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  • Writer's pictureSummer Goralik

Unwinding the Real Estate Compliance Dynamic: Exploring the Intersections and Divergences Between the California DRE, Commission Litigation, and Industry Standards

Updated: Jun 27

By Summer Goralik


Compliance in the real estate field can be multifaceted. As a former California Department of Real Estate (DRE) investigator turned compliance consultant, I can attest to the importance of adhering to state laws and regulations governing real estate professionals. Violations can trigger regulatory investigations and disciplinary actions, making it tantamount for real estate brokers and agents to keep these rules front and center on their compliance dashboards.

 

However, compliance extends beyond state regulations. The frequent commission litigations serve as a stark reminder that real estate professionals must navigate numerous requirements enforced by various entities. Let's use a bowling alley analogy to clarify this complexity. Imagine a real estate transaction as a bowling alley, where the licensee is the bowler aiming for a strike—achieving customer satisfaction and regulatory compliance. The optional bumpers are the additional requirements that ensure licensees stay on track, avoid non-compliance, and strive for a higher standard of professionalism.

 

This piece aims to highlight some key variations between requirements enforced by the California DRE and real estate practices governed by other entities. In particular, it will focus on the new rules and practice changes related to the settlement proposed by the National Association of Realtors (NAR) in connection with the class-action lawsuit known as Sitzer-Burnett, as well as other pending cases. Although the settlement and proposed practice changes have been preliminarily approved, they are awaiting final court approval, currently set for November 26, 2024.

 

It goes without saying that many questions and concerns are being raised in the industry right now, and there is, of course, a world of speculation about what it will all mean for consumers and licensed professionals. Cutting through the collective noise for just a moment, this article aims to educate real estate brokers and agents, as well as any consumers reading this piece, about where DRE-enforced compliance, commission suits, and real estate practice intersect or diverge.



Introductory Comments about Law versus Practice

 

A classic example of the contrast between rules enforced by the DRE and standards of practice is the "Code of Ethics.” This body of ethical standards applies to members of the National Association of Realtors (NAR), and its state and local counterparts. While some ethical expectations definitely overlap with statutory obligations mandated by the DRE, others do not.

 

During my tenure investigating complaints for the California DRE, I frequently encountered this disconnect. Complaints often stemmed from perceived unlawful activities against real estate brokers and agents, filed by consumers or licensed competitors. However, while unprofessional or unethical conduct might have been committed by a real estate licensee, it did not necessarily violate state regulations.


For instance, a broker might fail to respond promptly to a buyer’s purchase offer or neglect to return phone calls. These actions, which may fall below the standard of practice, are not explicitly outlined in the Real Estate Law enforced by the DRE. In other words, the Code of Ethics sets a higher standard of professionalism that members (Realtors) voluntarily adhere to. A violation of such standards may subject the licensed member to fines or other disciplinary actions, but the prohibited behavior may fall outside the DRE's jurisdiction.

 

Similarly, if a broker or agent fails to submit a listing to, and/or engages in the public advertising of a listing without any registration with, the Multiple Listing Service (MLS), in accordance with their rules (e.g., Clear Cooperation Policy), then the licensed MLS participant may face some kind of enforcement inquiry or action administered by this entity. Again, these requirements are not enforced by State law.

 

What’s the common theme here? While some real estate practices or actions may run afoul of rules enforced by trade groups or the MLS, they do not automatically fall within State law and/or warrant regulatory scrutiny or enforcement action by the DRE.

 


Unwinding the California Real Estate Compliance Dynamic

 

Real estate licensees encounter various layers and sources of regulation as well as enforcement, often posing distinct challenges in practice. Now, more than ever, it's crucial for licensees to thoroughly understand and effectively compartmentalize the multi-layered compliance expected in the real estate sector.

 

Here are some selective (though not exhaustive) questions frequently raised by my clients, providing insight into different compliance requirements and their enforcing authorities.

