The U.S. Department of Justice has filed an antitrust lawsuit against the National Association of Realtors alleging the 1.4 million-member trade group’s rules are illegal restraints on Realtor competition, the DOJ announced Thursday.
The federal agency filed a settlement at the same time as it filed the suit requiring NAR to repeal or change several rules the DOJ deems anticompetitive. According to the DOJ’s 11-page complaint, these include:
- prohibiting MLSs that are affiliated with NAR from disclosing to prospective buyers the commission that the buyer broker will earn if a buyer purchases a home listed on a multiple listing service;
- allowing buyer brokers to misrepresent to buyers that a buyer broker’s services are free;
- enabling buyer brokers to filter MLS listings based on the level of buyer broker commissions offered and to exclude homes with lower commissions from consideration by potential homebuyers; and
- limiting access to the lockboxes that provide licensed brokers with access to homes for sale to brokers who work for a NAR-affiliated MLS.
“These NAR rules, policies, and practices have been widely adopted and enforced by NAR-affiliated MLSs, and are, therefore, agreements among competing real estate brokers each of which reduce price competition among brokers and lead to lower quality service for American home buyers and sellers,” the complaint says.
The complaint alleges these “agreements” have a cumulative anticompetitive effect and individually and collectively “unreasonably restrain trade” in violation of the Sherman Antitrust Act and should therefore be prohibited by an injunction.
The DOJ said that, if approved by the court, its proposed settlement will improve competition in the real estate market, providing consumers with more choices and better service.
“Buying a home is one of life’s biggest and most important financial decisions,” said Assistant Attorney General Makan Delrahim of the Justice Department’s Antitrust Division, in a statement.
“Home buyers and sellers should be aware of all the broker fees they are paying,” Delrahim added. “Today’s settlement prevents traditional brokers from impeding competition — including by internet-based methods of home buying and selling — by providing greater transparency to consumers about broker fees. This will increase price competition among brokers and lead to better quality of services for American home buyers and sellers.”
In an emailed statement, NAR told Inman it had reached an agreement with the DOJ that “fully resolves” questions raised by the DOJ about the MLS system and commissions. The trade group will therefore make the following changes, according to NAR’s vice president of communications, Mantill Williams:
- In accordance with the MLS system’s long-standing focus on creating an efficient, transparent marketplace for home buyers and sellers, the amount of compensation offered to buyers’ agents for each MLS listing will be made publicly available. Publicly accessible MLS data feeds will include offers of compensation, and buyers’ agents will have an affirmative obligation to provide such information to their clients for homes of interest.
- The rule changes re-affirm that MLSs and brokerages, as always, must provide consumers all properties that fit their criteria regardless of compensation offered or the name of the listing brokerage.
- While NAR has long encouraged buyers’ agents to explain how they expect to be paid, typically through offers of cooperative compensation from sellers’ agents, there will be a rule that more definitively states that buyers’ agents cannot represent their services as free to clients.
- With the seller’s prior approval, a licensed real estate agent will have access to the lockboxes of properties listed on an MLS even if the agent does not subscribe to the MLS.
“The National Association of Realtors (NAR) rules and policies have long sought to ensure fair and competitive real estate markets for home buyers and sellers,” Williams said.
“Most of the changes seek to more explicitly state what is already the spirit and intent of NAR’s Code of Ethics and MLS Policies regarding providing information about commissions and MLS participation. We’re proud to be associated with the MLS system that puts consumers first and benefits home buyers, sellers and small business brokerages, and is constantly building upon these principles.
“While NAR disagrees with the DOJ’s characterization of our rules and policies, and NAR admits no liability, wrongdoing or truth of any allegations by the DOJ, we have agreed to make certain changes to the Code of Ethics and MLS Policies while we remain focused on supporting our members as they preserve, protect and advance the American dream of homeownership.”
NAR will be working with the DOJ to agree on exact rule changes within 45 days and then hold a special, virtual meeting of the NAR board of directors to approve the new rules. “We anticipate that the new rules will take effect in the first quarter of 2021,” Williams said. The board meeting has not yet been scheduled.
The vast majority of the 565 or so MLSs in the U.S. are owned by Realtor associations, which in turn are governed by NAR rules. If Realtor associations don’t follow NAR rules, they risk losing their charter. If Realtor-affiliated MLSs don’t follow NAR rules, they risk losing their NAR-provided professional liability insurance.
Commissions and steering
According to the complaint, NAR’s Handbook on Multiple Listing Policy 2020 currently recommends that MLSs prohibit disclosing to prospective buyers the total commissions offered to buyer brokers and all or nearly all NAR-affiliated MLSs have adopted that prohibition.
For instance, Section 18.3.1 of the handbook states: “Listings displayed pursuant to IDX shall contain only those fields of data designated by the MLS. Display of all other fields (as determined by the MLS) is prohibited. Confidential fields intended only for other MLS participants and users (e.g., cooperative compensation offers, showing instructions, property security information, etc.) may not be displayed.”
“This means that while buyer brokers can see the commission that is being offered to them if their home buyer purchases a specific property — a commission that will ultimately be paid through the home purchase price that the home buyer, represented by the buyer broker, pays — MLSs conceal this fee from home buyers,” the complaint says.
“NAR’s Commission-Concealment Rules relieve buyer brokers from the necessity of competing against each other by offering rebates or offering to accept lower commissions.”
The complaint adds that the rules “also make home buyers both less likely and less able to negotiate a discount or rebate off the offered commission” and “encourage and perpetuate the setting of persistently high commission offers by sellers and their listing agents,” resulting in higher prices for buyer broker services.
The complaint alleges that buyer brokers may steer potential homebuyers away from properties with lower commission offers “by filtering out, failing to show, or denigrating” them and that buyers can’t resist or detect the steering if they can’t see commission offers.
