Columbia that permit rebates” with an action to lift cash rebate restrictions, the legislation “overrides the commission’s decision and eliminates the pro-consumer benefits of the commission’s efforts.”
Read stated in his May 12 letter to Tennessee House Speaker James O. Naifeh, D-Covington, “As you know, the seller and seller’s broker typically agree on the rate of the commission to be paid and how the commission is allocated between the seller’s and buyer’s brokers. As a result, there is no opportunity for the buyer to negotiate with his or her broker for a lower commission rate. No matter how their agreement allocates the commission between the brokers … the total commission paid is the same.”
Rebates, Read stated, “often present the only viable way for a buyer’s broker to compete for business on the basis of price. Rebates … go directly to the buyer or the seller, and are powerful tools for competition among brokers.” And he estimated that cash rebates in Tennessee “could put millions of dollars back in the pockets of Tennessee consumers.”
Bucy, though, said that the Tennessee Realtor group and the National Association of Realtors “simply disagrees with the federal government position and actually believes that this particular piece of legislation and this rule that (was) in effect since 1987 has protected both consumers and licensees.”
He said that cash rebates can “obscure the value of a real estate transaction,” and if consumers “accepted a cash rebate and used it as part of the down payment it could ultimately amount to more mortgage fraud. Our belief, from the beginning of this process, has been that a consumer and a real estate licensee should negotiate on the front-end all fees and commissions — that’s the best way to save the consumer money. Put it on the front-end as opposed to at the closing table.”
Bucy said that he believes a gift card would be an allowed form of rebate under the proposed law, as it is not a cash rebate.
Language in the legislation, Senate Bill 1160, provides, “A real estate licensee shall not give or pay cash rebates, cash gifts or cash prizes in conjunction with any real estate transaction. As part of the Tennessee real estate commission’s general rulemaking authority the commission may regulate the practices of real estate licensees in regard to gifts, prizes or rebates that are not otherwise prohibited by law.” The legislation also would take effect immediately with the governor’s approval.
A spokesman for state Gov. Phil Bredesen said the governor received the legislation on May 18 and has until May 30 to consider the bill. The language relating to the real estate rebate restrictions was introduced as an amendment by state Sen. Steve Southerland, R-Morristown, a mortgage broker.
Last year, the Tennessee Association of Realtors backed legislation that established a set of minimum service requirements for all real estate licensees to perform for their clients, but provided that a client can “specifically and individually” waive any requirements in writing. Other states have passed variations of this so-called minimum-service legislation that drew opposition from the Justice Department and U.S. Federal Trade Commission, and the Tennessee Realtors’ group worked with U.S. Justice Department officials and state officials on that legislation in an effort to ease any antitrust worries.