 


Does the DRE require agents and brokers to be members of NAR and the California Association of Realtors (CAR), and/or other trade group organizations?

 

No. This also means that not all licensees are Realtors, the trademarked name assigned to members of NAR and its state and local subsidiaries. While not required by law, many licensees join trade groups for the benefits they offer, such as legal support, education, and training.

 

Does a California real estate licensee have to be a member of NAR, CAR, and/or local association of Realtors to access the MLS?

 

No. According to the California Regional MLS rules, it does not appear that Realtor membership is a prerequisite to gain access to the MLS. In my experience, not all real estate licensees know this information, and admittedly, if we turn back the clock, this was not always the case. Please refer to the sources below for more information on this topic.

 

Does the DRE require listings to be advertised on the MLS?

 

No. Although not mandated by law, listing property on the MLS is common practice to maximize exposure. It should be noted that ultimately, listing agents list real property on the MLS at the direction and authorization of their sellers.

 

Does the DRE require compliance with trade group or MLS rules?

 

No. Again, membership in trade groups, as well as use of the MLS, are voluntary. However, violations of the Code of Ethics, for example, can sometimes lead to a DRE enforcement matter if they involve regulatory non-compliance.

 

Does the DRE mandate the use of specific listing or buyer representation agreements?

 

No. Licensees can use any forms they choose, provided they comply with state law requirements. These rules include, but are not limited to, disclosing the negotiability of real estate commissions and having specific completion dates in connection with exclusive agreements covering residential real property, and full disclosure of commission or compensation to be paid to the licensee.

 

Notably, this flexibility is limited if you are a real estate salesperson, operating under the license, scope, and supervision of a real estate broker. Any salesperson should confer with their responsible broker before using any forms or agreements in the course of their licensed real estate activity.

 

Does the DRE mandate if and when a buyer representation agreement should be signed between a buying broker/agent and buyer?

 

At present, no. However, there is legislation (California Assembly Bill 2992) that might add these rules to DRE’s enforcement.

 

Does the DRE require a buyer representation agreement before touring properties?

 

No. This is not a state requirement that applies to all California licensees, but the proposed NAR settlement may introduce this as a new requirement for Realtors and MLS participants. According to NAR, these practice changes will go into effect ahead of the final approval hearing. As of the date of this article, that effective date is scheduled for August 17, 2024.

 

Who will enforce the use of buyer representation agreements as proposed by the NAR settlement?

 

According to NAR, the applicable MLS will enforce this compliance if the settlement is approved. However, it is possible that CAR might endeavor to develop some sort of enforcement mechanism in California. Furthermore, let’s not forget the United States Department of Justice (DOJ). It’s also feasible that they might seek some enforcement of egregious violations. Finally, lawyers could certainly sue Realtors who violate the rules. Overall, the important takeaway here is that the answer to this question is not fully known.

 

Does the DRE regulate the payment of real estate commissions?

 

Yes. Important rules include, but are not limited to:

 

  • Only licensed individuals or firms can engage in licensed work for compensation.

  • Real estate salespeople must be affiliated with a licensed broker in order to engage in licensed acts and be paid for their licensed services.

  • Commissions must be paid to brokers first, who then disburse to agents (NOTE: Review the DRE’s Spring 2012 Real Estate Bulletin article, “Unlawful Employment and Payment of Compensation” for a noted exception, but only if the Department’s guidance is strictly complied with and the broker controls the disposition of this payment).

  • Disclosure of compensation is mandatory, and commissions are, and have always been, negotiable by law.

 

One of the proposed changes outlined in the NAR settlement is that the MLS will no longer display any offers of compensation in connection with listings. If this rule is violated by a real estate broker or agent, will they be subject to a DRE investigation or license discipline?

 

No. Based on what I have read, these new practice changes will be monitored and enforced by the MLS. But again, as mentioned earlier, not everything is readily known to us at this time and things could change.

