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NAR "Legal Scan" Highlights Agency and RESPA Issues

Written by Kenneth R. Harney on Sunday, 08 July 2007 7:00 pm
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Agency and RESPA controversies top the list of legal challenges facing real estate professionals, according to the 2007 "Legal Scan" study by the National Association of Realtors.

Conducted once every two years and not released to the general public, the study involved analysis of 655 court cases, jury verdicts and settlement reports, plus a survey of a sample of active realty agents across the country.

Agency or representation duties issues were central to 100 of the legal disputes analyzed, dominated by allegations of breach of fiduciary duty, failure to properly represent buyers, and problems arising from dual agency arrangements. Among other top causes of lawsuits against realty brokers or agents were alleged omissions or misrepresentations in property condition disclosures (mold, structural defects, zoning, sewer/septic system and insect or vermin infestation).

Consumers filed hundreds of suits or complaints against agents, but according to the survey, they didn't win most of them. In fact, in the 315 cases out of 655 that ended with a judgment on the agent's professional liability for wrongdoing-whether through pretrial proceeding or a verdict-210 (66 percent) were resolved in the agent's favor, and 159 of those favorable outcomes did not require a trial. Twenty-two additional cases were settled out of court, with settlement amounts ranging from $5,000 to $2 million.

Most of the cases that ended with a finding of liability against the agent or broker went to trial. Damages were awarded in 93 cases, ranging from $1,500 to $4.2 million. Findings of deceptive trade practices were the source of the highest number of damage awards, followed by breach of fiduciary duty and breach of contract.

The Legal Scan survey of active agents and brokers sought to pinpoint where the industry sees legal and regulatory issues headed in the future. One out of three survey participants said that agency issues are likely to continue to be significant sources of legal disputes, especially claims that the agent breached his or her fiduciary duty, violated dual agency rules, failed to properly disclose the nature of the agent's representation, and failed to conform to minimum service agreements.

Participants were asked to comment on the causes of agency complaints and lawsuits. They said that agents who are targets of complaints often either "do not understand what it means to be a fiduciary" or they "just want to close deals. They seem to forget and say anything they think will put the deal together, thinking the end justifies the means."

On dual agency, there are major problems, according to the participants: Agents do not understand what it means to be a dual agent-they continue to represent one party in the transaction, to the detriment of the other. One participant said "dual agency, particularly single agent dual agency, remains a bullseye on our backs. It is a built-in lawsuit factor."

Growing problems with RESPA-related issues are expected by large numbers of agents, according to the survey, especially disputes triggered by alleged kickbacks, affiliated business arrangements and inadequate disclosure of settlement costs.

On kickbacks, survey participants said many agents simply do not know the law or what it prohibits. "Practices that were taught and considered acceptable for rewarding referrals and clients are being questioned, and most agents are not even aware that such a problem exists."

HUD, which has oversight and enforcement authority over RESPA, recently has emphasized penalizing recipients of kickbacks or "things of value" -- agents accepting free concert or ballgame tickets are examples -- as well as punishing the providers of kickbacks. State agencies also are ramping up their own RESPA-related crackdowns, and going after agents who receive gifts from title, settlement and mortgage companies for referrals of business.

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