“Fear of having buyers steered away from a property is also a strong deterrent to sellers who would otherwise offer lower buyer broker commissions, which further contributes to higher prices for buyer broker services,” the complaint says.
Last year, NAR amended the Realtor Code of Ethics to state: “Unless they are receiving no compensation from any source for their time or services, Realtors may use the term ‘free’ and similar terms in their advertising and in other representations only if they clearly and conspicuously disclose (a) by whom they are being, or expect to be, paid; (b) the amount of the payment or anticipated payment; (c) any conditions associated with the payment, offered product, or service; and (d) any other terms relating to their compensation.”
While the change was made in part for the purposes of “legal defensibility,” the DOJ’s complaint alleges that rule “allows brokers to mislead buyers by obscuring the fact that buyers have a stake in what their buyer brokers are being paid for their services. Buyer broker fees, though nominally paid by the home’s seller, are ultimately paid out of the funds from the purchase price of the house. If buyers are told that buyer broker services are ‘free,’ buyers are less likely to think to negotiate a lower buyer broker commission or to view buyer broker rebate offers as attractive.”
Filtering MLS listings
MLS Policy Statement 7.58 in the handbook states: “Participants may select the IDX listings they choose to display based only on objective criteria including, but not limited to, factors such as geography or location (“uptown”, “downtown”, etc.), list price, type of property (e.g., condominiums, cooperatives, single family detached, multi-family), cooperative compensation offered by listing brokers, type of listing (e.g., exclusive right-to-sell or exclusive agency), or the level of service provided by the listing firm.” [Emphasis in bold added.]
That rule also facilitates steering, the complaint alleges.
“NAR’s Commission-Filter Rules and Practices allow buyer brokers to filter MLS listings that will be shown to buyers based on the level of buyer broker commissions offered. Once this filtering is performed, some MLSs further permit buyer brokers to affirmatively choose not to show certain homes to potential home buyers if the buyer broker will make less money because of lower commissions. Homes may be filtered out in this manner even if they otherwise meet the buyer’s home search criteria,” the complaint says.
Regarding lockboxes, MLS Policy Statement 7.31 in the handbook states that “Any lockbox system must be designated as either an activity of an association of Realtors or an association-owned and operated MLS.” If the former, those eligible to hold a key include Realtors, Realtor Associates and non-principal brokers, sales licensees and licensed or certified appraisers affiliated with a Realtor.
If the latter, “then every MLS participant and every non-principal broker, sales licensee and licensed or certified appraiser who is affiliated with an MLS participant and who is legally eligible for MLS access shall be eligible to hold a key subject to their execution of a lease agreement with the MLS.”
According to the complaint, this means that licensed brokers who are not affiliated with NAR are not allowed to access lockboxes, preventing them from showing homes listed for sale and “thereby lessening competition for buyer broker services.”
The proposed settlement
The 16-page proposed settlement, which was submitted by both the DOJ and NAR, would apply to all Realtor associations and MLS users.
The settlement would require NAR, within five business days after it’s “entered” or approved by the court, to:
- repeal any rule, and to require its member boards and MLSs to repeal any rule, that “prohibits, discourages, or recommends against an MLS or MLS Participant publishing or displaying to consumers any MLS database field specifying compensation offered to other MLS Participants.”
- adopt a rule that requires all MLS participants, including subscribers, to provide to clients information about the amount of compensation offered to other MLS participants.
- repeal any rule, and require all member boards and MLSs to repeal any rule, that permits all MLSs and MLS participants, including buyer brokers, to represent that their services are free or available at no cost to their clients. NAR must also prohibit all MLSs and MLS participants from representing that their services are free or available at no cost to their clients.
- adopt a rule that prohibits MLS participants from filtering or restricting MLS listings that are searchable by or displayed to consumers based on the level of compensation offered to the buyer broker or the name of the brokerage or agent, and repeal any rule that permits or enables such filtering.
- adopt a rule that requires all member boards and MLSs to allow any licensed real estate agent or agent of a broker, to access, with seller approval, the lockboxes of those properties listed on an MLS.
The content of the rules must be approved by the DOJ.
The DOJ can still come after other NAR rules
The proposed settlement would keep NAR under the thumb of the DOJ until its expiration seven years after it’s approved by the court, though it gives the DOJ the option terminate the settlement in five years if the agency determines it’s no longer necessary or in the public interest. NAR would have to certify, first in the 60 days after the settlement is approved, and then annually that it has complied with the provisions of the settlement.
In an FAQ about the settlement, NAR said it would confirm compliance to the DOJ quarterly, similar to a previous settlement with the DOJ regarding NAR’s Virtual Office Website (VOW) policies that expired in 2018.
The settlement would require NAR to appoint an Antitrust Compliance Officer whose initial appointment and replacement must be approved by the DOJ. If that officer or NAR management were to learn of any potential violation of the settlement, NAR would be required to investigate and cease or modify the potentially violating activity so that it complies with the settlement terms. NAR would also have to file a statement with the DOJ describing the potential violation and steps taken to remedy it.
The proposed settlement does not prevent the DOJ from investigating or bringing actions “to prevent or restrain violations of the antitrust laws concerning any Rule or practice adopted or enforced by NAR or any of its Member Boards.”
The DOJ said it will publish the proposed settlement in the Federal Register as required by the Antitrust Procedures and Penalties Act and anyone may submit written comments regarding the proposed final judgment within 60 days of its publication to Chief, Office of Decree Enforcement and Compliance, Antitrust Division, U.S. Department of Justice, 950 Pennsylvania Ave., N.W., Washington, DC 20530. After the 60 days, the court may approve the proposed judgment if it finds it serves the public interest, the DOJ said.
Editor’s note: This story has been updated.