 

If a real estate licensee violates any of the practice changes mandated by the NAR proposed settlement (assuming court approval), could their license face discipline from the DRE?

 

The answer is nuanced and depends heavily on the specifics of each case. For instance, failing to execute a buyer representation agreement before showing real property might not necessarily lead to license discipline. According to NAR, enforcement of such rules will fall under the jurisdiction of MLSs.

 

Conversely, if a licensee does enter into a buyer representation agreement with a buyer, but neglects to include the required disclaimer about negotiable real estate commissions or fails to reference a specific date of final completion and termination, disciplinary action under the DRE's jurisdiction could indeed follow.

 

Adding to the complexity, the DOJ has played a significant role in the monitoring of the commission litigation, intervening in cases involving potential antitrust violations, and safeguarding consumers' interests. Consequently, and as stated earlier, non-compliance with the NAR settlement or related litigation outcomes could prompt scrutiny from federal authorities more potent than the DRE, as well as attorneys (everywhere).

 

Given this regulatory landscape, how can licensees best manage these challenges safely while meeting the requirements of all governing bodies and safeguarding consumer interests, especially in the aftermath of the myriad commission litigation?

 

Real estate salespeople should lean on guidance from their supervising brokers. A conscientious and experienced broker will seamlessly integrate regulatory dynamics into their office policies, procedures, transaction checklists, real estate forms, and training. By implementing effective policies and rigorous training, brokers equip agents with the essential knowledge and tools to conduct their real estate practices compliantly and efficiently.

 

On the other hand, this also means that brokers themselves must take a proactive, diligent approach, staying informed about existing rules and upcoming practice changes. To effectively lead their salesforce towards compliance and mitigate regulatory risks from every direction, brokers must serve as a reliable source of information and compliance support, providing necessary tools and systems for success. Should brokers face uncertainties or compliance gaps, consulting legal counsel or seeking additional compliance support is integral to maintain clarity and ensure comprehensive adherence.



Closing Thoughts


Right now, amidst commission litigation and industry speculation, it is critical for real estate brokers and agents to equip themselves with knowledge, training, and experience (if they have it). They should stay informed about commission lawsuits, the proposed NAR settlement, and the forms and client communications that will implement new practice changes. The more educated licensees are, the better they can serve their clients. Diversify your sources of information and engage in ongoing education through bulletins, advisories, independent news, town halls, lectures, and training sessions.


One aspect of this education involves understanding the relevant comparisons between California DRE requirements and the standards enforced by other institutions in the real estate industry. Insight into where these rules converge and deviate is fundamental for real estate licensees as they address and adapt to potential new practice changes.



Ask a Licensed Attorney and/or Responsible Broker


As a non-attorney, I must emphasize that real estate licensees should seek guidance from legal counsel to interpret and clarify real estate laws, regulations, and other discussed requirements. Additionally, agents have a duty to consult their supervising brokers, as all their actions are subject to supervision and approval—an advantageous safeguard, particularly when seeking compliance advice. Additionally, some article sources have been provided below for further reading.



Article Sources




About the Author


Summer Goralik is a Real Estate Compliance Consultant and licensed Real Estate Broker (#02022805). Summer offers real estate brokers a variety of consulting services including assistance with California Department of Real Estate investigations and audit preparation, mock audits, brokerage compliance guidance, advertising review, and training. She helps licensees evaluate their regulatory compliance and correct any non-compliant activities. Summer has an extensive background in real estate which includes private sector, regulatory and law enforcement experience. Prior to opening her consulting business in 2016, she worked for the Orange County District Attorney's Office as a Civilian Economic Crimes Investigator in their Real Estate Fraud Unit. Before that, Summer was employed as a Special Investigator for the DRE for six years. Among many achievements, she wrote several articles for the DRE, four of which were co-authored with former Real Estate Commissioner Wayne Bell. Prior to her career in government and law enforcement, Summer also worked in the escrow industry for nearly five years. For more information about Summer's background and services, please visit her website.

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