The vast majority of state real estate regulators are dominated by members of the industry and fail to provide consumers with adequate information, enforcement and complaint resolution, according to a report from the Consumer Federation of America.
The consumer watchdog’s report, “State Real Estate Commissions: Do They Serve the Consumer Interest?,” found that in 47 states and in Washington D.C., governments have given the power to regulate the real estate industry to real estate commissions, of which 85 percent of the seats are held by members of the industry or allied groups such as bankers and real estate attorneys or are vacant. Of 378 seats total, not one is held by a leader of a nonprofit consumer or housing organization, according to the report.
Only one state commission is required to have a majority of non-industry members, the New York State Board of Real Estate, the report said. In California, Minnesota and Illinois state departments, not commissions, regulate the industry. While Illinois has a real estate commission, it is only advisory.
“The real estate industry essentially regulates itself,” said Stephen Brobeck, a CFA senior fellow and the report’s author, in a statement.
The CFA report found that there are consequences for consumers of this industry domination. The nonprofit found that only 11 state commission websites provide “adequate” consumer information, while 21 “ignore home buyers and sellers.”
“The latter websites appeared to consider only the needs of the industry,” the report said. “The home page menu contained no mention of consumers nor was there a separate consumer page. The report also concluded that no websites could be considered excellent because none included a description of important consumer protections, adequate explanation of the sales process, and useful advice to consumers about how to receive good value from agent services.”
Earlier this year, the CFA published a more detailed report with these findings. The watchdog also found that state real estate commissions “do not make a sufficient effort to enforce agency disclosure laws,” exposing consumers to the conflict of interest risks posed by working with an agent who is not their fiduciary.
“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,” the CFA said.
“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.”
The report found that only 14 real estate commissions make information about complaints and disciplinary actions available to the public. In those states, fewer than 10 percent of complaints lead to disciplinary actions and the majority of those actions were related to an agent’s criminal conviction or lack of a real estate license rather than to a consumer complaint, the CFA said.
“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,” Brobeck said.
“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.”
The CFA report recommended that state governments shift authority from real estate commissions to state officials and ensure that consumers are represented on the commissions themselves through consumer or housing advocates.
“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,” the CFA said.
“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.”
Such a change would likely lead commissions to feel obligated to provide information to buyers and sellers on their websites, to put in more of an effort to enforce agency disclosure laws “and to refer egregious consumer complaints to the state attorney-general or consumer protection agency,” Brobeck said.
The CFA noted that the real estate industry has been under scrutiny recently for allegedly anti-competitive practices, including the sharing of commissions between buyer and listing brokers. The uncoupling of commissions is “a reform priority of CFA, ” the nonprofit said, “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.”
The CFA said real estate commissions “have sat on the sidelines of these controversies,” but in the past have supported allegedly anticompetitive practices such as buyer rebate bans and minimum service requirements.
“State real estate commissions should not escape the scrutiny that the industry has been under,” Brobeck said. “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.”